On March 28, 2011, Harry & David Holdings (“Debtors”) filed petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware. Debtors describe themselves as a “specialty retailer and producer of branded premium gift-quality fruit, gourmet food products and other gifts …” See Debtors’ Declaration in Support of First Day Filings (“Decl.”), at p. 3, a copy of which is available here for review. Debtors sell their products under various name brands, including Harry & David, Wolferman’s and Cushman’s. The company’s more popular products include Moose Munch, Royal Riviera Pears and the Fruit-of-the-Month Club. Decl. at p. 4. This post will look briefly at the nature of Debtors’ businesses, why Debtors’ filed for bankruptcy and what Debtors hope to achieve while in bankruptcy.
Unlike many distributors, Debtors grow, manufacture and package many of the items that generate revenue for their businesses. Debtors’ operations include 3,400 acres of land in Oregon, approximately two-thirds of which are orchards in Southern Oregon. Debtors’ holdings also include a 54,000 square foot bakery and “chocolate complex,” as well as a 646,000 square foot fruit and gift packaging center. Decl. at p. 4. Debtors also operate a 72,000 square foot call center in Oregon and maintain fruit packing and gift assembly complexes in Hebron, Ohio. Id.
Debtors sell their products to consumers through direct marketing and retail stores. Debtors’ direct marketing includes sales through catalogs, direct mail and the internet. Debtors also operate 70 retail stores generally located in malls and other retail centers. Debtors also operate a “flagship Country Village store” in Medford, Oregon. Decl. at p. 5.
Events Leading to Bankruptcy
Approximately sixty percent of Debtors’ revenue comes from sales during the holiday season (October through December). In prior decades, Debtors’ businesses were successful due in part to what the company describes as “brand equity, high customer awareness and distinctive ownership of fruit gifting.” Decl. at p. 9. Debtors also benefited from high costs of entry for potential competitors seeking to enter the mail order business. Id. However, as more consumers began to buy products on line, Debtors were confronted with greater competition from on line specialty retailers. Whereas Debtors manufacture 85% of their products internally, many of the company’s competitors distribute products that are manufactured by third parties. This results, then, in Debtors having to compete with specialty retailers that can operate with lower overhead costs than the Debtors. Decl. at p. 9.
Aside from increased competition, Debtors have suffered from price conscious consumers following the 2008 recession. Reduced sales over the last three years have caused the Debtors to sell their products at greater discounts. During the 2010 shopping season, Debtors were forced to discount their products more than originally anticipated. The poor sales performance resulted in the company not satisfying a cash covenant in a revolving credit agreement. Having lost the ability to borrow, Debtors were left with little choice other than to file for bankruptcy. Decl. at p. 10.
Objectives in Bankruptcy
Through bankruptcy, Debtors hope to secure $100 million in additional loans from their prepetition lenders. Debtors intend to use the bankruptcy financing to acquire inventory needed to get through the 2011 holiday season. Prior to filing for bankruptcy, Debtors and certain creditor constituencies entered into a “Plan Support Agreement”. According to the Debtors, the Plan Support Agreement spells out how the Debtors intend to emerge from bankruptcy on an expedited basis. The Agreement proposes a distribution of the reorganized Debtors’ new stock to senior note holders. Further, under the Agreement, unsecured creditors may elect to receive stock, a cash distribution (subject to the availability of cash) or a promissory note. Decl. at pp. 12-13.
The Harry & David Holdings bankruptcy is before the Honorable Mary F. Walrath. Judge Walrath previously served as Chief Judge of the Delaware Bankruptcy Court. Debtors are represented by Jones Day and Richards, Layton & Finger P.A.