Slashing costs and reducing inventory allowed Harry & David Holdings Inc. to carve out a bottom-line gain in its most pivotal reporting period of the year.

MEDFORD — Slashing costs and reducing inventory allowed Harry & David Holdings Inc. to carve out a bottom-line gain in its most pivotal reporting period of the year.

The Medford-based gourmet food and gift company announced fiscal second quarter 2010 earnings of $31.7 million, compared to $30.4 million for a similar period a year ago.

Harry & David improved earnings despite diminished revenue for the 13-week period ending Dec. 26. Net sales decreased 13.2 percent to $267 million, down from $307.7 million for the same period a year ago.

During a conference call with analysts, Harry & David executives said they planned for lower Christmas sales volume, later orders and customers snatching up lower-priced items.

"It was more challenging than we hoped, with later shopping and a shorter sales period," said Bill Williams, president and chief executive officer, "but our inventory management was effective."

Williams said reduced advertising expenditures and a smaller payroll contributed as well.

"We effectively met challenges, and we're looking to spring and planning our strategies for next fall to generate additional income," Williams said.

Harry & David reported sales were lower across its operations lines.

Direct marketing sales — including call center and online — decreased 13.3 percent to $29.75 million, primarily because of smaller average order sizes related to lower advertised retail prices and increased discounts.

Harry & David Stores saw a 6.4 percent decline in sales to $3.86 million and a comparable-store sales decline of 3.6 percent, or $2.1 million. The slide was attributed to less traffic and fewer stores. At the end of the quarter, Harry & David operated 136 stores, down from 144 a year earlier.

"We were consistent with expectations we shared in previous quarters," said Chief Financial Officer Ed Dunlap. "Sales were down, but we expected higher margins, and they were. Inventories were lower, borrowings were lower and our cash position was better. From our perspective, we felt we met expectations. Our liquidity is strong and we believe we have sufficient cash to take us into next season."

Gross profit decreased 10.5 percent to $131.2 million, compared to last year at $146.6 million on lower sales. The company said it had lower inventory write-offs, lower labor and overhead expenses, as well as reduced freight costs, but it had higher markdowns and discounts.

Inventory was $33.9 million, down 25.2 percent, at the end of the quarter

"We did sell out of some items as we approached Christmas," Williams said, "but we did an excellent job of taking them off sale (online) so they were not ordered when we were out of stock. We had substitute suggestions so our inventories were clean and we didn't have to turn away a lot of business."

The company's wholesale revenue fell 31 percent to $7.1 million, primarily due to its decision not to renew an online relationship with a major customer, Dunlap said.

Net income from continuing operations for the year to date was $10 million, compared to $15 million reported in the same period in fiscal 2009.

"We were in a stronger cash position at the end of December than we were last year," Williams said. "Our challenges have not yet subsided and we're planning with that in mind."

Reach Mail Tribune reporter Greg Stiles at 541-776-4463 or e-mail business@mailtribune.com.