HomeBase to Close Stores, Shift Focus

HomeBase Inc., caving in to home-improvement giants Home Depot Inc. and Lowe’s Cos., said Tuesday that it will bail out of the home-improvement sector entirely, closing 22 stores and converting 62 others into home furnishings businesses.

The Irvine company will stake its future on its House2Home stores, noting that five of these test home furnishing sites generated strong sales in their first 12 weeks.

The company closed 31 HomeBase stores Tuesday--most of them in Southern California--and plans to shut down the remaining HomeBase stores in stages over the next few months. The stores will reopen by Friday for liquidation sales.

The stores being converted to the House2Home concept are expected to reopen in the new format over the coming year. In Orange County, HomeBase will convert stores in Brea, Stanton, Irvine, Santa Ana and Laguna Niguel into House2Home sites.

HomeBase decided on its dramatic shift after struggling in an increasingly cutthroat arena over the past few years as Home Depot, the nation’s largest home-improvement chain, launched a massive expansion throughout California and Lowe’s, the No. 2 chain, lumbered into the state.

The move also comes amid signs of a recent slowdown in the home-improvement sector.

Analyst Howard Rosencrans, with HD Brous & Co, said the closure of HomeBase was overdue because the stores otherwise would have “run the company out of business.” But Rosencrans expressed strong reservations about the massive conversion because it stakes so much on a concept just three months old.

HomeBase’s stock, which has lost about 60% of its value this year, closed Tuesday at $1.25, down 6 cents a share, on the New York Stock Exchange.

While HomeBase’s new territory, home furnishings, has been a thriving segment of the retail sector in recent years, the company still figures to run into stiff competition. Chicago-based Sears, Roebuck & Co., for example, has launched a home-improvement superstore concept called Great Indoors. The retail giant plans to have 100 Great Indoors opened by the end of 2002, with one scheduled to open soon in the Irvine Spectrum.

Michele Feller, who handles investor relations for HomeBase, said the board decided a quicker transition is the better option.

“Economically, it is not feasible to close 84 stores and continue to stay afloat,” she said. “We wanted to minimize the downtime and return the company to a path of profitability as soon as possible.”

The changeover will be costly.

HomeBase said it will take a charge of about $55 million to liquidate inventory. It also plans to write down the value of about $34 million in assets, taking a charge for $13 million of that in the fourth quarter.

The retailer also forecast a loss of about $70 million, or $1.86 a share, for the full year. But company executives told analysts during a telephone conference Tuesday morning that they expect HomeBase to rebound.

The company said it expects to post a net loss of about $80 million in the next fiscal year, ending January 2002, but could turn a profit by the fourth quarter of that year.

“HomeBase made a valiant effort to sustain its position in the fiercely competitive home-improvement market,” Chief Executive Herbert Zarkin said. “However, despite our best efforts, we do not foresee the pressures on the HomeBase business subsiding in the near term. Rather, they are likely to intensify as time goes on.”

The Southland has been a magnet for such companies as baby boomers keep funneling money into their homes. Despite the market for such products, HomeBase has continued to struggle. The company posted a third-quarter loss of $10.3 million last month, including $4.8 million in expenses from launching the five House2Home stores. A year earlier, the company earned $3.9 million, or 10 cents a share.

Sales for the quarter slid 12% to $334.4 million while sales at stores open at least a year, a key performance indicator, dropped 12.5%.

But the company said the new House2Home stores have performed better than expected, logging sales of $21.4 million, about $4.3 million per store, from Sept. 9 through Nov. 25.

HomeBase said it has ample financial resources to complete the expansion, including access to a $250-million credit line and about $180 million from liquidating inventory at its HomeBase stores.

It said House2Home operations should generate enough cash flow to allow the company to pay off virtually all of its credit lines by January 2004.

While there are similarities in the concepts, HomeBase maintains that its home furnishings stores offer a different selection of products than its competitors. For example, Home Depot’s Expo Design Centers sell toilets and kitchen cabinets, while House2Home does not. On the other hand, House2Home sells towels and flatware, while Expo does not sell dinnerware and carries only a limited selection of towels.

HomeBase said the prime target for its House2Home stores are women ages 35 to 54 who own their homes and have a family income of $70,000 to $80,000.

The conversion will occur in stages over the next year. Of the 31 stores that closed Tuesday, 13 will close permanently after the liquidation sales, while 18 will be converted to the new concept.

HomeBase, which has about 10,000 employees, said that workers will be offered positions at the new House2Home stores but declined to say how many people ultimately will lose jobs.

A “reasonably large number” of HomeBase employees should keep positions with the company, said Zarkin, the chief executive. HomeBase stores each have about 110 workers, while House2Home stores have about 160 employees each.

HomeBase Inc. was founded in 1983 as HomeClub membership warehouse stores and went public two years later. The company, which has had several owners over the years, changed its name to HomeBase in 1992.

In 1997, a plan to combine HomeBase with Kmart Corp.’s Builders Square chain collapsed when the parties could not reach an agreement.

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HomeBase Home Depot Lowe’s Cos. Headquarters: Irvine Atlanta Wilkesboro, N.C. Employees: 10,000 201,000 70,000 Total stores 89 1,087 630 Southern Calif. stores 32 87 14 ’99 Profits $22.4 $161.4 $500.4 (millions) ’99 Revenue $1.4 $30.2 $13.3 (billions) Stock price $1.25 $44.00 $43.19 Market NYSE NYSE NYSE

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Source: Bloomberg News

O.C. stores that will convert to House to Home stores:

Stanton

Irvine

Laguna Niguel

Brea

Santa Ana

Source: HomeBase