It’s Curtains for Ailing House2Home Franchise

Battered by the economic fallout from the terrorist attacks, House2Home Inc. said Wednesday that it is going out of business, closing all 42 home furnishing stores only months after splashy grand openings.

House2Home, which converted the stores to cavernous home-furnishing businesses after struggling for years as a home-improvement chain, said the sluggish economy had slowed sales. But the business went into a tailspin after the Sept. 11 attacks, with sales slumping more than 30% in recent weeks.

“If we could erase Sept. 11, we’d be doing fine,” House2Home President Thomas Gallagher said. “Sept. 11 was insurmountable.”

The company filed for bankruptcy protection, but said it plans to liquidate its assets and shutter its stores, the last of which opened in August after they were converted from HomeBase home-improvement warehouses. The chain has 24 stores in Southern California.

House2Home has assets of $181.2 million and debts of nearly $193 million, according to its Chapter 11 filing in the U.S. Bankruptcy Court in Santa Ana.

The Irvine company, which last week failed to make an interest payment and admitted it was running out of options, said it expects the liquidation to take 13 weeks. House2Home would retain an unspecified number of its 4,700 workers to wind down operations.

The first round of layoffs is expected in December, Gallagher said.

In an effort to stave off collapse, the beleaguered company recently hired Barrington Associates to explore financial options.

The Los Angeles investment banking firm contacted 19 potential investors and buyers over about three weeks, but only received an offer to acquire four stores, said Mike Rosenberg, the firm’s managing director.

“We talked to a pretty broad range of potential investors and [buyers], and in the end nobody was really interested,” he said.

Brett Hendrickson, an analyst with B. Riley & Co. in Los Angeles, said House2Home had problems of its own making even before the terrorist attacks. Some stores were in poor locations, including under-performing malls, he said.

Howard Rosencrans, an analyst with HD Brous & Co., attributed House2Home’s demise on its hefty tab for leases.

The chain, formerly known as HomeBase, had lease obligations that were expected to total $71.6 million this year, according to a report filed with the Securities and Exchange Commission.

House2Home’s largest unsecured creditor is State Street Bank, which represents bondholders owed $90.2 million, court papers show.

The company entered the home furnishings business in September 2000 when it opened five House2Home stores.

The outlets, which carried a huge selection ranging from barbecues and patio furniture to sheets to vases, performed so well that the business later decided to convert 67 HomeBase stores into home furnishing warehouses boasting an average 100,000 square feet of space.

With the economy weakening, the company scaled back its ambitious plans. In late March, the company announced plans to convert only 42 of its home-improvement stores into House2Home units, raising some red flags in the investment community.

The company opened 17 House2Home stores in May and an additional 20 between June and August. Two companies that were once related to House2Home also said Wednesday they expect the bankruptcy to take a financial toll.

BJ’s Wholesale Club Inc., a discount warehouse chain based in Natick, Mass., said it will record an after-tax charge of as much as $65 million, or 88 cents a share, for liabilities and expenses related to House2Home leases.

BJ’s and House2Home were part of Waban Inc. until 1997, and BJ’s had agreed to share responsibility for some House2Home leases. Waban in turn had been spun off from TJX Cos., which was formerly called Zayre.

TJX, which owns T.J. Maxx clothing stores, had also agreed to share responsibility for some of the leases. TJX said it would set aside a $40-million after-tax reserve for potential lease liabilities.

Trading in House2Home’s stock was halted Wednesday when the markets opened. The shares, which had hit a 52-week high of $5 on June 25, were unchanged Tuesday, closing at 15 cents on the New York Stock Exchange.

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Bloomberg News contributed to this report.