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HomeBase Scales Back Its Store Conversion Plan

Retail: Home improvement firm will change 25 fewer stores to home furnishings and fire more than a fourth of its work force.


Bowing to the slowing economy, HomeBase Inc. said Tuesday it will scale back ambitious plans to remake itself into a home furnishings chain, closing 25 stores originally listed for the conversion and firing more than 2,600 workers.

The company, which is transforming itself from a home improvement chain after being battered by bigger competitors Home Depot Inc. and Lowe's Cos., said it plans to open 42 House2Home stores, down from the 67 conversions previously planned.

The slowing economy prompted the Irvine firm to reconsider the "scope and pace of the roll-out," including the wisdom of opening a new concept in several states where it had not yet been tested, spokeswoman Michele Feller said.

HomeBase also said it will take an after-tax charge associated with the store closures amounting to $90 million-$100 million.

The layoffs, which include 140 at the company's headquarters, represent more than 25% of the total work force.

While the pullback rattled investors and sent shares falling by 70 cents to $1.70 on the New York Stock Exchange, some analysts applauded the decision.

"They're making a smaller bet," said Brett Hendrickson, an analyst with B. Riley & Co. "It makes the ultimate pot of gold at the end of the conversion process somewhat less, but it also takes away a lot of the risk, because they're going to have a lot less debt."

But others questioned whether there will be a pot of gold of any size for HomeBase.

"I think when you've got a retailer who changes his colors mid-stream . . . it should be a huge red flag that flies up," said Brian Postol, an analyst with A.G. Edwards & Sons Inc. "I don't think you can convert from a home improvement to home furnishings mentality. I just don't see it happening."

HomeBase said, however, that sales at five test stores have kept pace with the company's expectations and that it expects to break even or become profitable by the third quarter this year, three months earlier than expected.

The company plans to open 17 more House2Home stores next month in Southern California.

But the company will still have plenty of competition, including some from its old nemesis Home Depot, which now has its own home decorating stores, called Expo Design Centers.

HomeBase last year launched its House2Home concept, which brings under one roof a wide variety of products, from towels and flatware to dining room sets and lawn furniture.

With sales strong in its five test stores in Southern California and Nevada, the company announced last December that it was abandoning the home improvement business. The company said then that it would permanently close 22 HomeBase stores. On Tuesday, it increased the closures to 47 stores, including 16 in California.

The stores will be closed during the next three months after liquidation sales, the company said. The pullback will leave HomeBase with stores in California, Nevada and Arizona.

HomeBase said it expects to report a net loss of $3.50 to $3.75 per share for the first fiscal quarter ending April 28. For the fiscal year ending in January, the company expects its losses to total $4 to $4.25 a share. Previously, HomeBase said it expected to lose $2.13 a share for the year.

While the company said its decision to operate fewer stores will eat into earnings for the next three years, it said estimated sales and profit margins per store should remain the same.

HomeBase will be saddled with less debt as it converts fewer stores. With the transformation costing an estimated $5.5 million per store, the company expects to borrow up to $110 million, rather than the $170 million previously anticipated.

A slower conversion makes more sense, some analysts said.

"I thought they were much too aggressive in their initial roll-out plans," said Howard Rosencrans, an analyst with HD Brous & Co. "I think it was important not to move too quickly."

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