Contacts: Michele Feller
HomeBase, Inc.
949-442-5448
Roger S. Pondel or Julie Crandall
Pondel/Wilkinson Group
310-207-9300
FOR IMMEDIATE RELEASE
HOMEBASE TRANSITIONS INTO HOME DECORATING MARKET WITH
BROAD EXPANSION OF NEW HOUSE2HOME(TM) RETAIL CONCEPT
-- Retailer looks to increase returns, stockholder value with repositioning --
Irvine, California - December 5, 2000 - As part of a major effort to
effect a corporate turnaround and reposition itself in the marketplace,
HomeBase, Inc. (NYSE: HBI) today announced that its board of directors approved
a plan to initiate a broad expansion of the company's new House2Home(TM) retail
concept, reflecting a change in corporate focus toward the home decorating
retail market. As part of its repositioning, the company will exit the home
improvement sector, converting an additional 62 of its HomeBase stores to the
House2Home format and closing the remaining 22 stores.
On September 9 of this year, the company opened five House2Home test
stores in different markets throughout Southern California and in Las Vegas,
Nevada. All five stores are converted HomeBase stores.
"This is a tremendously exciting day for our company as we commit to
change our course for the future and embark upon a new beginning," said Herbert
Zarkin, chairman, president and chief executive officer. "HomeBase has made a
valiant effort to sustain its position in the fiercely competitive home
improvement market. 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.
"After careful deliberation and evaluation of the test store results as
well as consideration of a variety of alternatives, the board of directors is
convinced that our new House2Home concept presents a clear and compelling
opportunity for an effective and fast turnaround," Zarkin continued. "While we
regretfully move away from the HomeBase brand, we embrace the positive changes
that are about to come, and look forward to pursuing a more promising avenue of
growth that offers the possibility of substantially higher returns and greater
stockholder value over the long term."
The Store Conversion Process
Under the chain-wide conversion program, the House2Home expansion is
planned to roll out in a staggered, eight-phase schedule over a 12-month period,
involving the conversion of 62 additional stores and the closure of 22 stores.
The first two phases of the rollout were launched simultaneously today and
involve a total of 31 stores, largely in the greater Los Angeles area. Eighteen
of the stores in these first two phases will be converted into House2Home
stores, while 13 in this group will be closed under one of several scenarios.
These include:
= not renewing a small number of leases that will soon expire;
= closing certain stores with longer leases until the company makes
a final determination about whether to convert them into
House2Home stores at a later date, sublease them to another party
or negotiate lease terminations; or
= selling selected owned stores that are not slated for conversion.
The majority of HomeBase stores that are not slated for conversion into
House2Home stores are included in these first two phases of the rollout.
The inventory liquidation period at each store is scheduled to last
approximately 11 weeks, after which the stores will close. Those to be converted
will then undergo roughly nine weeks of construction and re-merchandising.
Stores in phases one and two are scheduled to reopen in April and May of 2001. A
new phase will begin every three weeks and follow the same approximate 20-week
timeframe. Employees at the stores will be given an opportunity to apply for a
position with any House2Home store, which, on average, staffs 45% more employees
than an average HomeBase store. Employees who do not take positions at
House2Home stores will be offered severance packages upon agreeing to stay
through the liquidation period of their store.
Vision for Financial Growth
If the conversion program is completed within the scheduled 12-month
period, Zarkin noted that the company could return to profitability as soon as
the fourth quarter of next fiscal year, with the following fiscal year, ending
January 2003, being the first profitable full year.
Zarkin said, "Based on our internal business model, we believe
House2Home can generate a compounded average annual growth rate in earnings of
70% over the three-year period following the completion of the conversion, and
yield a return on invested capital, before tax, of over 20%. We consider this to
be a significant return over a relatively short period of time."
The company said if it meets its near-term financial goals, it expects
to earn approximately $0.50 per diluted share in the fiscal year ending January
2003, which is the first full year of House2Home operations following the
completion of the conversion program next year. The company expects to earn
roughly $1.00 per diluted share the following fiscal year, which ends January
2004, and about $1.40 per diluted share the year after. These earnings estimates
reflect the following assumptions:
= Average annual sales per store of approximately $17 million in
the first 12 months of operation, growing to more than $19 million
in their second full year and over $21 million in their third full
year. This does not include any new store openings.
= Stores maintain an average gross product margin of approximately
40%;
= Store payrolls reflect an average of 160 team members per store; and
= Operating income per store grows to $2.5 million, or between 11%
and 12% of sales, by the third year.
Zarkin added that, as part of the company's business plan, ongoing
operations of House2Home stores over the next three years should generate ample
cash flow to enable the company to pay off virtually all of its credit facility
borrowings by January 2004. "While there are no guarantees, we believe, based on
the results of the pilot program to date, extensive industry research and our
cumulative years of retail experience, that these financial goals are reasonable
and achievable," said Zarkin. "Combined sales at the five House2Home test stores
for the 12-week period since their early September opening through the fiscal
month ending November 25, 2000 totaled approximately $21.4 million, or an
average of about $4.3 million per store. This has exceeded our expectations by a
percentage rate in the mid-teens. Once the House2Home chain becomes well
established over the next two to three years, we will explore opportunities for
new store openings in order to grow our market share and achieve greater
operational efficiencies."
The Financial Impact of the Conversion Program
The financial impact of the conversion program will begin in the fourth
quarter of the current fiscal year, which ends January 27, 2001. The company
will record a charge of approximately $55 million for the liquidation of
inventory at all 84 remaining HomeBase stores. The company will also write-down
fixed assets totaling approximately $34 million for its 84 HomeBase stores, of
which $13 million will be charged in the fourth quarter. As a result of these
charges, the company estimates a net loss for the fourth quarter of
approximately $60 million, or $1.60 per diluted share, which would bring the net
loss for the year to an estimated $70 million, or $1.86 per diluted share.
Other primary expenditures associated with the conversion program
include:
= An average of approximately $2.5 million per store for
construction and fixtures, which would be spent during the three
to four months prior to grand opening;
= Approximately $1 million per store for pre-opening expenses,
including employee training, grand opening advertising, etc.;
= Roughly $2 million per store for inventory, net of payables; and
= Approximately $4 million for total anticipated severance costs.
= In addition, stores that are either closed temporarily for
construction or closed permanently will not be generating revenue
to offset fixed expenses.
In total, the company currently expects a net loss for next fiscal year of
approximately $80 million, or $2.13 per diluted share, with the majority of the
loss being incurred in the first two quarters of the year, a smaller loss in the
third quarter and a return to profitability in the fourth quarter as the
conversion is completed.
Resources to Execute the Conversion Program
The company also noted that it has ample financial resources to
complete the House2Home expansion, including:
= A $250 million credit line, the borrowings on which are not expected
to exceed $170 million at their peak. The company has entered into an
underwritten commitment letter agreement with Fleet Retail Finance
to amend the existing credit facility to provide added flexibility
to support the conversion program.
= Approximately $180 million, net, from inventory liquidations at
the 84 HomeBase stores;
= Additional cash from sales of owned properties not slated for
conversion; and
= Cash flow from stores in operation.
"In addition to our financial resources, we are well equipped with
other critical resources needed to successfully execute this transformation,"
said Zarkin. "We have a strong organization and solid infrastructure, a talented
and dedicated team of professionals led by an experienced management team
and, most importantly, a clear vision for the future."
Market Positioning of the House2Home Concept
"We have a unique opportunity to take a leadership position in some
high-growth areas within the home furnishings market that we have identified as
fragmented businesses, which no single dominant retailer is currently addressing
in any meaningful way," Zarkin said. "We believe House2Home offers consumers a
shopping experience unlike any other with important points of differentiation,
including a unique mix of product categories under one roof, a product selection
that is as deep as it is broad, an emphasis on value with a wide range of price
points, special conveniences and added services, as well as excellent customer
service. While many of our departments will have competition, we believe there
is no other single retailer that competes directly with the entire store. We
are, in essence, inventing a new retail category with House2Home, introducing
the big box format to the moderately priced home decorating market."
In addition to competitive positioning, the company stated it believes
the House2Home concept has key advantages, despite ongoing fluctuations in the
economy, based on the following:
= The home furnishings sector is consistently cited by industry
analysts as being among the strongest areas of retail today, and
an area with ample room for growth, and House2Home's product mix
emphasizes categories that continue to show growth.
= With a value-orientation, House2Home can cater to a broader base
of consumers amidst an increasingly price-conscious retail
environment.
= As a home decorating concept, House2Home is less dependent than
the home improvement business on fluctuations in the housing
market.
= The variety of product categories in a House2Home store helps
mitigate the impact of a downturn in any one facet of the
business. In addition, the format is flexible, enabling
departments to expand or shrink in size according to changes in
consumer preference.
= High levels of home ownership and low unemployment continue to
support generally positive consumer sentiment.
= Performing well in an environment of moderating consumer spending
bodes well for the concept's sustainability over time under a variety
of economic conditions.
The company will host a conference call today at 6:00 a.m. PST to
discuss its House2Home expansion. To listen to the call, please dial
212-676-5225 and reference reservation #17093804. A live webcast of the call
will also be available in the investor relations section of the company's web
site, at www.homebase.com. A telephonic replay of the call will be available for
48 hours, beginning at 8:00 a.m. PST on December 5, 2000. To access the
telephonic replay, please dial 1-800-633-8284 and enter reservation #17093804.
An online replay of the webcast will also be available from December 5, 2000
through December 31, 2000 at www.homebase.com and, for StreetFusion subscribers,
at www.streetfusion.com.
HomeBase, Inc. is a retail company with 89 stores in 10 western states.
The company currently has 84 HomeBase home improvement stores, which average
over 100,000 interior square feet, with an adjoining outdoor nursery. The
company also operates five House2Home home decorating superstores in California
and Nevada, which also average over 100,000 interior square feet, with an
adjoining outdoor nursery and garden center. The company is in the process of
converting the vast majority of its HomeBase stores into House2Home stores over
the coming months. Representing four specialty stores under one roof, House2Home
is an exciting one-stop shopping destination for everything that makes a house a
home.
Matters discussed in this press release include forward-looking
statements that involve risks and uncertainties that could cause results to
differ materially from those expressed. Such risks and uncertainties include,
but are not limited to, a change in the ongoing positive trends at House2Home
stores; House2Home becoming a substantial growth opportunity for the company,
with the potential to increase returns and stockholder value; the accuracy of
all assumptions in this press release upon which the company's earnings
estimates are based; the company's ability to successfully complete a conversion
program within a 12-month period and return to profitability by the fourth
quarter of that fiscal year; the competitive marketplace; economic conditions in
the company's markets and the factors set forth in the company's annual report
on Form 10-K for the fiscal year ended January 29, 2000 under the heading "Risk
Factors" and in the company's other filings with the Securities and Exchange
Commission. The company undertakes no obligation to release publicly the results
of any revisions to these forward-looking statements that may be made to reflect
events or circumstances after the date hereof.
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