The company’s board of directors voted to reduce the scale of the House2Home rollout to minimize the uncertainties associated with a broader, more expensive rollout and maximize the probability of the expansion program's success. Under the new plan, the company expects to approach break even or possibly return to profitability by the third quarter of this year instead of by the fourth quarter, as previously planned.
“Although sales at the five House2Home test stores have remained positive, we are beginning to see the potential impact that macro economic conditions can have on certain aspects of our business,” said Herbert Zarkin, chairman, president and CEO. “For example, diminished consumer confidence has caused us to question our entry into colder climate markets, where the outdoor living category of the House2Home concept has yet to be tested. In addition, an increasingly tight credit market can make it more difficult for certain of our vendors and business partners to meet the demands of a rapid, large-scale expansion.
“Although we would like to open more House2Home stores this year, given recent developments, we believe a more modest launch of the House2Home concept is the right decision at this time, enabling us to preserve significant upside potential while minimizing the downside risk," Zarkin added.
On Dec. 5, 2000, HomeBase announced its intention to exit the home improvement business and reposition itself as a home furnishings retailer with a broad expansion of its new House2Home concept.
Under the revised schedule, the company will not convert any of the 26 remaining HomeBase stores in phases six through eight of its eight-phase rollout program to the House2Home format. Phases six, seven and eight include stores throughout the Pacific Northwest, the Rockies and El Paso, Texas. All 26 stores have been closed and are scheduled to reopen for liquidation sales. Upon completion of an 11-week liquidation process, the stores will close permanently, with all employees being offered severance packages. In total, the company will operate approximately 42 House2Home stores this year and close roughly 47 HomeBase stores. Phases one through five of the program are proceeding on schedule, with the next 17 House2Home stores scheduled to grand open throughout the Los Angeles market in May, as planned.
The company will take an up front charge of between $90 and $100 million, after tax, in the first quarter ending April 28, 2001 for the write-down of fixed assets and for the post-closing occupancy costs associated with a total of 47 stores that will not be converted. The company will market for sale its owned properties not slated for conversion. Consequently, the company expects to report a net loss for the first fiscal quarter of approximately $3.50 to $3.75 per diluted share, bringing the anticipated net loss for the current fiscal year ending January 2002 to approximately $4.00 to $4.25 per diluted share.
As a result of having fewer House2Home stores open and, therefore, lower total sales, the company has revised its three-year earnings outlook. The company now expects to earn approximately 30 cents per diluted share for the fiscal year ending January 2003, 65 cents per diluted share for the fiscal year ending January 2004, and 95 cents per diluted share for the fiscal year ending January 2005.
These estimates reflect an anticipated 20% reduction in general and administrative expenses, including a staff reduction of approximately 140 people at the company's home office in Irvine, California. The company has not changed its assumptions regarding average annual sales per store or average per store operating and profit margins.