HomeBase, Inc.

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HomeBase, Inc.

3345 Michelson Drive
Irvine, California 92612-0560
U.S.A.
Telephone: (949) 442-5000
Fax: (949) 442-5779
Web site: http://www.homebase.com

Public Company
Incorporated: 1985 as HomeClub, Inc.
Employees: 8,400
Sales: $1.52 billion (1999)
Stock Exchanges: New York
Ticker Symbol: HBI
NAIC: 42131 Lumber, Plywood, Millwork, and Wood Panel Wholesalers; 44419 Other Building Material Dealers; 44411 Home Centers; 44413 Hardware Stores; 44412 Paint and Wallpaper Stores

HomeBase, Inc. is one of the leading chain of home improvement stores in the western United States. From its base of operations in California, HomeBase has spread throughout the West. By early 1999, it had 47 warehouse stores in California and 37 in the states of Washington, Oregon, Idaho, Nevada, Arizona, New Mexico, Utah, Colorado, and Texas. The company planned to open an additional six stores later that year. Each HomeBase store averages over 103,000 square feet of space and carries a broad variety of building supplies and home improvement merchandise for the kitchen, bathroom, and remainder of the home. The central focus of each store is the Design Center, with a selection of home decor items. Stores also include nursery and gardening sections. In 1999 HomeBase reported net sales of over $1.44 billion, down slightly from the previous fiscal year.

The Birth of HomeClub to the Merger with Zayre: Mid-1980s

HomeBase Inc. has its origins in two HomeClub Stores which opened in southern California in 1983. The stores were part of the early boom in so-called warehouse stores, where shoppers who became members were entitled to discounts on purchases. In 1984, HomeClub obtained $5 million in venture capital which it used to build an additional five stores in California and to expand into Nevada. Only one year later, an October 1985 public offering brought HomeClub $30 million and the chain opened 12 new stores in California. In January 1986, flush with success, HomeClub merged with the Zayre Corporation, a department store chain headquartered in Framingham, Massachusetts. HomeClub became a wholly owned Zayre subsidiary and formed, with BJ’s Wholesale Club, a Zayre’s warehouse division. After the merger, HomeClub opened another ten stores in the western United States.

The Zayre discount department stores were entering a period of decline in the late 1980s, however. Zayre reported a loss of $69 million for the first half of 1988, and in September, Zayre cut its 392 department stores loose, selling them for $800 million to Ames Department Stores of Rocky Hill, Connecticut. Zayre was left with two healthy businesses, the home improvement chain HomeClub and BJ’s Wholesale Club, a discount warehouse operation. In December 1988 Zayre announced it was planning a thoroughgoing restructuring. First, it spun off its two profitable subsidiaries, HomeClub and BJ’s. What was left of Zayre was then merged into TJX Cos., a group of firms that included apparel chains Hit or Miss and T.J. Maxx, and the Chadwicks of Boston mail-order catalog.

New Life Under Waban: Late 1980s to Early 1990s

After the spinoff, HomeClub and BJ’s became part of Waban Inc., a new company named for a small town near Zayre’s old headquarters, with a management team made up primarily of former Zayre executives. Analysts saw a healthy future for the new company—one predicted 30 percent profit growth for several years’ time—and maintained its stock was significantly undervalued considering the large, yet-unsatisfied market for warehouse stores which then was said to exist. Over the course of the next year or two events seemed to justify Wall Street’s optimism—by early 1990, HomeClub operated 59 stores throughout the West.

Only six months later, however, HomeClub President John R. Chase resigned suddenly, an event some observers attributed to the climate in the home improvement market which had begun to turn turbulent. In particular, HomeClub found itself in fierce competition with the rapidly expanding Home Depot chain. James Halpin became HomeClub’s president, its fifth in as many years. In March 1991, in an attempt to build the chain’s customer base, Halpin introduced a major change in HomeClub’s operation: henceforth its stores would no longer offer memberships. For the previous eight years, both members and nonmember could shop at HomeClub stores. The $10-$ 15 annual membership fee entitled shoppers to a five percent discount on their purchases. The membership plan, in addition to breeding customer loyalty, was designed to provide HomeClub with an up-to-date mailing list. However, company research discovered that the membership plan was keeping many potential customers away because the public in general believed that only members were allowed to shop at HomeClub.

The change had an immediate effect on Waban’s bottom line. Member fees had to be refunded on a pro-rated basis. All customers were offered the five percent discount from then on. At the same time HomeClub lost the significant amount of income that the membership fees had brought each year. In the end, abandoning the membership plan forced Waban to take an $8.8 million charge against earnings in the fourth quarter of 1990. Part of the loss was offset by a public offering Waban Inc. made in November 1991, when four million shares of common stock were sold at $19 per share.

In an attempt to combat Home Depot’s growing ascendancy in the home improvement market, Halpin also instituted other changes at HomeClub. He tried to extend the chain’s appeal beyond its traditional clientele of contractors and hardcore do-it-yourselfers. Store layout and design were made more attractive in order to appeal to women, who decided how home decorating money was spent in most households. The chain began stocking merchandise with more upscale appeal. The HomeClub advertising budget was shifted away from its primitive-looking direct mail flyers to four-color newspaper supplements. Some $20 million was spent on computers to track stock in stores and keep tabs on shipments. Additional warehouses were built to expedite order fulfillment. Departments in Home-Club stores which were not directly related to core business—photo-finishing, for example—were abolished. The strategy was initially successful. In the last quarter of 1990, sales increased by 7.4 percent to $279 million, and by 18 percent to $1.3 billion for all of 1990. HomeClub also added eight new stores that year. Sales rose again in 1992, to $2.8 billion, an increase of 15.5 percent for the year.

The Change to HomeBase: 1992

In February 1992, Waban announced that the name of all HomeClub stores would be changed to HomeBase. The change was meant to eliminate any remaining confusion in the mind of the public about the chain’s lack of membership requirements. At the same time, HomeBase management began to stress quality customer service in stores; and the chain’s motto was changed to reflect this, from “America’s D-I-Y Warehouse”—do-it-yourself was seen as the antithesis of customer service—to” America’s Best Home Improvement Warehouse.” The new motto was also meant to better define exactly what HomeBase did.

Although the name change was expected to cost the company an additional $2.1 million, in the fall of 1991 Waban Inc. put into motion an ambitious plan for national expansion, opening a number of stores in the Midwest, in particular in Chicago. Besides kicking off the national expansion of HomeBase, the plan was intended to reduce the chain’s dependence on changeable economic conditions in the home building and improvement market in California where 47 HomeBase stores—well over half of all its units—were located. In addition to Chicago, Washington state was a focus of expansion, and moves into Kansas City, Detroit, and Cleveland were rumored. All in all, by the end of 1992 Waban hoped to have 88 HomeBase stores in 12 states.

In November 1992 James Halpin resigned as HomeBase president and was succeeded by William Patterson, who came over from Sears, Roebuck. One of Patterson’s first moves was to create a contractor services program made up of 120 installation sales representatives recently laid off by Sears. Under the program, the service reps would offer the full range of services they offered by Sears, but for HomeBase. Patterson saw the plan as a way to capture business that had not been tapped by competitors, especially Home Depot.

Company Perspectives:

“The Base,” as HomeBase has become known, distinguishes itself from other “big box” home improvement stores in three important ways: HomeBase services do-it-yourselfers and professional contractors by providing everyday low prices; our stores maintain an extensive merchandise selection that includes thousands of name brand and private label items; and our highly trained staff provides exceptional and timely customer service. Building relationships is what HomeBase is all about. It starts with our team members, the people who staff our stores everyday. Specially skilled tradespeople and support team members undergo constant training programs to better serve our customers, who range from the first time do-it-yourselfers to the seasoned contractor. HomeBase depends on strong relationships with vendors to maximize our product selection and maintain competitive pricing. Together, these relationships form HomeBase—a company focused on positive growth and committed to building long-term value for our stockholders.

In May 1993, investors were shocked when John F. Levy, the CEO of Waban Inc. and the nephew of Waban Chairman Sumner L. Feldberg, stepped down, citing disappointing growth and earnings in previous years. Although Levy’s public statements maintained that his departure was voluntary, speculation was rife that he had, in actuality, been forced to leave. What seemed clear was that Waban and HomeBase were not performing in the marketplace at the same level as companies like Home Depot. The shake-up continued in October when Patterson was replaced after less than a year as HomeBase president. One cause for the change was differences in management philosophy between Patterson and the new Waban CEO Herbert J. Zarkin. On the other hand, Patterson’s replacement, Allan Sherman, had already worked closely with Zarkin at BJ’s Wholesale Club. Another cause for Patterson’s ouster was Waban’s continuing demand for higher profits from HomeBase. Its operating income rose slightly in 1992, but it was only 2.9 percent of sales, a percentage that was down from 3.2 percent the previous year. The drop in income was blamed partly on the cost of opening new stores and a recession in California. A cutback in HomeBase’s ambitious expansion program was an austerity measure that was unveiled at the end of 1993, when Waban announced plans to close or sell 24 of its 90 HomeBase stores. At the same time, it decided to limit its business to states in the West. It pulled out of the Midwest completely, sold its seven Chicago-area stores, and tabled plans already underway for new stores in Illinois, Ohio, and Indiana. The change in those strategic plans cost HomeBase about $100 million.

By October 1996 HomeBase had 84 stores in its chain once again. That month Waban Inc.’s board of directors approved a proposal to spin off BJ’s Wholesale Club. Under the plan, Waban would continue as a separate entity under the name HomeBase Inc. The rationale behind the change was to enable the management of each company, BJ’s and HomeBase, to focus exclusively on its own goals and operations. Most analysts considered the move long overdue. A decade earlier the two companies had been too small to attract on their own financing adequate for growth. The year 1996 was seen as an optimal time for a split which would enable markets to better evaluate the strength and value of each company, which would then maximize the stock values of each. HomeBase was also considered a brake on the growth most investors felt BJ’s was capable of.

Less than four months later, however, in February 1997, the spinoff was shelved indefinitely when Waban Inc., Kmart, and Leonard Green & Partners, a private merchant banking firm in Los Angeles that specialized in buyouts of established companies, announced a deal that would combine HomeBase and Kmart’s troubled Builders Square chain. Under the terms of the proposed transaction, Leonard Green would be the majority shareholder of the new company, while Waban and Kmart would each retain 20 percent minority interests. With about 250 stores and annual revenues of approximately $4 billion, the chain would be the third largest home improvement company in the United States behind Home Depot and Lowe’s Companies.

Just two months after the merger was announced, it was called off again though, apparently by Waban Inc., which in public statements simply said the parties had been unable to agree on terms. One analyst speculated that Waban may have started thinking more optimistically about HomeBase’s future during its negotiations, and that Leonard Green failed to close the deal quickly enough. In the wake of the failed merger, Waban revived its earlier plan to spin off BJ’s Wholesale Club.

The Spinoff of BJ’s and the Renaming of Waban: Late 1990s

By mid-1997, when the spinoff was approved by shareholders, HomeBase—Waban Inc. had been renamed Home-Base Inc.—was struggling against Home Depot, even on its home turf in southern California. According to the Orange County (California) Register, almost 74 percent of consumers said they had shopped at Home Depot sometime in 1996, compared to only 46 percent for HomeBase. Compounding the problem was an aggressive program of expansion into southern California by Home Depot and Eagle Hardware & Garden, a chain based in Washington state. Part of HomeBase’s problem was the look of many of its stores—about half had been remodeled, and the older ones had the dirty, bare-bones warehouse look of the early HomeClub concept. In December 1997, announced that it was accelerating its remodeling program; the 17 still slated for renovation would be completed within six months rather the two years originally planned. HomeBase also planned to build about 14 new stores over a three year period.

As the summer of 1998 rolled around, HomeBase’s situation became more and more precarious. Its net income for 1997 took a nosedive to $1.5 million from $21.4 million in 1996. Sales at stores open a year or more fell by 1.7 percent. HomeBase Inc.’s stock price rose only 10.8 percent in 1997 compared to a 16.4 percent average for other companies in its sector.

In late 1998, however, HomeBase Inc. announced an unexpected profit of one cent per share, compared to its ten cents a share loss the previous year. When it announced the profit, however, the company also announced plans to increase sales staff and its advertising budget. Those changes, company officials warned, would probably depress 1999’s profits.

In the spring of 1999, the board of directors approved a so-called shareholders’ rights plan which was designed to forestall hostile takeover attempts. Under the plan, if an investor obtained more than 15 percent of HomeBase shares, the company’s directors had ten days to determine whether the move constituted a takeover attempt. If so, other shareholders would be offered HomeBase stock at a discounted price.

Key Dates:

1983:: HomeClub opens two membership stores in southern California.
1984-85:: HomeClub opens 17 more California stores.
1985:: HomeClub goes public.
1986:: HomeClub becomes a wholly owned subsidiary of Zayre Corporation of Framingham, Massachusetts.
1989:: Zayre spins off its warehouse division; HomeClub becomes part of Waban Inc.
1992:: HomeClub drops membership discount and changes name to HomeBase.
1997:: Waban Inc. spins off BJ’s Wholesale Club subsidiary and becomes HomeBase, Inc.

As 1999 ended, HomeBase Inc. found itself the defendant in a lawsuit over one of its oldest stores. The owners of the Orangefair Marketplace, a mall in Orange County, California, sued the company for more than $100,000 in back rent on a store that had been part of the chain practically from the beginning. HomeBase closed the store at the end of September 1999, but refused to vacate the property on the grounds that its lease ran through 2002. HomeBase maintained it was not required to pay rent if mall occupancy fell below 62.5 percent; the mall argued that occupancy dropped that low only because Home-Base closed. Just before Christmas 1999, a judge ordered HomeBase to pay $135,000 in back rent. The mall planned a further suit for losses it had incurred due to HomeBase’s refusal to relinquish the property, a claim that could total more than $3 million.

Principal Competitors

Home Depot, Inc.; Eagle Hardware and Garden Inc.; Hechinger Stores Co.; Builders Square Inc.; Payless Cashways Inc.; Orchard Supply Hardware Corp.; Lumbermen’s Building Centers.