Waban Inc.

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Waban Inc.

One Mercer Road
P.O. Box 9600
Natick, Massachusetts 01760
U.S.A.
(508) 651-6500
Fax: (508) 651-7437

Public Company
Incorporated: 1983 as HomeClub Inc.
Sales: $3.65 billion
Employees: 16,000
Stock Exchanges: New York
SICs: 5031 Lumber, Plywood and Millwork; 5039 Construction Materials; 5122 Drugs, Proprietaries and Sundries; 5141 Groceries, General Line

Waban Inc. consists of two warehouse merchandising businesses: HomeBase and BJ’s Wholesale Club. In 1994 Home-Base, one of the nation’s four largest home-improvement merchandisers with a warehouse format, ranked as the second-largest operator of home-improvement stores in the western United States. BJ’s Wholesale Club, which sells food and general merchandise, was the nation’s third-largest membership warehouse chain the same year. As of 1992 Waban was the sixth-largest business based in Massachusetts.

Waban’s rise to prominence was a rapid one. The HomeBase part of the business was founded by Robert McNulty and George Handgis as HomeClub Inc. Based in Fullerton, California, HomeClub opened its first two warehouse outlets in the California communities of Fountain Valley and Norwalk in October 1983. Warehouse-format home centers typically offer lower prices than traditional home-improvement and building supply stores and lumber yards. They also typically offer greater product selection and in-stock merchandise. The home-center warehouse format generally serves do-it-yourself customers as well as professional contractors and facility managers.

A high-school dropout and Vietnam veteran with experience in home-improvement retail stores, McNulty was the active partner in the fledgling business. Armed with $4.5 million in startup funds from venture-capital investors, he regularly put in 90-to 100-hour workweeks. By the end of 1985 the HomeClub chain had grown to 18 stores, with 18 more stores planned to open in 1986. These stores were open to all, but nonmembers paid five percent more for purchases than fee-paying members. The company reported sales of $90.5 million in the six months ending July 28, 1985, with net income (excluding an extraordinary item) of $1.7 million.

McNulty’s plans for national expansion were scotched by a disappointing response to HomeClub’s initial public offering of stock in October 1985. Lacking what he called the “deep pockets” needed to go nationwide, he agreed the following month to sell the company to discount merchandiser Zayre Corp. for Zayre common stock valued at between $147 million and $151 million. McNulty calculated his projected profit from Zayre stock and options at $6.5 million. Sixty-five of his employees also owned HomeClub shares that they swapped for Zayre stock after the deal was ratified in January 1986.

Zayre, with headquarters in Framingham, Massachusetts, was then operating self-service discount department stores and off-price specialty stores. In announcing the acquisition, Zayre’s president said it was “part of the company’s long-term strategy to become a diversified, value-based chain-store retailer.” HomeClub maintained its headquarters in Fullerton and McNulty continued to lead the company after the purchase. He resigned in 1986 to pursue other business ventures and was replaced by Herbert J. Zarkin, who remained president until 1988. By late 1988 HomeClub had expanded greatly, with annual sales of more than $750 million.

Zayre introduced the warehouse-club concept to New England by founding BJ’s Wholesale Club in 1984. In that year it opened three 100,000-square-foot facilities. Patterned after such competitors as The Price Co.’s Price Club and Wal-Mart’s Sam’s Club, BJ’s typically offered a wide array of merchandise in self-service no-frills facilities. Establishments confined product choice to brand-name leaders and refused to accept credit cards. Its goal was to achieve high sales volumes and rapid inventory turnover, attracting customers from supermarkets, discount stores, office-supply stores, consumer electronics stores, automotive stores, and wholesale distributors and jobbers. The reference to “wholesale” in the company name was primarily a marketing device, for the operation was directed principally, if not wholly, toward retail sales. As a membership club, BJ’s charged its customers an annual fee. This fee was originally $30. It dropped to $25 for a time, but the $30 membership fee was eventually reinstated.

A computer-management executive named Mervyn Weich was appointed to run the operation. Headquarters were established in Natick, Massachusetts. By mid-1987, 15 BJ stores were in operation in the East and Midwest, and annual sales rose from $350 million in 1986 to $580 million in 1987. The company, however, posted a loss. Weich (who later opened a rival operation called Wholesale Depot) resigned at the end of June 1987 and was replaced by John F. Levy. An analyst for a brokerage house told a Boston Globe reporter at the time, “if I were senior management, I would have hoped BJ’s had accomplished more by this time, given the money thrown into it.”

By the end of 1988 the number of BJ stores had grown to 22 in 11 states. Sales volume reached $827 million that year, placing BJ’s fifth in the nation among warehouse clubs. In late 1989 its stock consisted of about half food and half general merchandise, with small businesses representing about ten percent of the customers but about half of total sales. A representative store, like the 107,000-square-foot facility in Weymouth, Massachusetts, stocked 3,500 items in bulk, including television sets, exercise equipment, power tools, clothing, books, tires, and house wares. Goods were typically stacked almost to the ceiling in plain steel racks.

Profitability remained elusive, however, even though sales reached $1.1 billion in 1990. In the face of stiff competition from other warehouse clubs entering New England and the Middle Atlantic states, BJ’s had been forced to restrict its markup to only eight to ten percent above cost. An industry analyst told the Boston Globe that although the club had cut costs to the bone and raised efficiency, it was failing to attract repeat business because it was not introducing new products. By contrast, the HomeClub organization, with about the same sales volume in 55 stores, had established itself as a moneymaker.

Following Zayre’s acquisition of HomeClub, it was consolidated with BJ’s into a single warehouse-club division. This division became Waban Inc. in 1989, the year Zayre, which was renamed TJX Cos., spun it off as a separate company. Based at BJ’s Natick headquarters, Waban was named for a nearby Massachusetts village. Zayre stockholders received one Waban share for every two Zayre shares they owned. Most stockholders sold their shares, which fell from an initial price of $18 a share to about $14.50 in the next few months. Some brokers and analysts were bullish on the new company’s potential, though, noting that it had a debt-to-capital ratio of only 11 percent and a price-earnings ratio lower than its competitors.

Waban’s first months of operation proved difficult. Net income fell from $28.8 million in 1989 to $18.4 million in 1990. Management attributed the profit drop to a decision to set aside money for needed substantial long-term investments, but analysts noted stiff competition from HomeClub’s archrival, Home Depot. The price of Waban stock fell as low as $4.63 a share in 1991. In March of that year HomeClub terminated its membership fee in an effort to increase its customer base. The more than one million current members were issued refund vouchers of $10 to $15, redeemable at all warehouses. The name of the chain was changed to HomeBase in 1992 in order to remove any remaining perception that it had a membership policy.

HomeClub had 70 stores in operation in the West when, in mid-1991, it opened its first midwestern location. The new store was located in Toledo, Ohio, at the site of a former BJ’s establishment. The company’s president foresaw the possibility of opening 150 HomeClubs over a 10-year period in the Midwest, where the warehouse-club format had not been widely tested. HomeClub also began a campaign to attract women by offering more home-decor items, including Oriental rugs.

Midwestern expansion proved a mistake. HomeClub entered the Chicago area in 1991 by revamping failed BJ’s stores. It abandoned Chicago two years later, turning over leases on five of its six stores in the metropolitan area to Home Depot. The warehouse chain—now HomeBase—also closed its two Toledo stores at this time. While their operations were profitable, the stores did not return profits high enough to satisfy Waban.

BJ’s, which had grown to 28 stores by mid-1991 and had added fresh-meat departments and in-store bakeries to its stores, sold one of its four Chicago-area outlets that year while turning over the other three to HomeClub. Waban’s retreat from the Midwest was based on its conclusion that this region was not as interested in the warehouse concept as the East and West.

In 1992 BJ’s reached sales volume of $1.79 billion, but average sales of $48 million for its 39 stores trailed the results posted by competing warehouse-club chains. In May 1993 Levy was replaced as chief executive officer of Waban by Zarkin, who had been serving as president of BJ’s since 1990. Levy acknowledged that “results have fallen short of the board’s goals,” an outcome industry analysts described as a sure sign of a shakeout in the warehouse-format industry. One analyst told the Boston Globe that “BJ’s clubs and HomeBase stores just aren’t quite up to par with the execution of Sam’s Club or a Home Depot.”

The subsequent restructuring of Waban included a decision to spend $100 million to close or relocate 24 HomeBase stores (including the Chicago-area stores). HomeBase’s operating income for the third quarter of the fiscal year had declined to $8.4 million from $14.8 million in the previous year’s third quarter, despite an increase of four percent in total sales. Zarkin said Waban sought to build “HomeBase into a major regional home-improvement retailer in the western United States, a position similar to that held by BJ’s Wholesale Club as the dominant membership warehouse club in the Northeast.”

At the end of 1993 there were 82 HomeBase stores in 11 western states; 51 were in California. Sales volume (excluding the 24 stores closed or to be closed) came to $1.6 billion, and operating income was $42.7 million. A net loss was recorded, however, because of a $60.2-million post-tax reserve set aside for restructuring. The average HomeBase store occupied 101,000 square feet.

Waban’s evaluation was that the division was falling short in providing service to the casual do-it-yourself customer. Company strategy, as approved in the November 1993 restructuring plan, called for an increase in customer service by hiring more salespeople, an aggressive marketing campaign, cost-cutting via centralization of merchandise replenishment and reduction of freight costs, and selective price increases. A satellite-television network was used to broadcast product-knowledge training sessions to all the stores. The restructuring plan also called for the closing of 16 HomeBase stores, mostly older units with undesirable buildings or unacceptable retail locations.

BJ’s Wholesale Club, meanwhile, had 52 stores in 12 eastern seaboard states ranging from Maine to Florida at the end of 1993. It also had 2.6 million club members. The average store occupied 110,000 square feet. BJ’s made plans to open about 15 new warehouse clubs each year during the mid-1990s, virtually all of them in the Northeast. Since BJ’s appeal was based on low prices and high volume, it constantly sought to reduce its operating costs and pass savings along to its members. Sales volume in 1993 came to $2 billion, while operating income reached $45.2 million.

Supermarket-style conveyers and sophisticated scanning technology at BJ’s checkouts resulted in significant cost reductions in 1992 and 1993. New products and services added in the early 1990s included fresh meat and bakery departments, optical centers, cellular-phone sales booths, lottery-ticket counters, an auto-buying service, a travel service, and novel departments like “Pop’n Fudge,” which offered fresh gourmet popcorn and homemade fudge. A BJ’s credit card was introduced in late 1993.

BJ’s recorded annual double-digit growth in total sales and operating profit during 1991-93. It was able to drive down costs during this period by flowing a greater percentage of its goods through its cross-docking facilities and centralizing many labor-intensive activities in those facilities. It paid manufacturers a lower price for freight because they were not shipping to each club individually. This process also allowed BJ’s to maintain lower inventory levels, thereby enabling the clubs to operate more efficiently and reduce interest costs.

For the fiscal year ended January 29, 1994, Waban grew in sales volume by 6.9 percent, reaching nearly $3.6 billion. While the company recorded its first loss ($17.8 million), the drop was attributed to a restructuring charge of $60.2 million to reposition HomeBase; otherwise the company recorded a profit comparable to the previous year’s $44.2 million. For the fiscal year ended January 28, 1995, sales volume rose slightly, to $3.65 billion, while net income increased significantly, to nearly $65 million. Waban’s long-term debt was $259 million in October 1994.

Listed on the New York Stock Exchange, Waban common stock reached a high of $26.50 a share in 1992. At the end of 1994 it was trading at about $16 a share, but by the end of March 1995 it had risen to about $19 a share. As of that date no dividend had ever been paid out by Waban.