HomeBase Closures a Warning for Retail Investors

LOS ANGELES-The decision by home-improvement giant HomeBase Inc. to close 22 of its stores and convert 62 others to home-furniture outlets is a warning sign for retail-property investors and a sobering reminder than even California’s red-hot economy may be slowing, experts tell GlobeSt.com.By exiting the increasingly cutthroat HI business, HomeBase officials did “exactly what they needed to do,” says Howard Rosencrans, an analyst who follows the industry for HD Brous & Co. in New York. “The chain was not viable, and it was not going to be viable.”

Many HomeBase stores have already been padlocked in the wake of the company’s Tuesday announcement that it would permanently close 22 of its stores and convert 62 others to House2Home stores. The company’s House2Home concept, in which everything from furniture to wallpaper is sold under the same giant roof, made its debut at a handful of Southern California locations earlier this year.

Though HomeBase’s withdrawal is the first major casualty of the nation’s fierce war between home-improvement stores, most experts agree that it won’t be the last. Despite signs that the HI industry’s revenue growth is slowing, most of the nation’s home-improvement chains–often anchor tenants in new retail projects–continue to open stores at a fevered pitch.

In a way, HomeBase’s fate was cast when archrivals Home Depot and Lowe’s, the nation’s two largest HI chains, each began aggressive expansion efforts in Southern California. Home Depot’s SoCal charge began in earnest around 1998, while Lowe’s joined the fray only last year.

“HomeBase made a valiant effort to sustain its position in the fiercely competitive home-improvement market,” Herbert Zarkin, who took over as the company’s CEO in the spring, said in a statement published Wednesday. However, he added, “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.”

HomeBase employs about 10,000 people. Though some of those workers will be laid off, company officials say others will be offered jobs at the converted House2Home stores. The conversion process itself will be costly: HomeBase says it will take a $55-million charge to liquidate inventory and another $34 million to write-down assets.

HomeBase’s dramatic decision comes at a time when overall retail spending appears to be flattening out across the nation, a worrisome sign for retailers and retail-property investors alike. California likely won’t be spared from a widely anticipated downturn: Though a recent study by the UCLA Anderson School of Business says Y2K taxable sales in the state will likely be 10.9% higher than last year, a more modest 5.6% gain is expected in 2001 and a 5.3% decline is forecast for 2002.