Lumber Liquidators 2007 Annual Report Download

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AnnuAl
RepoRt
2007
YeAR ended decembeR 31, 2007

Table of contents

  • Page 1
    AnnuAl RepoRt 2007 YeAR ended decembeR 31, 2007

  • Page 2
    Our customers say it best! "GReAt pRoducts, GReAt seRvice! i cAn't believe how GReAt mY flooRs look...thAnk You so much!" Derrick K., Trussville, AL "We had been looking for Bamboo and did our homework. Your prices are unbelievable with a great product. Thanks for the deal." Brett T., Charleston, ...

  • Page 3
    ... our product offering and further develop our superior customer service during 2007. Strengthened Infrastructure. Our improvements included enhancements to our operating platform and upgrades to our inventory planning and merchandise management systems. We also added staff across all levels of...

  • Page 4
    ... product line. Overall, we strengthened our commitment to a greater in-stock position, including key moldings and accessories. Improved Customer Service. We also focused on enhancing the customer experience and improving our service offering. We added regional store management, dedicated resources...

  • Page 5
    ... Bamboo & Cork 10% Laminates 24% Home Centers 53% Floor Covering Stores 69% Hardwood (Solid & Engineered) 7% Lumber Liquidators Lumber Liquidators 2007 Product Mix Marketshare of the U.S. Hardwood Flooring 2007 Estimated Retail Sales* *Catalina Research Inc.'s November 2007 Wood Flooring Report

  • Page 6
    ..., Store Operations E. Livingston B. Haskell Secretary, General Corporate Counsel H. Franklin Marcus, Jr. Vice President, Finance; Treasurer E. Jean Matherne Senior Vice President, Human Resources SHAREHOLDER INFORMATION Corporate Address Lumber Liquidators, Inc. 3000 John Deere Road Toano, VA 23168...

  • Page 7
    ...December 31, 2007, the last business day of the Registrant's most recently completed fiscal quarter, the aggregate market value of such shares held by non-affiliates of the Registrant (based upon the closing sale price of such shares on New York Stock Exchange on December 31, 2007) was approximately...

  • Page 8
    LUMBER LIQUIDATORS, INC. ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS Page PART I Item 1. Item 2. Item 3. Item 4. Business ...Properties ...Legal Proceedings ...Submission of Matters to a Vote of Security Holders ...PART II Item 5. Item 6. Item 7. Item 8. Item 9. Item 9B. Market for Registrant's ...

  • Page 9
    ...to offer a broad assortment of high-quality products to our customers at a lower cost than our competitors. As of December 31, 2007, we sold our products through 116 Lumber Liquidators stores in 43 states, a call center, our website and a catalog. Our company was founded in 1994 by Tom Sullivan, the...

  • Page 10
    ... proprietary brands, targeted marketing campaigns and more efficient net sales and inventory planning and forecasting, as well as favorable long-term industry trends. In addition, we continue to build on what we believe is our strong track record of consistent store-level execution. Expand Operating...

  • Page 11
    ... installation process and provides product reviews and endorsements. Some customers contact our call center, which is staffed by more than 50 flooring experts who are also available for online chat and email. Customers can order samples or a catalog through any of our sales channels. We hire store...

  • Page 12
    ... and local level using both traditional and new media. We co-sponsor various television shows such as "Extreme Makeover: Home Edition" and HGTV's "Dream Home," which use our products and enable potential customers to see both what our flooring will look like after installation and the relative...

  • Page 13
    ... experience with large retailers in the home improvement industry, the retail flooring industry or the flooring installation industry. Store manager compensation consists of a base salary and commissions. A store's warehouse is stocked with that store's most popular hardwood products and high-volume...

  • Page 14
    ... and after" gallery from previous customers, as well as detailed product information and how-to videos that explain the installation process. As with our call center, visitors can also order flooring samples. Catalog and Other Mailings Our direct mail strategy focuses on regular contact with our...

  • Page 15
    ... refinished numerous times. We offer flooring products made from more than 25 wood species, including both domestic woods, such as ash, beech, birch, hickory, northern hard maple, northern red oak, pine and American walnut, and exotic woods, such as bloodwood, cherry, cypress, ebony, koa, mesquite...

  • Page 16
    ... stores. Products supplied by our North American suppliers are generally delivered to our Toano facility or our stores by truck. Our Toano facility is strategically located near the international shipping port in Norfolk and major east-west and north-south interstate highways. In 2007, approximately...

  • Page 17
    ..., decreased waste and workplace safety. Distribution, Order Fulfillment and Inventory Management We operate a single distribution center located in Toano, Virginia. We warehouse our products at that facility before shipping them to our stores by truck or intermodal, and approximately 85% of our...

  • Page 18
    ... net sales and average net sales per store older than one year all improved in 2007 compared to 2006. We believe the number of retailers serving the homeowner-based segment of the wood floor market declined in 2007, and our results benefited from increased market share. While the housing market may...

  • Page 19
    ...chains by offering competitive prices, higher-quality hardwood flooring products, a broader product assortment, a shorter delivery time, and better customer service by virtue of our more knowledgeable sales staff. In addition, we believe that our largest competitors with Internet operations focus to...

  • Page 20
    ... federal, state and local government regulation, including regulations relating to employment, public health and safety, zoning and fire codes. We operate each of our stores, finishing facility and distribution center in accordance with standards and procedures designed to comply with applicable...

  • Page 21
    .... The hardwood flooring industry is highly dependent on the remodeling of existing homes and new home construction. In turn, remodeling and new home construction depend on a number of factors which are beyond our control, including interest rates, tax policy, employment levels, consumer confidence...

  • Page 22
    ... of new markets and store locations, our ability to negotiate leases on acceptable terms, management of pre-opening expenses, the quality of our operations, consumer recognition of the quality of our products, our ability to meet customer demand, the continued popularity of hardwood flooring and...

  • Page 23
    ...because of changes in domestic and international supply and demand, labor costs, competition, market speculation, product availability, environmental restrictions, government regulation and trade policies, weather conditions, processing and freight costs and delivery delays. We generally do not have...

  • Page 24
    ...website and call center, to process orders, to respond to customer inquiries, to manage inventory, to purchase merchandise and to sell and ship goods on a timely basis. Our high growth rate creates additional challenges in maintaining and expanding our systems. We may experience operational problems...

  • Page 25
    ...competition could cause price declines, decrease demand for our products and decrease our market share. We operate in the hardwood flooring industry, which is highly fragmented and competitive. We face significant competition from multinational home improvement chains, national and regional flooring...

  • Page 26
    ... a new toll-free number. If our advertisements fail to draw customers in the future, or if the cost of advertising or other marketing materials increases significantly, we could experience declines in our sales and operating results. We have entered into a number of lease agreements with companies...

  • Page 27
    ... by Tom, and 1.5 million shares of our common stock were placed in escrow by Tom, representing the maximum amount of shares Tom and Kevin believed would be earned under the Variable Right. The Variable Right fully vested and became exercisable in connection with the initial public offering (or "IPO...

  • Page 28
    ...to spend a significant amount of management time and external resources to comply with laws, regulations and standards relating to corporate governance and public disclosure, including under the Sarbanes-Oxley Act of 2002 and related rules of the SEC and New York Stock Exchange. Complying with those...

  • Page 29
    ... performance of our competitors; • the public's reaction to our press releases, our other public announcements and our filings with the SEC; • changes in earnings estimates or recommendations by research analysts who follow Lumber Liquidators or other companies in our industry; • variations in...

  • Page 30
    ... Connecticut Delaware Florida Georgia Idaho Illinois 1 2 1 10 3 2 1 11 2 1 4 Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi 2 1 1 1 2 1 2 4 3 2 1 Missouri Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina Ohio Oklahoma...

  • Page 31
    On December 7, 2007, Kevin Sullivan filed a demand for arbitration naming the Founder and us as respondents. In his demand, Kevin "seeks to recover the full number of shares due him under" the Variable Plan agreement. In accordance with the terms of the Variable Plan, we determined and certified ...

  • Page 32
    ...in the operation and expansion of our business and therefore do not anticipate payment of any cash dividends on our common stock in the foreseeable future. Recent Sales of Unregistered Securities Immediately prior to the initial public offering on November 9, 2007, 7,952,018 shares of our redeemable...

  • Page 33
    ... election, we were not subject to federal and certain state income taxation at the corporation level. (4) Share amounts as of December 31, 2003 have been adjusted to reflect the December 2004 common stock dividend of 150,000:1 to Tom Sullivan, our founder and chairman of our board of directors. 27

  • Page 34
    ...) 2003 (unaudited) Balance Sheet Data Cash and cash equivalents ...$ 33,168 $ 3,965 $ 6,031 $ 3,031 $ 3,073 Merchandise inventories ...72,024 51,758 30,009 22,507 14,910 Total assets ...128,424 78,020 55,162 39,753 21,017 Total debt and capital lease obligations, including current maturities...

  • Page 35
    ... team. We expect that our aggregate operating expenses will decline as a percentage of our net sales as our business continues to grow. 2007 Highlights Initial Public Offering. On November 9, 2007, we completed our initial public offering of 3,800,000 shares of common stock at a per share price...

  • Page 36
    ... through lower product costs and resulted in more consistent in-stock positions for key product lines. Our sales volume increased, as more consistent in-stock positions allowed us to satisfy our customers' varying delivery needs. In the third quarter of 2007, our new Senior Vice President of...

  • Page 37
    ... and engineered hardwoods, laminate, bamboo and cork flooring products, moldings and flooring accessories made through our stores, call center, website and catalog. Net sales, which include freight costs billed to customers, are net of any returns by customers. Net sales from customer orders placed...

  • Page 38
    ... website. We have made a significant investment in advertising to develop our national brands, including our portfolio of proprietary product offerings. We believe Lumber Liquidators is now recognized across the United States as a destination for high-quality hardwood flooring at everyday low prices...

  • Page 39
    ... to Our Business and Industry." Labor Costs. The second-largest component of our SG&A expenses is expense relating to employees, consisting principally of salaries, commissions and benefits paid to employees in our stores-which increase as we open more stores-and employees in our distribution...

  • Page 40
    ... this report, we maintain an equity incentive plan for employees, non-employee directors and other service providers, the Lumber Liquidators, Inc. 2007 Equity Compensation Plan (the "2007 Plan"), and a stock unit plan for regional store management (the "2006 Regional Plan"). We adopted the 2007 Plan...

  • Page 41
    ... by strength in the sales of the Bellawood line, particularly exotic hardwoods, and the broader assortment of engineered hardwoods, including an expanded offering of handscraped products, which offset declines in sales of liquidation deals and unfinished hardwoods. Moldings and accessories increased...

  • Page 42
    .... In-store and regional store management salaries, commissions and benefits expense increased $6.3 million, primarily due to the 25 new store locations opened in 2007 and an increase of the number of regional managers from eight to 15. The investment we began in 2006 in our executive and operational...

  • Page 43
    ... margin than our average product and because we implemented a retail pricing strategy designed to enable those products to gain market share. As part of our efforts to optimize inventory levels, we implemented a number of price discounts (primarily during the fourth quarter of 2006) with respect...

  • Page 44
    ...to an increase in the store support infrastructure principally in the second half of 2006, including the hiring of our new chief executive officer and other executives and operational managers. As a percentage of net sales, salaries, commissions and benefits paid to our employees declined to 8.9% in...

  • Page 45
    ... the 2006 Regional Plan due to the IPO. March 31, 2006 Quarter Ended June 30, September 30, December 31, 2006 2006 2006 (dollar amounts in thousands) Net Sales ...Gross Profit ...Selling, General and Administrative Expenses(1) ...Operating Income ...Net Income ...Number of Stores Opened in Quarter...

  • Page 46
    ... business (primarily through opening new stores) and maintaining our existing stores. In 2008, we intend to open between 30 and 40 new store locations; continue the remodeling of existing store showrooms to enhance consistency in presentation; upgrade our finishing line in Toano, Virginia; increase...

  • Page 47
    ... sales from newly opened stores and increasing comparable store net sales. In addition, we increased inventory, primarily in our Toano facility, to be in a better position to drive sales and meet customer demand. Investing Activities. Net cash used in investing activities was $6.0 million for 2007...

  • Page 48
    ...That facility was replaced by a new revolving credit agreement in August 2007. Conversion of Preferred Stock In connection with our IPO, funds managed by TA Associates converted 7,952,018 shares of series A convertible preferred stock, par value $0.01, to shares of common stock, par value $0.001, on...

  • Page 49
    ...balance sheet under the line item "Customer Deposits and Store Credits" until the customer takes possession of the merchandise. Equity Compensation We currently maintain a single equity incentive plan under which we may grant non-qualified stock options, incentive stock options and restricted shares...

  • Page 50
    ... number of new stores, hiring a number of key senior executives (including a new CEO), and implementing a number of operational, financial and governance policies to enhance our reporting and compliance functions. After our IPO, we consider the fair value of our common stock to be the closing price...

  • Page 51
    ...of our IPO, we have invested our cash in short-term investments with maturities of three months or less. Changes in interest rates affect the interest income we earn, and therefore impact our cash flows and results of operation. In addition, any future borrowings under our revolving credit agreement...

  • Page 52
    ... and Supplementary Data. Page Index to Financial Statements Report of Independent Registered Public Accounting Firm ...Balance Sheets as of December 31, 2007 and 2006 ...Statements of Income for the years ended December 31, 2007, 2006 and 2005 ...Statements of Stockholders' Equity (Deficit...

  • Page 53
    ...position of Lumber Liquidators, Inc. at December 31, 2007 and 2006, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles. /s/ ERNST & YOUNG LLP Richmond, Virginia March...

  • Page 54
    ...' Equity (Deficit) Current Liabilities: Accounts Payable ...Customer Deposits and Store Credits ...Accrued Compensation ...Other Current Liabilities ...Current Portions of Long-Term Debt and Capital Lease Obligations ...Total Current Liabilities ...Stock Compensation Liability ...Long-Term Debt and...

  • Page 55
    Lumber Liquidators, Inc. Statements of Income (in thousands, except share data and per share amounts) 2007 Year Ended December 31, 2006 2005 Net Sales ...Cost of Sales ...Gross Profit ...Selling, General and Administrative Expenses ...Operating Income ...Interest Expense ...Other (Income) Expense ...

  • Page 56
    ...2006 ...Reincorporation in Delaware ...Sale of Common Stock, net of issuance costs of $5,650 ...Conversion of Redeemable Preferred Stock into Common Stock ...Stock-Based Compensation Expense ...Reclassification of Stock Compensation Liability ...Net Income ...Balance December 31, 2007 ... 15,000,100...

  • Page 57
    ... and Amortization ...Deferred Income Taxes ...Stock-Based Compensation Expense ...Accretion of Redeemable Preferred Stock ...Changes in Operating Assets and Liabilities: Merchandise Inventories ...Accounts Payable ...Customer Deposits and Store Credits ...Prepaid Expenses and Other Current Assets...

  • Page 58
    ... may be ordered, and customer questions/concerns addressed, through both our call center in Toano, Virginia, and our website, www.lumberliquidators.com. The Company finishes the majority of the Bellawood products in Toano, Virginia, which along with the call center, corporate offices, and finishing...

  • Page 59
    ..., or approximate, market interest rates. Merchandise Inventories The Company values merchandise inventories at the lower of cost or market. Merchandise cost is determined using the average cost method. All of the hardwood flooring purchased from vendors is either prefinished or unfinished, and in...

  • Page 60
    ... production of the Company's proprietary brand, the transportation costs from the distribution center to the store locations, and any inventory adjustments, including shrinkage. The Company includes transportation costs for the delivery of products directly from stores to customers in cost of sales...

  • Page 61
    ...the form of stock options and restricted stock awards to employees and non-employee directors. The Company recognizes expense for its stock-based compensation based on the fair value of the awards that are granted. Measured compensation cost is recognized ratably over the requisite service period of...

  • Page 62
    ... merchandise vendors had an outstanding balance due to the Company of $1,780, of which $1,009 had been included in other current assets. NOTE 3. PROPERTY AND EQUIPMENT Property and equipment consisted of: December 31, 2007 2006 Vehicles ...Finishing Equipment ...Office Equipment and Other ...Store...

  • Page 63
    ... principal payments through scheduled expiration in March 2011, and bore interest payable monthly in arrears, at the 30-Day London Interbank Offer Rate ("LIBOR") + 0.90%. The Company entered into a new revolving credit agreement (or "2007 Revolver") to replace the existing revolving line of credit...

  • Page 64
    The future minimum rental payments under capital leases and non-cancellable operating leases, segregating ANO and Related Companies leases from all other operating leases, were as follows at December 31, 2007: Operating Leases ANO and Related Companies Capital Leases Store Leases Headquarters Lease ...

  • Page 65
    ...grants of stock units are available under the 2006 Regional Plan. The stock units would have expired without value unless a trigger event, as defined, occurred. The IPO was a trigger event, and the Company recorded $258 of stock-based compensation expense in the fourth quarter of 2007. The remaining...

  • Page 66
    ... put-call provisions, executed by the Founder or Kevin, if an IPO or sale event, as defined, had not taken place prior to February 1, 2008. The Founder was liable for the cash payment, and the Company guaranteed his performance. The Company has accounted for the Variable Plan in accordance with the...

  • Page 67
    ...$11 per share IPO price to adjust the Stock Compensation Liability to $9,392, representing $260 of 2007 stock-based compensation expense. The Stock Compensation Liability was reclassified to Additional Capital in accordance with the provisions of SFAS 123(R). As described in Note 11, Kevin filed for...

  • Page 68
    ... $4,124 The Company made income tax payments of $7,383, $6,989 and $10,381 in 2007, 2006 and 2005, respectively. NOTE 8. PROFIT SHARING PLAN The Company maintains a profit-sharing plan, qualified under Section 401(k) of the Internal Revenue Code, for all eligible employees. Employees are eligible...

  • Page 69
    ... Note 5, the Company leases a number of its store locations and Corporate Headquarters from ANO and Related Companies. As of December 31, 2006, other assets included $35 that the Founder owed the Company in the normal course of business. The amount was paid in the first quarter of 2007. In 2005 and...

  • Page 70
    On December 7, 2007, Kevin Sullivan filed a demand for arbitration naming the Founder and the Company as respondents. In his demand, Kevin "seeks to recover the full number of shares due him under" the Variable Plan agreement. In accordance with the terms of the Variable Plan, the Company determined...

  • Page 71
    ... reporting. This annual report does not include a report of management's assessment regarding internal control over financial reporting or an attestation report of the company's registered public accounting firm due to a transition period established by rules of the SEC for newly public companies...

  • Page 72
    ...one of our Section 16 officers, were each a day late in filing Form 4s to reflect a stock purchase. Code of Ethics We have a Code of Conduct, which applies to all employees, officers and directors of Lumber Liquidators, Inc. Our Code of Conduct meets the requirements of a "code of ethics" as defined...

  • Page 73
    ... for our annual meeting of stockholders to be held on May 15, 2008. Lease Arrangements As of December 31, 2007, we leased our Toano facility, which includes a store location, and 23 of our other store locations from ANO LLC ("ANO"), a company that is wholly owned by Tom Sullivan, our founder...

  • Page 74
    ..., Item 8 of this annual report: Page Report of Independent Registered Public Accounting Firm ...Balance Sheets as of December 31, 2007 and 2006 ...Statements of ... not applicable. 3. Exhibits The exhibits listed on the accompanying Exhibit Index are filed or incorporate by reference as part of this...

  • Page 75
    ... caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the city of Toano, state of Virginia, on March 12, 2008. LUMBER LIQUIDATORS, INC. By: /s/ JEFFREY W. GRIFFITHS Jeffrey W. Griffiths President and Chief Executive Officer POWER OF ATTORNEY Each person...

  • Page 76
    ... Plan#* Employment Agreement with Jeffrey W. Griffiths#* Employment Agreement with H. Franklin Marcus, Jr.#* Offer Letter Agreement with Robert M. Morrison#* Offer Letter Agreement with Marco Pescara#* Form of Non-Qualified Employee Stock Option Agreement#* Lease by and between ANO LLC and Lumber...

  • Page 77
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  • Page 79
    ... such a low price and I'm definitely happy that I ended up taking my ï¬,oor from your company." Catherine D., Hackensack, NJ "We LOVE our new floor and the beauty and brightness it adds to our kitchen and addition." Brenda S., Road Spooner, WI "We love our floor! We installed Bellawood Brazilian...

  • Page 80
    ...503.221.4944 UTAH Salt Lake City 515 W Pickett Circle Ste 100 801.886.8878 NEVADA Las Vegas 6455 S Dean Martin Dr, Ste F 702.893.3338 Reno 9728 S Virginia St, Ste E 775.851.4949 INDIANA Fort Wayne 2639 Goshen Rd 260.494.3210 Indianapolis 8410 N. Michigan Road 317.541.1444 VIRGINIA Lynchburg 3710...