Lumber Liquidators 2007 Annual Report Download - page 17

Finishing
Annually, we finish approximately 70% of our Bellawood products (about 20 million square feet in 2007) at
our state-of-the-art finishing facility in Toano, and we obtain the balance from qualified finishing suppliers in
North America, South America and Australia. We also finish small quantities of certain of our other products at
that facility. We currently operate one finishing line at Toano and we have the space to construct a second
finishing line in that facility. We continually invest in improving our process controls and product quality, and
we believe that our existing finishing infrastructure at our Toano facility can support our planned growth over at
least the next three years with limited capital expenditures to increase capacity. Bellawood products have one of
the highest scuff resistant finishes in the industry as measured by the Taber Abrasion Test, an abrasion testing
method designed to measure the abrasion resistance of protective floor finishes. We have adopted sophisticated
quality assurance policies and techniques and throughout the finishing process, we perform numerous tests and
visual inspections to verify that the flooring complies with our specifications, and that the final prefinished
hardwood flooring meets our standards. In developing these policies and techniques, we emphasize defect
prevention, minimizing variations in our products, 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 merchandise
passes through that facility before we move it to our stores. It generally takes between two to five days for a
shipment to reach our stores, and each store receives an average of 1.4 shipments per week. In some cases, our
suppliers deliver products directly to our stores. We believe that our existing distribution infrastructure at our
Toano facility can support our planned growth over at least the next three years with limited capital expenditures
and planned logistics initiatives.
In the first quarter of 2007, we upgraded our corporate network with high-speed dedicated lines capable of
carrying both voice and data communications. At this time all of our stores were rewired for voice and data.
Voice communications are now carried over a scalable Internet-based network. During the first half of 2008, we
plan to implement a new point-of-sale system in all of our stores. This touch screen system will provide for real-
time tracking of inventory and sales information. We believe that our updated inventory management and
communications systems will allow for improved forecasting, more efficient inventory management, rapid stock
replenishment and concise merchandise planning.
Our Market
The hardwood flooring market represents approximately 10% of the overall U.S. floor coverings market,
which includes carpet and area rugs, hardwood and softwood flooring, ceramic floor and wall tile, resilient sheet
and floor tile and laminate flooring. In its November 2007 Wood Flooring report, Catalina Research estimates
that the value of U.S. hardwood flooring wholesale sales in 2007 was approximately $2.5 billion in
“manufacturers’ dollars” or $4.1 billion in retail sales. In 2007, approximately 69% of our net sales, or $280
million, were hardwood flooring, representing an estimated market share of 6.8%. Catalina estimates that sales of
hardwood flooring declined 5.0% in comparing 2007 to 2006, following a decline of 4.2% in comparing 2006 to
2005. However, without estimating a turnaround period, Catalina estimates a rebound in demand will be sharp,
and hardwood flooring sales will grow at a compound annual growth rate of 7.5% through 2012.
We believe the demand impacting the wood flooring market which serves the homeowner depends on
complex economic and demographic factors that influence home-related discretionary spending, and these
factors may vary locally, regionally and nationally. We believe our market is impacted by home remodeling
activity, employment levels, housing turnover, real estate prices, new housing starts, consumer confidence, credit
availability, and the general health of consumer discretionary spending. We do not anticipate significant
improvement in the general wood flooring market at least through the first half of 2008.
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