Lumber Liquidators 2007 Annual Report Download - page 26

Damage, destruction or disruption of our Toano facility could significantly impede our ability to finish and
distribute our products.
We currently finish approximately 70% of all Bellawood products at our Toano facility. In 2007, Bellawood
flooring accounted for approximately one-third of our net sales. We also finish small quantities of certain of our
other products there. In addition, the Toano facility serves as our distribution center, and approximately 85% of
our merchandise passes through this facility before we move it to our stores. The Toano facility also houses our
primary computer systems, which control our management information and inventory management systems, and
our corporate headquarters. We do not have any other finishing or distribution facilities. If the Toano facility or
our inventory held there were damaged or destroyed by fire, wood infestation or other causes, our entire finishing
and distribution processes would be disrupted, which could cause significant lost production and delays in
delivery. This could impede our ability to stock our stores and deliver products to our customers, and cause our
sales and operating results to deteriorate.
Failure to maintain relevant product endorsement agreements and product placement arrangements could
harm our reputation and cause our sales to deteriorate.
We have established relationships with well-known and respected home improvement celebrities to
evaluate, promote and help establish with consumers the high-quality nature of our products. If these individuals
were to stop promoting our products, if we were unable to renew our endorsement contracts with them or if we
could not find other endorsers of a similar caliber, our sales and reputation could be harmed. Similarly, any
actions that persons endorsing our products may take, whether or not associated with our products, which harm
their or our reputations could also harm our brand image with consumers and our reputation, and cause our sales
to deteriorate. We also have a number of product placement arrangements with home improvement-related
television shows. We rely on these arrangements to increase awareness of our brands, and to enable potential
customers to see both what our flooring will look like after installation and the relative ease with which it can be
installed. Any failure to continue these arrangements could cause our brands to become less well-known and
cause our sales to deteriorate.
Our success depends on the continued effectiveness of our advertising strategy.
We believe that our past success was achieved in part through our successful investment in local and
national advertising. We typically locate our stores in industrial or commercial areas that have lower rents than
traditional retail locations, but that are generally set some distance from population centers and downtown urban
areas. To support this real estate strategy, we have used extensive advertising to encourage customers to drive to
our stores. We may need to increase our advertising expense to support our business strategy in the future. In
addition, we lease but do not own the rights to 1-800-FLOORING. Although we have an indefinite renewal right
under the related contract, it could be terminated in certain circumstances, which could increase our costs until
we were able to publicize 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 controlled by our controlling stockholder,
which may make it more difficult to modify or terminate those leases.
We have entered into several agreements with related parties in connection with a significant number of
transactions, including leases for our Toano facility, which includes a store location, and 25 of our other store
locations as of December 31, 2007. Tom Sullivan is the sole owner of ANO LLC, with which we have in the past
entered into most such agreements. In addition, Tom is the sole owner of Wood on Wood Road, Inc., and he has
a 50% membership interest in BMT Holdings, LLC, and we lease one store location from each of these entities.
While we believe that these leases we have signed to date are on fair market terms, it may be more difficult for us
to modify or terminate those leases in the future, or we may be prevented from doing so by the actions of Tom,
who is a significant stockholder.
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