Lumber Liquidators 2007 Annual Report Download - page 60

Cost of Sales
The cost of sales includes the actual cost of the merchandise sold, the transportation costs from vendor to
the Company’s distribution center or store location, any applicable finishing costs related to 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 if delivered by third parties or in selling, general and administrative expenses (or “SG&A”) if
delivered by the Company’s delivery fleet. Costs related to the Company’s delivery fleet, which include delivery
salaries, maintenance and depreciation, totaled approximately $1,600 in 2007 and 2006, and $2,600 in 2005.
The Company offers a range of prefinished products with warranties on the durability of the finish ranging
from 10 to 50 years. Warranty reserves are based primarily on claims experience, sales history and other
considerations, and warranty costs are recorded in the cost of sales. Warranty costs and changes to the warranty
reserve were not significant for 2007, 2006 or 2005.
Advertising Costs
Advertising costs charged to SG&A were $41,693, $36,288 and $27,570 in 2007, 2006 and 2005,
respectively. The Company uses various types of media to brand its name and advertise its products. Media
production costs are generally expensed as incurred, except for direct mail, which is expensed when the finished
piece enters the postal system. Media placement costs are generally expensed in the month the advertising
occurs, except for contracted endorsements and sports agreements, which are generally expensed ratably over the
contract period. Amounts paid in advance are included in prepaid expenses and totaled $1,935 and $2,667 at
December 31, 2007 and 2006, respectively.
Store Opening Costs
Costs to open new store locations are charged to SG&A as incurred.
Depreciation and Amortization
Property and equipment is carried at cost and depreciated on the straight-line method over the estimated
useful lives of the related assets. Vehicles and office equipment are depreciated over useful lives which range
from three to five years, and finishing equipment is depreciated over five years. The estimated useful lives for
leasehold improvements are the shorter of the estimated useful lives or the remainder of the lease terms. For
leases with optional renewal periods, the Company uses the original lease term, excluding optional renewal
periods to determine the appropriate estimated useful lives. Leasehold improvements are currently being
amortized over useful lives which range from two to fifteen years.
Some of the Company’s vehicles are leased under capital leases. These assets are recorded at the lower of
fair value or the present value of net minimum lease payments and amortized over the shorter of their estimated
useful life or the life of the lease. Amortization of capital leases is included within depreciation expense.
Operating Leases
The Company has operating leases for its stores, Corporate Headquarters and certain transportation
equipment. The lease agreements for certain stores contain rent escalation clauses and rent holidays. For
scheduled rent escalation clauses during the lease terms or for rental payments commencing at a date other than
the date of initial occupancy, the Company records minimum rental expenses on a straight-line basis over the
terms of the leases in SG&A.
54