Lumber Liquidators 2008 Annual Report Download

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2008
YEAR ENDED DECEMBER 31, 2008

Table of contents

  • Page 1
    2008 YEAR ENDED DECEMBER 31, 2008

  • Page 2
    ... PRICE, LUMBER LIQUIDATORS HELPED US TO GO FROM INEXPERIENCED DO IT YOURSELF CUSTOMERS TO CONFIDENT DO IT AGAIN CUSTOMERS." Gene and Diana S., Reno, Nevada "In March of this year, my husband and I purchased a second home and I knew we would be replacing the living room carpet with a Bellawood floor...

  • Page 3
    ... to marketing. Our brand represents quality and value to our customers. The high levels of brand recognition that we have established for our entire chain and many of our individual products helped us drive consumer demand to store locations generally not in high-traffic, or high cost areas. In...

  • Page 4
    ... we continue to Benefit from our strong value proposition and high brand recognition; Leverage our proven store model as we open new stores with minimal upfront costs; Gain additional market share in the highly fragmented hardwood flooring market; Increase operational efficiencies; and, ultimately...

  • Page 5
    ...the year 57 2005 76 2006 91 2007 116 Net new stores 2008 Net Income $22.1 $16.0 $12.9 $12.0 $8.0 $4.0 $0 $10.7 $8.0 $11.3 2004 2005 2006 2007 2008 11% Moldings & Accessories 1% Other 11% Bamboo & Cork 13% Laminates 64% Hardwood (Solid & Engineered) Lumber Liquidators 2008 Product Mix

  • Page 6
    ... Corporate Address Lumber Liquidators, Inc. 3000 John Deere Road Toano, VA 23168 (757) 259-4280 Independent Registered Public Accounting Firm Ernst & Young LLP Transfer Agent & Registrar Computershare Investor Services P.O. Box 43078 Providence, RI 02940 (800) 662-7232 New York Stock Exchange Ticker...

  • Page 7
    ... in its Charter) Delaware (State of Incorporation) 043229199 (I.R.S. Employer Identification No.) 3000 John Deere Road Toano, VA 23168 (Address of principal executive offices, including, zip code) (757) 259-4280 (Registrant's telephone number, including area code) Securities registered pursuant...

  • Page 8
    ... Officers and Corporate Governance ...Executive Compensation ...Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...Certain Relationships, Related Transactions and Director Independence ...Principal Accountant Fees and Services ...PART IV Item 15...

  • Page 9
    ... Our corporate headquarters is in Toano, Virginia, where we also operate our distribution and finishing facility and our call center. In August 2007, we reincorporated from Massachusetts to Delaware, and in November 2007, we completed our initial public offering. Our stock now trades on the New York...

  • Page 10
    ...hardwood products at attractive prices. We believe that these direct supplier relationships are relatively unique in our industry. In addition, we believe our supply chain and centralized inventory at our Toano facility allow us to meet the delivery needs of our customers better than our competitors...

  • Page 11
    ... 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 items, but primarily holds customer-specific merchandise inventory waiting...

  • Page 12
    ... of our store operations and, along with our call center staff, are trained to understand the characteristics and installation method for the broad range of hardwood flooring that we offer, and to guide customers through the purchase process. Many of our staff have relevant industry experience, and...

  • Page 13
    ...the savings, during three-day weekends when a customer has more time to consider (and possibly even install) a new flooring purchase, and during our annual "odd lot" sidewalk sale in April. Our product credibility also benefits from celebrity endorsements and product placement opportunities. We have...

  • Page 14
    ... 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 15
    ... wood flooring products, and we also sell stair treads and risers. Accessories include underlays that can be placed between the new floor and the sub-floor, insulating sound and cushioning the floors. In addition, we sell installation supplies (such as adhesive and trowels), floor cleaning supplies...

  • Page 16
    ... 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. Many of the economic indicators associated with the wood flooring market and generally...

  • Page 17
    ... our distribution center. We believe that we have good relations with our employees. Intellectual Property and Trademarks We have a number of marks registered in the United States, including Lumber Liquidators®, Bellawood®, 1-800-FLOORING®, Dura-Wood® , Blutec®, Quickclic®, Virginia Mill Works...

  • Page 18
    ...to Our Business and Industry Current economic conditions may adversely impact demand for our products, reduce access to credit and cause our customers and others with which we do business to suffer financial hardship, all of which could adversely impact our business, results of operations, financial...

  • Page 19
    ... 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, credit availability, real estate prices, demographic trends...

  • Page 20
    ... could harm our business and operating results. Our plans call for a significant number of new stores, and increased orders from our website, call center and catalogs. Our existing management information systems, including our store management systems and financial and management controls, may be...

  • Page 21
    ... our business and reduce our sales. We depend on our management information systems to integrate the activities of our stores, 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...

  • Page 22
    ... business and lead to reduced sales and reputational damage. Our website and our call center are integral parts of our integrated multi-channel strategy. Customers use our website and our call center as information sources on the range of products available to them and to order our products, samples...

  • Page 23
    ... price, customer service, store location and range, quality and availability of hardwood flooring we offer our customers. Our competitive position is also influenced by the availability, quality and cost of merchandise, labor costs, finishing, distribution and sales efficiencies and our productivity...

  • Page 24
    ...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 are transitioning our toll-free telephone number from 1-800-FLOORING, which we lease...

  • Page 25
    ...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 these...

  • Page 26
    ...business or other investors. In addition, the timing and volume of any transactions involving our common stock by these stockholders may, among other things, cause fluctuations in the price of our common stock. Our anti-takeover defense provisions may cause our common stock to trade at market prices...

  • Page 27
    ... in supply prices; and tax expenses, impairment charges and other non-operating costs. As a result of these factors, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any year. Average store sales or comparable store sales in...

  • Page 28
    ... Arizona Arkansas California Colorado Connecticut Delaware Florida Georgia Idaho Illinois 4 3 1 12 4 2 1 12 5 1 6 Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi 2 2 2 2 3 1 3 4 5 2 1 Missouri Nebraska Nevada New Hampshire New Jersey New Mexico...

  • Page 29
    ...entered into a purchase agreement with Vazilia Corporation ("Vazilia") pursuant to which we would purchase a total of approximately 27 million square feet of Vazilia's assorted products over a four-year period, with the unit prices set at the time a purchase order was created/accepted (the "Purchase...

  • Page 30
    ...low closing sales prices from November 9, 2007 through December 31, 2007. Dividend Policy We are not required to pay any dividends and have not declared or paid any cash dividends on our common stock. We intend to continue to retain earnings for use in the operation and expansion of our business and...

  • Page 31
    ...companies selected for the same period. Home Depot, Inc. and Lowe's, Inc. constitute the Peer Group index companies. The graph assumes a $100 investment in our common stock.../2008 11/30/2008 12/31/2008 Lumber Liquidators, Inc. NYSE Stock Market (US Companies) Dow Jones US Furnishings Index Peer Group...

  • Page 32
    ... of Income Data Net sales ...Cost of sales ...Gross profit ...Selling, general and administrative expenses ...Impairment loss on long-lived assets ...Operating income ...Interest expense ...Other (income) expense(2) ...Income before income taxes ...Provision for income taxes(3) ...Net income ...Net...

  • Page 33
    ... of high-quality products to our customers at a lower cost than our competitors. We offer our products through multiple, complementary channels, including 150 Lumber Liquidators stores in 44 states at December 31, 2008, a full-service call center in Toano, Virginia, our website and catalogs. We...

  • Page 34
    ... 17.3% in 2006. Due to increases in baseline store volumes, an increase in the number of new stores opened in existing markets, and a weakening in the residential flooring market, we anticipated comparable store net sales to increase at slower rates in 2008 than in previous years. Through the nine...

  • Page 35
    ... 34 new store locations opened during 2008, and a 1.6% increase in comparable store net sales. Consumer demand for our expanded product assortment drove increases in sales volume (primarily measured in square footage), partially offset by a decrease of approximately 4.3% in the average retail price...

  • Page 36
    ...of the operational metrics that we consider in evaluating net sales include our sales mix, future demand as measured by open orders and the related customer deposits, the average number of days an order/ customer deposit is outstanding, requests for samples and catalogs, new store performance levels...

  • Page 37
    ... store volumes and an increase in the number of new stores opened in existing markets, which tend to open at a higher base level of net sales. See "Item 1A. Risk Factors-Risks Related to Our Business and Industry." Gross Profit and Gross Margin. Gross profit is equal to our net sales minus our cost...

  • Page 38
    ...expect labor costs to increase as we open more stores, but decrease as a percentage of net sales. Other Expenses. Our SG&A expenses also include occupancy costs for our stores, warehouse and headquarters (including rent, utilities, real estate taxes and maintenance charges); stock-based compensation...

  • Page 39
    ... 8 of 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, from which we expect to continue to grant stock options and restricted share awards, primarily on an annual basis. 33

  • Page 40
    ... 31, 2008 2007 2006 (in millions, except percentages and number of stores) Net sales ...Comparable store net sales increase from prior year ...Number of stores opened in period(1) ...Cost of sales ...Gross profit ...SG&A expenses ...Operating income ...Net income ... $482.2 1.6% 34 $314.5 167.7 130...

  • Page 41
    ... and laminate products offered under a number of our proprietary brands, continued to drive increased demand. Partially offsetting this benefit were decreases in the sales mix of certain Bellawood and certain other hardwoods which generally carry a higher than average unit retail price. Sales of...

  • Page 42
    ... to 120 days. In addition, a number of logistics initiatives have been implemented to reduce the miles driven by trucks supplying merchandise inventories to our stores. These initiatives began in the third and fourth quarter of 2007 and continued throughout 2008. Liquidation deals favorably impacted...

  • Page 43
    ... increased to 3.5% for 2008, from 3.0% for 2007. This increase as a percentage of net sales was primarily due to expenses related to operating as a public company, including certain insurance costs. In addition, legal and professional fees related to the Variable Plan were approximately $0.7 million...

  • Page 44
    ... the following factors: • Generally strong consumer demand for our expanded product assortment continued to drive comparable store increases in sales volume and changes in our sales mix which increased our average retail price per unit sold approximately 3.3%. In 2007, increased demand was driven...

  • Page 45
    ...-store management labor costs for the 25 new store locations opened in 2007. In addition, we increased the number of regional managers from eight to 15. The investment we began in 2006 in our executive and operational store support infrastructure increased salaries, commissions and benefits expense...

  • Page 46
    ...Taxes ...Effective Tax Rate ... $7,171 38.8% $8,161 38.8% The effective tax rate...Sales ...Gross Profit ...Selling, General and Administrative Expenses(1) ...Operating Income ...Net Income ...Number of Stores Opened in Quarter ...Comparable Sales... of stock-based compensation expense for the reversal of ...

  • Page 47
    ... of, and income contributed by, new stores. Our net sales also fluctuate slightly as a result of seasonal factors. We experience slightly higher net sales in spring and fall, when more home remodeling and home building activities are taking place, and slightly lower net sales in holiday periods and...

  • Page 48
    ... in-transit," based on whether we have physically received the products at either our central distribution center in Toano, Virginia or at an individual store location. Merchandise inventories and available inventory per store in operation on December 31 were as follows: 2008 2007 (in thousands...

  • Page 49
    ... purchases, including the support of up to $5.0 million for letters of credit, and for general operations. The Revolver is secured by our inventory, has no mandated payment provisions and we pay a fee of 0.125% per annum, subject to adjustment based on certain financial performance criteria, on...

  • Page 50
    ...our financial statements: Recognition of Net Sales We recognize net sales for products purchased at the time the customer takes possession of the merchandise. We recognize service revenue, which consists primarily of freight charges for in-home delivery, when the service has been rendered. We report...

  • Page 51
    ...paid in any year. The expected stock price volatility range is based on the historical volatilities of companies included in a peer group that was selected by management whose shares or options are publicly available. The volatilities are estimated for a period of time equal to the expected life of...

  • Page 52
    ... 8. Consolidated Financial Statements and Supplementary Data. Page Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets as of December 31, 2008 and 2007 ...Consolidated Statements of Income for the years ended December 31...

  • Page 53
    ... financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those...

  • Page 54
    ... accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting...

  • Page 55
    ...Stockholders' Equity Current Liabilities: Accounts Payable ...Customer Deposits and Store Credits ...Accrued Compensation ...Sales and Income Tax Liabilities ...Other Current Liabilities ...Total Current Liabilities ...Deferred Rent ...Stockholders' Equity: Common Stock ($0.001 par value; 35,000,000...

  • Page 56
    Lumber Liquidators, Inc. Consolidated Statements of Income (in thousands, except share data and per share amounts) 2008 Year Ended December 31, 2007 2006 Net Sales ...Cost of Sales ...Gross Profit ...Selling, General and Administrative Expenses ...Operating Income ...Interest Expense ...Other (...

  • Page 57
    ......Balance December 31, 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...

  • Page 58
    ...1,449 Excess Tax Benefits on Stock Option Exercises ...(40) - - Accretion of Redeemable Preferred Stock ...- 43 51 Changes in Operating Assets and Liabilities: Merchandise Inventories ...(16,707) (20,266) (21,749) Accounts Payable ...(281) (642) 7,884 Customer Deposits and Store Credits ...809 2,805...

  • Page 59
    ... areas in 44 states. In addition to the store locations, the Company's products 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...

  • Page 60
    ... of Net Sales The Company recognizes net sales for products purchased at the time the customer takes possession of the merchandise. Service revenue, primarily freight charges for in-home delivery, is recognized when the service has been rendered. The Company reports revenue net of sales and use...

  • Page 61
    ... 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 62
    ...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 the related stock-based compensation award. Income Taxes...

  • Page 63
    ... all store locations, the Corporate Headquarters and certain equipment. The store location leases are operating leases and generally have five-year base periods with multiple five-year renewal periods. The Founder is also the sole owner of ANO LLC, DORA Real Estate Company, LLC and Wood on Wood Road...

  • Page 64
    ...) $1,449 Overview The Company has an equity incentive plan for employees, non-employee directors and other service providers, the Lumber Liquidators, Inc. 2007 Equity Compensation Plan (the "2007 Plan"), from which it grants stock options and restricted stock awards. The total number of shares of...

  • Page 65
    ... shares of common stock. Pursuant to the provisions of the 2006 Regional Plan, the Company purchased 10,406 shares of common stock from the Regional Managers at the fair market value on the vest dates for a total of $103, to cover applicable federal and state withholding taxes. We expect the...

  • Page 66
    ... 7.5 years 7.5 years The expected stock price volatility range is based on the historical volatilities of companies included in a peer group that was selected by management whose shares or options are publicly available. The volatilities are estimated for a period of time equal to the expected life...

  • Page 67
    ...to award Kevin a right to purchase an ownership position in common stock from the Founder for his service to the Company. ...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...

  • Page 68
    ... Plan, the Variable Right fully vested in conjunction with the IPO and was exercised on February 1, 2008. At that time, the Company had no excess tax deductions from previous stock-based awards, and therefore recognized additional tax expense related to the non-deductible portion of the Variable...

  • Page 69
    ... 5, the Company leases a number of its store locations and Corporate Headquarters from ANO and Related Companies. NOTE 11. COMMITMENTS AND CONTINGENCIES The Company is from time to time subject to claims and disputes arising in the normal course of business. In the opinion of management, while the...

  • Page 70
    ...into a purchase agreement with Vazilia Corporation ("Vazilia") pursuant to which the Company would purchase a total of approximately 27 million square feet of Vazilia's assorted products over a four-year period, with the unit prices set at the time a purchase order is created/accepted (the "Purchase...

  • Page 71
    .... The quarter ended December 31, includes $2,960 of stock-based compensation expense for an accrual related to the Variable Plan and $1,224 of stock-based compensation for the acceleration of stock options and the recognition of the expense associated with the 2006 Regional Plan due to the IPO. 65

  • Page 72
    ... the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management's Annual Report on Internal Control Over Financial Reporting Our...

  • Page 73
    ... 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 by Item 406 of Regulation S-K, and applies to our Chief Executive Officer, Chief Financial Officer...

  • Page 74
    ... incorporated by reference from the definitive proxy statement for our 2009 annual meeting of shareholders, which will be filed no later than 120 days after December 31, 2008. Item 14. Principal Accountant Fees and Services. The information required by this Item with respect to principal accountant...

  • Page 75
    .... 1. Financial Statements The following financial statements are submitted in Part II, Item 8 of this annual report: Page Report of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets as of December 31, 2008 and 2007 ...Consolidated Statements of Income for the years ended...

  • Page 76
    ... behalf by the undersigned, thereunto duly authorized in the city of Toano, Commonweath of Virginia, on March 10, 2009. LUMBER LIQUIDATORS, INC. By: /s/ JEFFREY W. GRIFFITHS Jeffrey W. Griffiths President and Chief Executive Officer Pursuant to the requirements of the Securities and Exchange Act...

  • Page 77
    ... 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 Liquidators (relating to Toano...

  • Page 78
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  • Page 79
    ...(City Of Industry) IDAHO 19555 E. Walnut Dr. South • 626.465.1560 Boise Los Angeles (Commerce) 7428 W Mossy Cup St. • 208.286.1180 6548 Telegraph Rd. • 323.721.0800 ILLINOIS Los Angeles (West LA) Arlington Heights 2310 Cotner Ave. • 213.785.3456 1460 E. Algonquin Rd. • 847.357.0400 Ontario...

  • Page 80
    ... towards existing orders or previous sales. One coupon per person per order. For in-store purchases, coupon must be presented to store employee at time of purchase. Not valid in combination or conjunction with any other offer, discount or promotion. Applies to in-stock product only. Coupon is not...