Lumber Liquidators 2008 Annual Report Download - page 35

total labor costs to decline as a percentage of net sales. In 2008 and 2007, our labor costs were significantly
impacted by our investment in the store support infrastructure. Overall, we expect that our aggregate operating
expenses will decline as a percentage of our net sales as we continue to grow our store base and net sales.
We completed our initial public offering on November 9, 2007, receiving net proceeds of $36.2 million. We
used a portion of those proceeds to repay all outstanding amounts under our senior secured loan agreement, and
we remain debt free through December 31, 2008. Leading up to, and as a result of, our initial public offering, and
due to the Variable Plan described below and in Notes 6 and 11 to the consolidated financial statements, our
stock-based compensation expense has significantly impacted our operating results and net income.
2008 Highlights
Net Sales.Net sales for 2008 increased $76.9 million from 2007, or 19.0%, primarily driven by
non-comparable store net sales, including 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 per unit sold. Changes in our mix of products sold, or sales mix, were the primary drivers of
both the decrease in the average retail price per unit sold and a decrease in our average sale, to approximately
$1,750 in 2008 from approximately $1,800 in 2007. We believe changes in our sales mix were primarily due to i)
customer acceptance of an expanded assortment of premium products within the laminates, bamboo and cork
product lines, which generally carry a lower than average retail price, ii) our increased emphasis on, and the
availability of, liquidation deals, and iii) the weakening economy. As compared to our competitors, we believe
our retail prices present the greatest value in the premium product categories. We utilize liquidation deals to both
present a value opportunity and drive incremental consumer traffic, a portion of which is converted to demand
for our proprietary brands. In our proprietary brands of laminates, bamboo and cork, net sales increased 45.3%
and the average retail price per unit sold increased 6.2%.
Gross Margin.Gross margin was 34.8% for 2008, up from 33.3% for the prior year. This improvement is
primarily due to changes in our sales mix, and our effective execution of initiatives in store operations,
merchandising and logistics. These initiatives enhanced our retail pricing discipline and strengthened our control
over costs that impact the average cost per unit sold. In addition, our 2008 efforts to strengthen the
merchandising of liquidation deals from acquisition to final sell-through, coupled with an increased availability
of high-quality, high unit count special liquidation deals primarily in the first half of the year, benefited gross
margin.
The Variable Plan.As described in detail below, and in Notes 6 and 11 to the consolidated financial
statements, a December 1, 2008 arbitration ruling confirmed the number of shares of common stock to be
transferred from our Founder to his brother under the provisions of the Variable Plan, and we do not anticipate
any additional costs to be incurred related to this matter. As a result of the arbitration ruling, we reduced stock-
based compensation by $2.96 million, reversing an accrual from the fourth quarter of 2007. During 2008, legal
and professional expenses, net of insurance reimbursements, related to the Variable Plan were $0.7 million and
were included in selling, general and administrative expenses.
Effective Income Tax Rate.The effective income tax rate for 2008 was 41.4%, as compared to 38.8% for
2007. The increase in the effective rate is primarily a result of the exercise of the Variable Right (as defined
below) on February 1, 2008 pursuant to the terms of the Variable Plan. The fair value of the Vested Shares on the
exercise date was less than the fair value on the vesting date and, as a result, a portion of the related deferred tax
benefit was not deductible on our tax return. We had no excess tax deductions recorded in additional capital to
offset this reduction in the deferred tax benefit. Accordingly, we recorded $0.7 million of additional income tax
expense during the first quarter of 2008, which was slightly offset during the year by excess tax benefits on stock
option exercises.
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