Lumber Liquidators 2009 Annual Report Download

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YEAR ENDED DECEMBER 31, 2009
2009 ANNUAL REPORT
2009 ANNUAL REPORT

Table of contents

  • Page 1
    YEAR ENDED DECEMBER 31, 2009 2009 ANNUAL REPORT

  • Page 2
    ... happy that I ended up taking my ï¬,oor from your company." Catherine D., Hackensack, NJ "We had been looking for Bamboo and did our homework. Your prices are unbelievable with a great product. Thanks for the deal." Brett T., Charleston, SC "If I knew what a difference this would make I would...

  • Page 3
    ...Operations. As more store associates participated in our standardized training program, and we expanded our regional management, we continued to develop and improve the knowledge and customer service focus of our sales force. Merchandising. We enhanced our merchandising strategies, including product...

  • Page 4
    ... strengthen our business model and gain additional market share. As always, we appreciate the ongoing support of our customers, shareholders, vendors and employees, and we look forward to continuing this journey together. Tom Sullivan Founder and Chairman of the Board Jeffrey Griffiths President...

  • Page 5
    ... year 76 2006 91 2007 116 2008 150 Net new stores 2009 Net Income $22.1 $26.9 $16.0 $12.9 $12.0 $8.0 $4.0 $0 $10.7 $11.3 2005 2006 2007 2008 2009 13% Moldings & Accessories 1% Other 11% Bamboo & Cork 18% Laminates 57% Hardwood (Solid & Engineered) Lumber Liquidators 2009 Product Mix

  • Page 6
    ... 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 Symbol: LL Investor Relations Ashleigh McDermott Lumber Liquidators Holdings, Inc. 3000 John Deere Road Toano, VA...

  • Page 7
    ...file number: 001-33767 Lumber Liquidators Holdings, Inc. (Exact Name of Registrant as Specified in its Charter) Delaware (State of Incorporation) 27-1310817 (I.R.S. Employer Identification No.) 3000 John Deere Road, Toano, Virginia (Address of principal executive offices) 23168 (Zip Code) (757...

  • Page 8
    LUMBER LIQUIDATORS HOLDINGS, INC. ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS Page Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Item 5. PART I Business ...Risk Factors ...Unresolved Staff Comments ...Properties ...Legal Proceedings ...Submission of Matters to a Vote of Security Holders ... 3...

  • Page 9
    ... to our customers at a lower cost than our competitors. Our company was founded in 1994 by Tom Sullivan, the current chairman of our board of directors, and in 1996, he opened the first Lumber Liquidators store near Boston, Massachusetts. Tom believed that traditional home improvement and flooring...

  • Page 10
    ... sales strategy emphasizes customer service by providing superior convenience and education tools for our customers to learn about our products and the installation process. We hire store associates who often have relevant industry experience and our call center is staffed by more than 50 flooring...

  • Page 11
    ... deposit when an order is placed for product not taken home that day, we reduce store-level working capital requirements. Across our markets, our average new store has historically become profitable within three months of beginning operations and generally returned its initial cash investment within...

  • Page 12
    ...with GE, our customers may use their Lumber Liquidators credit card to tender installation services provided by HSS. We generally utilize the credit program for promotional opportunities, including programs for up to 18 months of deferred interest with payments. Call Center, Website and Social Media...

  • Page 13
    ... of engineered, resilient and laminate flooring. Most of our other sales are to contractors, who are primarily small businesses that are either building a small number of new homes or have been hired by an owner to put in a new floor. Our Products We offer a complete assortment of wood flooring that...

  • Page 14
    ... sell installation supplies (such as sealers, adhesives and trowels), floor cleaning supplies and butcher-block kitchen countertops. Bamboo and Cork. Our proprietary bamboo products, harvested from the fast growing bamboo plant, are offered as a prefinished or stained solid wood or engineered floor...

  • Page 15
    ... by a number of complex economic and demographic factors that may vary locally, regionally and nationally. We are impacted by home remodeling activity, employment levels, housing turnover, real estate prices, new housing starts, consumer confidence, credit availability and the general health of...

  • Page 16
    ...States, including Lumber Liquidators®, Bellawood®, 1-800-HARDWOOD®, 1-800-FLOORING®, Dura-Wood®, Blutec®, Quickclic®, Virginia Mill Works Co. Hand Scraped and Distressed Floors®, Morning Star Bamboo Flooring®, Dream Home Laminate Floors®, Builder's Pride®, Schön Engineered Floors®, Casa...

  • Page 17
    ..., relate to matters such as sales growth, comparable store net sales, impact of cannibalization, price changes, earnings performance, stock-based compensation expense, margins, return on invested capital, strategic direction, the demand for our products and store openings. We have used words such...

  • Page 18
    ... the successful selection of new markets and store locations, our ability to negotiate leases on acceptable terms, management of store opening costs, the quality of our operations, consumer recognition of the quality of our products, our ability to meet customer demand, the continued popularity...

  • Page 19
    ...cannot find replacement suppliers, we could experience deterioration in our net sales and operating results. If we fail to identify and develop relationships with a sufficient number of qualified mills, our ability to obtain hardwood products that meet our high quality standards could be harmed. We...

  • Page 20
    ... could disrupt our business and reduce our net 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 14

  • Page 21
    ... call center in good working order, it could reduce our net sales and damage our reputation. Failure to manage our growth effectively 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...

  • Page 22
    ...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 continue to transition our toll-free telephone number from 1-800-FLOORING, which we lease...

  • Page 23
    .... We may incur costs resulting from security risks we face in connection with our electronic processing and transmission of confidential customer information. We accept electronic payment cards for payment in our stores and through our call center. In addition, our online operations depend upon the...

  • Page 24
    ... this report, including our operating performance and the performance of our competitors; the public's reaction to our press releases, our other public announcements and our filings with the SEC; changes in earnings estimates or recommendations by research analysts who follow Lumber Liquidators or...

  • Page 25
    ...Hampshire ...4 South Carolina ...4 New Jersey ...7 South Dakota ...1 New Mexico ...1 Tennessee ...4 New York ...10 Texas ...15 North Carolina ...7 Utah ...2 North Dakota ...1 Vermont ...1 Ohio ...6 Virginia ...7 Oklahoma ...2 Washington ...6 Oregon ...2 West Virginia ...2 Pennsylvania ...7 Wisconsin...

  • Page 26
    ... Director Independence in Item 13 of this report. Item 3. Legal Proceedings. On September 3, 2009, a former store manager and a current assistant store manager (together, the "Plaintiffs") filed a putative class action suit against Lumber Liquidators, Inc. ("LLI") in the Superior Court of California...

  • Page 27
    ...high and low sales prices per share as reported by the NYSE for each quarter during the last two fiscal years. Price Range High Low 2009: Fourth Quarter ...Third Quarter ...Second Quarter ...First Quarter ...2008: Fourth Quarter ...Third Quarter ...Second Quarter ...First Quarter ...Dividend Policy...

  • Page 28
    ... initial public offering date, through December 31, 2009 to that of the total return index for the NYSE Composite, the Dow Jones US Furnishings Index and the S&P SmallCap 600 Index (which now includes Lumber Liquidators) assuming an investment of $100 on November 9, 2007. In calculating total annual...

  • Page 29
    ...Year Ended December 31, 2008 2007 2006(1) (in thousands, except share and per share amounts) 2005 Statement of Income Data Net sales ...Cost of sales ...Gross profit ...Selling, general and administrative expenses ...Operating income ...Interest expense ...Other (income) expense(2) ...Income before...

  • Page 30
    ... flooring experts and believe our high level of customer service reflects this positioning. We offer our products through multiple, complementary channels, including 186 Lumber Liquidators stores in 45 states at December 31, 2009, a full-service call center in Toano, Virginia, our website and...

  • Page 31
    ... store net sales increase. We completed our initial public offering in November 2007. We reorganized effective December 31, 2009, creating a new holding company structure, and as a result, a new parent company named Lumber Liquidators Holdings, Inc. was formed. Outstanding shares of the common stock...

  • Page 32
    ... engineered hardwoods, laminate, resilient, bamboo and cork flooring products, moldings and flooring accessories made through our stores, call center, website and catalogs. Net sales, which include freight costs billed to customers, are net of any returns by customers. Net sales from customer orders...

  • Page 33
    ... store; competition; pricing; product availability and quality; the timing of our advertising promotional events and/or timing of three-day Holiday weekends; and weather and other climatological effects. We believe increases in baseline store volumes and new store openings in existing markets...

  • Page 34
    ... the national, regional and local level to develop our national brands, including our portfolio of proprietary product offerings. We believe Lumber Liquidators is now recognized across the United States as a destination for high-quality hardwood flooring at everyday low prices. We have historically...

  • Page 35
    ...by decreased net sales in certain hardwood product lines, including Bellawood, engineered and unfinished. Comparable store net sales benefited from the continued maturation of stores in operation for 13 to 36 months at December 31, 2009, where net sales increased 15.7%. Net sales at these comparable...

  • Page 36
    ... due to the 36 new stores opened in 2009. Depreciation and amortization increased $0.4 million but remained a constant 0.9% of net sales. Stock-based compensation expense related to the grant of stock options and restricted shares to employees and directors was $3.0 million in both 2009 and 2008. As...

  • Page 37
    ..., bamboo 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 higher than average retail prices per...

  • Page 38
    ...costs tends to lag by 60 to 120 days. In addition, a number of logistics initiatives were 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...

  • Page 39
    ...a percentage of net sales, salaries, commissions and benefits were 10.1% of net sales for 2008 and 9.9% of net sales for 2007. This increase as a percentage of net sales was primarily the result of increases in employee benefit costs and additional corporate store support infrastructure. Advertising...

  • Page 40
    ... solution to benefit management reporting and planning, business continuity and disaster recovery, and overall system security; continue remodeling existing store showrooms to enhance consistency in presentation; and make improvements to our Corporate Headquarters in Toano, Virginia. Cash and...

  • Page 41
    ... for the 34 new stores opened in 2008, $1.4 million of upgrades to our website and routine capital purchases of computer hardware and software and $1.1 million in leasehold improvements and certain equipment at our corporate headquarters. In addition, we purchased the phone number 1-800-HARDWOOD and...

  • Page 42
    ...and estimates used in the preparation of 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...

  • Page 43
    ... assumptions of stock price volatility or expected lives of our options, our stock-based compensation expense and result of operations could have been different. Self Insurance Effective June 1, 2008, we self-insure for certain employee health benefit claims. Management estimates a liability for...

  • Page 44
    ...cash flows and results of operations. In addition, any future borrowings under our revolving credit agreement would be exposed to..., in an effort to mitigate losses associated with these risks, we may at times enter into derivative financial instruments, although we have not historically done so. We ...

  • Page 45
    ... to Consolidated Financial Statements Report of Ernst & Young LLP, Independent Registered Public Accounting Firm ...Report of Ernst & Young LLP, Independent Registered Public Accounting Firm, on Internal Control over Financial Reporting ...Consolidated Balance Sheets as of December 31, 2009 and 2008...

  • Page 46
    ... December 31, 2009, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Lumber Liquidators Holdings, Inc.'s internal control over financial reporting as of December...

  • Page 47
    ...audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Lumber Liquidators Holdings, Inc. as of December 31, 2009 and 2008 and the related consolidated statements of income, stockholders' equity (deficit) and cash...

  • Page 48
    Lumber Liquidators Holdings, Inc. Consolidated Balance Sheets (in thousands, except share data) December 31, 2009 2008 Assets Current Assets: Cash and Cash Equivalents ...Merchandise Inventories ...Prepaid Expenses ...Other Current Assets ...Total Current Assets ...Property and Equipment, net ......

  • Page 49
    Lumber Liquidators Holdings, Inc. Consolidated Statements of Income (in thousands, except share data and per share amounts) Year Ended December 31, 2008 2007 2009 Net Sales ...Cost of Sales ...Gross Profit ...Selling, General and Administrative Expenses ...Operating Income ...Interest Expense ......

  • Page 50
    ... Liquidators Holdings, Inc. Consolidated Statements of Stockholders' Equity (Deficit) (in thousands, except share data) Common Stock Par Value Additional Capital Retained Earnings (Deficit) Total Stockholders' Equity (Deficit) Shares Balance December 31, 2006 ...Reincorporation in Delaware ...Sale...

  • Page 51
    ... Taxes ...(1,110) (486) 377 Stock-Based Compensation Expense ...2,955 9 6,211 Other ...- (40) 43 Changes in Operating Assets and Liabilities: Merchandise Inventories ...(44,611) (16,707) (20,266) Accounts Payable ...17,235 (281) (642) Customer Deposits and Store Credits ...(613) 809 2,805 Prepaid...

  • Page 52
    ... Statement Presentation Lumber Liquidators, Inc. ("LLI") was organized in 1994 as a Massachusetts corporation, and in August 2007, LLI was reincorporated in Delaware. In November 2007, LLI completed its offering of 3,800,000 shares of common stock in an initial public offering at a per share price...

  • Page 53
    ... with GE, the Company's customers may use their Lumber Liquidators credit card to tender installation services provided by the Company's installation partner, The Home Service Store, Inc. ("HSS"). These HSS installation transactions are not processed through the Company's point of sales system...

  • Page 54
    ... production of the Company's proprietary brands, 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 55
    ... ...Office Equipment ...Computer Software ...Computer Hardware ...Store Fixtures ...Leasehold Improvements ... 5 to 7 5 5 to 7 3 to 10 5 7 1 to 15 Operating Leases The Company has operating leases for its stores, Corporate Headquarters and certain equipment. The lease agreements for certain stores...

  • Page 56
    Lumber Liquidators Holdings, Inc. Notes to Consolidated Financial Statements-(Continued) (amounts in thousands, except share data and per share amounts) Recent Accounting Pronouncements In February 2008, FASB issued amendments that delayed the effective date of the fair value disclosure requirements...

  • Page 57
    ... Real Estate Company, LLC and Wood on Wood Road, Inc., and he has a 50% membership interest in BMT Holdings, LLC (collectively, "ANO and Related Companies"). As of December 31, 2009, the Company leased 25 of its locations from ANO and Related Companies representing 13.4% of the total number of store...

  • Page 58
    ... Company has an equity incentive plan for employees, non-employee directors and other service providers, the Lumber Liquidators Holdings, Inc. 2007 Equity Compensation Plan (the "2007 Plan"), from which it grants stock options and restricted stock awards. The total number of shares of common stock...

  • Page 59
    ... 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 60
    Lumber Liquidators Holdings, Inc. Notes to Consolidated Financial Statements-(Continued) (amounts in thousands, except share data and per share amounts) Restricted Stock Awards The following table summarizes activity related to restricted stock awards: Weighted Average Grant Date Fair Value Shares...

  • Page 61
    ...Revenue Service has completed audits of the Company's federal income tax returns for the years through 2007. NOTE 8. PROFIT SHARING PLAN The Company maintains a profit-sharing plan, qualified under Section 401(k) of the Internal Revenue Code, for all eligible employees. Through 2009, employees were...

  • Page 62
    ... 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...

  • Page 63
    ... 31, 2009 2009 2009 2009 (dollars in thousands, except per share amounts) Net Sales ...Gross Profit ...Selling, General and Administrative Expenses ...Operating Income ...Net Income ...Net Income per Common Share-Basic ...Net Income per Common Share-Diluted ...Number of Stores Opened in Quarter...

  • Page 64
    Lumber Liquidators Holdings, Inc. Notes to Consolidated Financial Statements-(Continued) (amounts in thousands, except share data and per share amounts) Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. Item 9A. Controls and Procedures. An ...

  • Page 65
    ... the definitive proxy statement for our 2010 annual meeting of shareholders, which will be filed no later than 120 days after December 31, 2009. Code of Ethics We have a Code of Conduct, which applies to all employees, officers and directors of Lumber Liquidators Holdings, Inc. and its direct and...

  • Page 66
    ..., Item 8 of this annual report: Page Report of Ernst & Young LLP, Independent Registered Public Accounting Firm ...Report of Ernst & Young LLP, Independent Registered Public Accounting Firm, on Internal Control over Financial Reporting ...Consolidated Balance Sheets as of December 31, 2009 and 2008...

  • Page 67
    ... caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the city of Toano, Commonwealth of Virginia, on February 18, 2010. LUMBER LIQUIDATORS HOLDINGS, INC. By: /s/ JEFFREY W. GRIFFITHS Jeffrey W. Griffiths President and Chief Executive Officer Pursuant to...

  • Page 68
    ... Employee Stock Option Agreement, effective October 18, 2006 (filed as Exhibit 10.07 to the Company's Registration Statement on Form S-1, filed April 23, 2007 (File No. 333-142309), and incorporated by reference) Lease by and between ANO LLC and Lumber Liquidators (relating to Toano facility...

  • Page 69
    ... and incorporated by reference) Second Amendment to Executive Employment Agreement with Jeffrey W. Griffiths (filed as Exhibit 10.1 to the Company's current report on Form 8-K, filed December 30, 2009 (File No. 001-33767), and incorporated by reference) Amended and Restated Annual Bonus Plan (filed...

  • Page 70
    ...6225 District Blvd • 661.412.0063 Concord (Pacheco) - 110 2nd Ave South Unit A-1 • 925.231.1059 Fresno - 2955 S. Orange Ave • 559.708.4281 Los Angeles (City Of Industry) - 19555 E. Walnut Dr South • 626.465.1560 Los Angeles (Commerce) - 6548 Telegraph Rd • 323.721.0800 Los Angeles (West LA...

  • Page 71
    ... Exp. • 972.422.0727 San Antonio - 2200-2 NW Loop 410 • 210.524.9996 UTAH Lindon - 1451 West 40 South, Ste 100 • 801.429.9465 Salt Lake City - 515 W Pickett Cir, Ste 100 • 801.886.8878 VERMONT Burlington (Williston) - 329 Harvest Ln • 802.316.4113 VIRGINIA Dulles (Chantilly) - 14310 Sully...

  • Page 72
    ... you Lumber Liquidators." Vickie Z., Haines City, FL "ONCE YOU'VE BEEN TO LUMBER LIQUIDATORS YOU WILL SEE THAT NO ONE ELSE HAS ANY RIGHT BEING IN THE BUSINESS. I KNEW I WAS GOING TO END UP THERE BUT I CHECKED OUT THE COMPETITION FIRST. I DON'T LIKE DEALING WITH PEOPLE WHO THINK YOU ARE GOING TO PAY...