Lumber Liquidators 2009 Annual Report Download - page 36

historic average container rates resulted in up to 60 basis points of gross margin benefit in the third and fourth
quarters. We expect our international container rates to remain generally lower than our historic average at least
into early 2010, though with moderating benefit.
• Our gross margin in 2008 included the net impact of certain special liquidation deals and the retroactive rebate of a
bamboo tariff. In 2008, those special liquidation deals, unique in their unit count, quality and cost, added
approximately 20 basis points to gross margin in 2008. Gross margin for 2008 benefited from the retroactive rebate
by approximately 20 basis points.
Operating Income and Operating Margin.
For the year ended
December 31,
2009 2008
(dollars in thousands)
Gross Profit .............................................. $194,677 $167,678
SG&A Expenses .......................................... 151,070 130,693
Operating Income ......................................... $ 43,607 $ 36,985
Operating Margin ..................................... 8.0% 7.7%
Operating income for 2009 increased $6.6 million, or 17.9%, over 2008 as the $27.0 million increase in gross profit was
partially offset by a $20.4 million increase in SG&A expenses. SG&A expenses in 2008 were reduced by $2.96 million in the
fourth quarter 2008 as a reserve related to the final accounting for the Variable Plan was reversed, lowering stock-based
compensation expense. Increases in SG&A expenses were principally due to the following factors:
• Salaries, commissions and benefits increased $10.3 million for 2009 from the prior year, and as a percentage of net
sales, were 10.8% of net sales for 2009 and 10.1% of net sales for 2008. These increases were primarily due to the
growth in our store base, but also included increased employee benefit costs, continued investment in store support
infrastructure and generally higher incentive bonuses.
• Advertising expenses increased $1.5 million from 2008 to $47.3 million in 2009, but as a percentage of net sales,
declined to 8.7% for 2009, from 9.5% for 2008. Our national advertising campaigns were leveraged across a larger
store base in comparing 2009 to 2008, and in general, both national advertising and direct sales generation
programs benefited from lower unit prices. We believe the effectiveness of our advertising spend was improved
through increases in direct mail, internet search and promotional television.
• Occupancy costs increased $3.3 million to $18.4 million, or 3.4% of net sales for 2009, from $15.1 million, or
3.1% of net sales for 2008. Overall, the increase was primarily 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 discussed above, stock-based compensation expense in 2008
was reduced to $0.01 million by the benefit of a reserve reversal related to the final accounting for the Variable
Plan.
• Certain other expenses, including legal and professional fees, increased $1.9 million in 2009 and remained at a
constant 3.5% of net sales. Legal and professional fees in 2009 included $1.4 million related to a trademark
infringement action against a competitor that we initiated, litigated and eventually settled. In 2008, legal and
professional fees related to the Variable Plan were approximately $0.7 million, net of insurance proceeds.
Provision for Income Taxes.
For the year ended
December 31,
2009 2008
(dollars in thousands)
Provision for Income Taxes ................................... $17,181 $15,643
Effective Tax Rate ...................................... 39.0% 41.4%
30