Lumber Liquidators 2010 Annual Report Download

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2010 ANNUAL REPORT
YEAR ENDED DECEMBER 31, 2010

Table of contents

  • Page 1
    2010 ANNUAL REPORT YEAR ENDED DECEMBER 31, 2010

  • Page 2
    ... to anyone." Lisa S., Mundelein, IL "Lumber Liquidators makes it easy to select, order and pick up new flooring. The salespeople are always pleasant and helpful and load your car. Prices are excellent and I like the fact that you can order online and pick up in store." Deb Z., Hope Valley, RI "One...

  • Page 3
    ... to serve a greater number of these customers in our comparable stores during the year. Our low-cost store model in which new stores quickly become profitable allowed us to achieve our expansion goals for the year, as we opened 37 new stores. Specifically, we achieved Net sales growth of 13.9% to...

  • Page 4
    ... highly fragmented wood flooring market, even in the continuing difficult macroeconomic environment. We have been pleased with the performance of our new stores as our low cost, flexible store model enables us to quickly generate a strong return on capital when opening new locations. We ended 2010...

  • Page 5
    ... stores 2006 2010 0 $28.0 $24.0 $20.0 MILLIONS Net Income $22.1 $26.9 $26.3 $16.0 $12.9 $12.0 $8.0 $4.0 $0 $11.3 2006 2007 2008 2009 2010 14% Moldings & Accessories 1% Other 11% Engineered Hardwood 10% Bamboo & Cork 21% Laminates 43% Solid Hardwood Lumber Liquidators 2010 Product...

  • Page 6
    ... (800) 662-7232 New York Stock Exchange Ticker Symbol: LL Investor Relations Ashleigh McDermott Lumber Liquidators Holdings, Inc. 3000 John Deere Road Toano, VA 23168 (757) 566-7512 [email protected] http://ir.lumberliquidators.com ANNUAL MEETING May 6, 2011, 10:00 am EST Lumber Liquidators...

  • Page 7
    ...Address of principal executive offices) 23168 (Zip Code) (757) 259-4280 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, par value $0.001 per share New York...

  • Page 8
    ... III Directors, Executive 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...

  • Page 9
    ... integrated business model enables us to offer a broad assortment of high-quality products 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...

  • Page 10
    ... our distribution network allows us to meet the delivery needs of our customers better than our competitors. Our Growth Strategy We intend to continue to increase net sales and profitability by strengthening our position as a leading provider of hardwood flooring. In recent years, home-related...

  • Page 11
    ...products and the installation process. Our website contains a broad range of information regarding our floors and accessories. We hire store associates who often have relevant industry experience and our call center is staffed by more than 60 flooring experts. Customers can order samples or catalogs...

  • Page 12
    ... overall marketing strategies. We distribute our catalogs, as well as other direct mailings, to key consumer and commercial segments around specific store locations. Copies of our catalogs can also be obtained through our stores, our call center and our website. In addition, we utilize direct mail...

  • Page 13
    ... 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 includes prefinished premium domestic and exotic hardwoods, engineered hardwoods, unfinished hardwoods, bamboo, cork and laminates, as well as...

  • Page 14
    ... Order Fulfillment We operate a central distribution center located in Toano, Virginia, supplemented by a facility we lease in Hampton, Virginia. In addition, we will operate a facility in Toronto, Canada, which will be both a store front and a small warehouse for that metropolitan market. In 2010...

  • Page 15
    ... things, 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 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
    ... difficulties leading to restructurings, bankruptcies, liquidations and other unfavorable events for our customers, suppliers and other service providers. If such conditions deteriorate in 2011, our industry, business and results of operations may be severely impacted. The hardwood flooring industry...

  • Page 18
    ... 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 of hardwood flooring, and...

  • Page 19
    ...full month of operation) will also affect our sales growth and business results. Among other things, increases in our baseline store volumes and the number of new stores opened in existing markets, which tend to open at a higher base level of net sales, will impact our comparable store net sales. As...

  • Page 20
    ...ability to obtain hardwood products that meet our high quality standards could be harmed. We purchase flooring directly from mills located around the world. We believe that these direct supplier relationships are relatively unique in our industry. In order to retain the competitive advantage that we...

  • 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
    ... the basis of 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...

  • Page 23
    ... sales and operating results to deteriorate or otherwise harm our business. With regard to our products, we may spend significant time and resources to ensure compliance with applicable advertising, importation, exportation, environmental, health and safety laws and regulations. If we should violate...

  • Page 24
    ... may incur costs resulting from security risks we face in connection with our electronic processing, transmission and storage 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...

  • Page 25
    ... stockholders, including sales of common stock by our directors and executive officers; the arrival or departure of key personnel; and other developments affecting us, our industry or our competitors. In addition, the stock market may experience significant price and volume fluctuations. These...

  • Page 26
    ... 23, 2011. State Stores State Stores State Stores State Stores Alabama ...5 Iowa ...Arizona ...4 Kansas ...Arkansas ...2 Kentucky ...California ...19 Louisiana ...Colorado ...5 Maine ...Connecticut ...3 Maryland ...Delaware ...3 Massachusetts ...Florida ...16 Michigan ...Georgia ...7 Minnesota...

  • Page 27
    ...September 7, 2010, a former store manager filed an action against LLI in the United States District Court for the Middle District of Florida. In the complaint, the former store manager alleges that LLI breached an alleged contract for the payment of a commission and violated the Fair Labor Standards...

  • Page 28
    ...$0.001. Total shares of common stock outstanding at February 22, 2011 were 27,612,266, and we had 15 stockholders of record. The following table shows the 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 2010: Fourth...

  • Page 29
    ... of our common stock during the period beginning November 9, 2007, our initial public offering date, through December 31, 2010, 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 includes Lumber Liquidators) assuming an...

  • Page 30
    ..." of this report. 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 of the...

  • Page 31
    ... of high-quality hardwood flooring products. We offer our products through multiple, complementary channels, including 223 Lumber Liquidators stores in 46 states at December 31, 2010, a full-service call center in Toano, Virginia, our website and our catalog. We seek to appeal to customers who...

  • Page 32
    ...for in-home delivery Our cost of sales is driven primarily by the cost of acquiring the products we sell from our suppliers, but also includes international and domestic transportation costs, customs and duty charges, transportation charges from our distribution center to our stores and the cost of...

  • Page 33
    ... by customer deposits on open orders, had nearly returned to historic norms at December 31, 2010, and certain metrics which indicate better servicing of customer interest, including catalog and flooring sample requests, returned to pre-implementation levels in December 2010. During 2011, functional...

  • Page 34
    ...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 consumer discretionary spending. Many of the economic indicators associated with the wood flooring market and more...

  • Page 35
    ... and as a percentage of net sales. Year Ended December 31, 2010 2009 2008 (in millions, except percentages and number of stores) Net sales ...Comparable store net sales increase ...Number of stores opened in period ...Cost of sales ...Gross profit ...SG&A expenses ...Operating income ...Net income...

  • Page 36
    ...demand for our hardwood products. Net sales benefited from more consistent in-stock positions of certain key product lines, including product lines customers expect to be in-stock at a store location, such as laminates, moldings and accessories. Our sales mix of moldings and accessories increased to...

  • Page 37
    ...store management and staffing at certain smaller stores, as well as an expanded store training program; Labor costs for our distribution, warehousing and finishing functions due primarily to increased sales volume and higher in-stock positions of merchandise inventories; and Expanded corporate store...

  • Page 38
    ... following factors: • Net sales benefited from more consistent in-stock positions of certain key product lines, including product lines customers expect to be in-stock at a store location, such as laminates, moldings and accessories. Our sales mix of moldings and accessories increased to 12.7% of...

  • Page 39
    ... the vendor-mill and the final sales floor, and reduced the cost of our products and the related transportation. Our efforts to broaden our assortment of moldings and accessories while remaining committed to an available in-stock position increased the sales mix of this key product line, which...

  • Page 40
    ...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...

  • Page 41
    ... to open between 40 and 50 new store locations; continue to invest in our integrated technology solution; continue to remodel existing store showrooms; invest in our finishing line; and continue to enhance the online customer experience through our website. Cash and Cash Equivalents In 2010, cash...

  • Page 42
    ... 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 revenue...

  • Page 43
    ... non-qualified stock options, incentive stock options and restricted shares to employees and non-employee directors. We recognize expense for our stock-based compensation based on the fair value of the awards that are granted. Measured compensation cost is recognized ratably over the service period...

  • Page 44
    ... 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, 2010 and 2009...

  • Page 45
    ... December 31, 2010, 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 46
    ... statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection...

  • Page 47
    ...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 ...Deferred Tax Liability ...Stockholders' Equity: Common Stock ($0.001 par value...

  • Page 48
    Lumber Liquidators Holdings, Inc. Consolidated Statements of Income (in thousands, except share data and per share amounts) 2010 Year Ended December 31, 2009 2008 Net Sales ...Cost of Sales ...Gross Profit ...Selling, General and Administrative Expenses ...Operating Income ...Interest Expense ......

  • Page 49
    ... Compensation Expense ...- - Exercise of Stock Options ...206,821 - Excess Tax Benefits on Stock Option Exercises ...- - Release of Restricted Stock ...48,245 - Common Stock Purchased Pursuant to Equity Compensation Plans ...(16,608) - Net Income ...- - Balance December 31, 2010 ...27,472,680 $ 27...

  • Page 50
    ... Taxes ...4,300 (956) (486) Stock-Based Compensation Expense ...3,091 2,955 9 Other ...- - (40) Changes in Operating Assets and Liabilities: Merchandise Inventories ...(21,789) (44,611) (16,707) Accounts Payable ...1,136 17,235 (281) Customer Deposits and Store Credits ...2,234 (613) 809 Prepaid...

  • Page 51
    ... GE Money Bank (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...

  • Page 52
    ...has occurred. Self Insurance The Company is self-insured for certain employee health benefit claims. The Company estimates a liability for aggregate losses below stop-loss coverage limits based on estimates of the ultimate costs to be incurred to settle known claims and claims not reported as of the...

  • Page 53
    ... brands, the transportation costs from the distribution center to the store locations, any inventory adjustments, including shrinkage, and the costs to produce samples. The Company includes transportation costs for the delivery of products directly from stores to customers in cost of sales...

  • Page 54
    ...the form of stock options and restricted stock awards to 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...

  • Page 55
    ...its stores, Corporate Headquarters, supplemental distribution facilities and certain equipment. The store location leases are operating leases and generally have five-year base periods with one or more fiveyear renewal periods. The Company's founder is the sole owner of ANO LLC and Wood on Wood Road...

  • Page 56
    ... Options and Restricted Stock Awards ...Variable Plan ...Regional Manager Plan ...Total ... $2,962 - 129 $3,091 $2,826 - 129 $2,955 $ 2,840 (2,960) 129 $ 9 Overview The Company has an equity incentive plan for employees, non-employee directors and other service providers, the Lumber Liquidators...

  • Page 57
    ... to the provisions of the 2006 Regional Plan, the Company withheld 20,134 shares of common stock from the Regional Managers at the fair market value on the vest dates for a total of $354, to cover applicable federal and state withholding taxes. Stock Options The following table summarizes activity...

  • Page 58
    Lumber Liquidators Holdings, Inc. Notes to Consolidated Financial Statements-(Continued) (amounts in thousands, except share data and per share amounts) The fair value of each stock option award is estimated by management on the date of the grant using the Black-ScholesMerton option pricing model. ...

  • Page 59
    ... the Variable Plan's cumulative compensation costs. This additional income tax expense was the result of a decrease in the fair value of the Vested Shares from the vest date to the exercise date. Subsequent stock option exercises during 2008 resulted in an excess tax benefit that reduced income tax...

  • Page 60
    ... 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 eligible to participate following the completion of one year of service and attainment of age 21. As of January 1, 2010, employees are...

  • Page 61
    ... would be anti-dilutive: 2010 As of December 31, 2009 2008 Stock Options ...Restricted Stock Awards ...NOTE 10. RELATED PARTY TRANSACTIONS 287,857 - 10,436 - 435,760 5,800 As described in Note 5, the Company leases a number of its store locations and Corporate Headquarters from ANO and Related...

  • Page 62
    ... 31, 2010 2010 2010 2010 (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 63
    ...over financial reporting to address the implementation of the SAP system that occurred during the third quarter of 2010. Our third quarter 2010 implementation included point-of-sale, warehouse management, merchandising, product allocation, general ledger and related management reporting systems. Our...

  • Page 64
    ... the definitive proxy statement for our 2011 annual meeting of shareholders, which will be filed no later than 120 days after December 31, 2010. 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 65
    ..., 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, 2010 and 2009...

  • Page 66
    ... and in the capacities indicated on February 23, 2011. Signature Title /S/ JEFFREY W. GRIFFITHS Jeffrey W. Griffiths Chief Executive Officer and Director (Principal Executive Officer) Chief Financial Officer (Principal Financial and Principal Accounting Officer) Chairman of the Board /S/ DANIEL...

  • Page 67
    ... D. Sullivan Stock Option Agreement and Lumber Liquidators, Inc. Guaranty Agreement, and amendment thereto (filed as Exhibit 10.09 to the Company's Amendment No. 1 to its Registration Statement on Form S-1, filed May 30, 2007 (File No. 333-142309), and incorporated by reference) Form of Option Award...

  • Page 68
    ... 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 as Exhibit...

  • Page 69
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  • Page 70
    ....4006 West Chicago (Geneva) - 33W461 Roosevelt Rd. • 630.206.1535 INDIANA Evansville - 1200 North Willow Rd., Ste. 203 • 812.618.1301 Fort Wayne - 2639 Goshen Rd. • 260.494.3210 Indianapolis - 8410 N. Michigan Rd. • 317.541.1444 South Bend - 3725 Cleveland Rd., Ste. 600 • 574.485.2524 IOWA...

  • Page 71
    ...South Main St. • 412.927.0354 Harrisburg (New Cumberland) - 2 Laurel Rd. • 717.798.8605 King Of Prussia (Oaks) - N 1420 E Dr., 422 Business Cntr. • 484.991.4075 Philadelphia - 10500 E. Roosevelt Blvd. • 267.234.7570 Pittsburgh - 4700 Campbells Run Rd. • 412.788.4666 Reading - 150 Corporate...

  • Page 72
    ... Riverside, CA "I am very pleased with Lumber Liquidators. If I had not found Lumber Liquidators, I probably would not have been able to afford new flooring. I wish there was one closer to home." Dana D., Purvis, MS "This is quality stuff!!" Actual Customer, Steilacoom, WA e,KDYHUHFRPPHQGHG/XPEHU...