Lumber Liquidators 2011 Annual Report Download

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“ Amazing deal. I searched the internet for
days for a better deal, but these guys had
the sale I was looking for. Thanks Lumber
Liquidators!”
John P., Hammonton, NJ
“ I had a contractor put in our new floor.
He said that the wood was the best he has
ever put down as far as finishes,
installation and color.”
Actual Customer, Portland, CT
“ We purchased an older home with carpet and
couldn’t wait to replace the living room and
kitchen floors with hardwood. We could not
be happier.”
Vicki, South Charleston, WV
2011 ANNUAL
REPORT
YEAR ENDED DECEMBER 31, 2011

Table of contents

  • Page 1
    ...put in our new floor. He said that the wood was the best he has ever put down as far as finishes, installation and color." Actual Customer, Portland, CT "Amazing deal. I searched the internet for days for a better deal, but these guys had the sale I was looking for. Thanks Lumber Liquidators!" John...

  • Page 2
    ... "Lumber Liquidators is the only store where I will purchase wood flooring. They have the best prices and quality product I could find. Amazing company!" Actual Customer "Great flooring at a great price. I installed this in a bedroom and it turned out better than expected. Only took a couple hours...

  • Page 3
    ..., we continued to gain market share in our highly fragmented wood flooring market, primarily through new store openings. Specifically, for the full year we reported Net sales growth of 9.9% to $681.6 million; Gross margin expansion of 50 basis points to 35.3%; Operating margin of 6.2%; and Fully...

  • Page 4
    ... direct sourcing. The momentum we built in the past year, particularly in the second half of 2011, has our team focused on growth and committed to the continuous improvement of our operations. Looking at our strategy going forward in 2012, our team is focused on five key strategic initiatives...

  • Page 5
    ...25 34 36 263 223 37 40 223 2011 Beginning of the year Net new stores Net Income $22.1 $26.9 $26.3 $26.3 $11.3 2007 2008 2009 2010 2011 1% Other 15% Moldings & Accessories 11% Engineered Hardwood 10% Bamboo & Cork 24% Laminates 39% Solid Hardwood Lumber Liquidators 2011 Product Mix

  • Page 6
    ... Corporate Address Lumber Liquidators Holdings, 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...

  • Page 7
    ...held by non-affiliates of the Registrant (based upon the closing sale price of such shares on New York Stock Exchange on June 30, 2011) was approximately $490 million. Shares of Registrant's common stock held by each executive officer and director and by each entity or person that, to the Registrant...

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

  • Page 9
    ... flooring brand within the industry. We were founded in 1994. In November 2007, we completed our initial public offering and now the stock of Lumber Liquidators Holdings, Inc. trades on the New York Stock Exchange under the symbol "LL." We are a Delaware corporation with a corporate headquarters...

  • Page 10
    ... service provides a competitive advantage. Our Growth Strategy We intend to increase net sales and profitability by strengthening our position as a leading provider of hardwood flooring. In the last three years, we have grown primarily through share gains in a highly fragmented wood flooring market...

  • Page 11
    ...sales-driven bonuses over a relatively low base salary. The store manager is responsible both for store operations and for overseeing our customers' shopping experience. A store's warehouse is stocked with a combination of that store's most popular products and high-volume items, as well as customer...

  • Page 12
    ... a national and local level using both traditional and new media. We work with shows such as "Extreme Makeover: Home Edition" and HGTV's "Dream Home Sweepstakes," which use our products and enable potential customers to see both what our flooring will look like after installation and the relative...

  • Page 13
    ... 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, generally sourced directly from the mill, that includes prefinished premium domestic and exotic hardwoods, engineered...

  • Page 14
    ... and cork flooring products carry wear warranties ranging from 10 to 30 years. Finishing In 2011, we finished approximately 79% of our Bellawood products at our finishing facility in Toano, Virginia, and we obtained the balance from qualified finishing suppliers in North America and South America...

  • Page 15
    ... 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-HARDWOOD®, 1-800-FLOORING®, Dura-Wood®, Quickclic®, Virginia Mill Works Co. Hand...

  • Page 16
    ... Star Bamboo Flooring®, Dream Home Laminate Floors®, Builder's Pride®, Schön Engineered Floors®, Casa de Colour Collection® and other product line names. We have also registered certain marks in jurisdictions outside the United States, including the European Union, Canada, China, Australia and...

  • Page 17
    ...hardwood flooring industry is highly dependent on the 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...

  • Page 18
    ... 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 19
    ...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 20
    ... 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 21
    ... should change, we may experience increased costs or incur decreased efficiency in order to adhere to the new standards. The operation of stores in Canada may present increased risks due to our limited familiarity with that market. In 2011, we opened seven store locations in Canada. As a result of...

  • Page 22
    ... 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. We may experience operational problems with our information systems as a result...

  • Page 23
    ... in the hardwood flooring market expect to have sales associates serving them who are knowledgeable about the entire assortment of products offered by the retailer and the process of choosing and installing hardwood flooring. As a result, competition for qualified store managers and sales associates...

  • Page 24
    ... could adversely affect our business and might prevent our brands from achieving or maintaining market acceptance. We may also encounter claims from prior users of similar intellectual property in locales where we operate or intend to operate. This could harm our image, brand or competitive position...

  • Page 25
    ...Lumber Liquidators or other companies in our industry; variations in general economic conditions; actions of our current 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...

  • Page 26
    ... ...5 New York ...13 Texas ...20 North Carolina ...8 Utah ...2 North Dakota ...1 Vermont ...1 Ohio ...8 Virginia ...9 Oklahoma ...2 Washington ...7 Oregon ...2 West Virginia ...3 Pennsylvania ...12 Wisconsin ...4 We lease all of our stores and our corporate headquarters located in Toano, Virginia...

  • Page 27
    ...February 20, 2012 were 28,019,230, and we had 12 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 2011: Fourth Quarter ...Third Quarter ...Second Quarter ...First...

  • Page 28
    ... stock. Comparison of 4 Year Cumulative Total Return Assumes Initial Investment of $100 December 2011 350.00 300.00 250.00 200.00 150.00 100.00 50.00 0.00 11/9/2007 12/31/2007 12/31/2008 6/30/2009 12/31/2009 6/30/2010 12/31/2010 3/31/2011 6/30/2011 9/30/2011 12/31/2011 Lumber Liquidators...

  • Page 29
    ... report. We completed our initial public offering in November 2007. We reorganized effective December 31, 2009 to create a new holding company structure. As a result, a new parent company named Lumber Liquidators Holdings, Inc. was formed. Outstanding shares of the common stock of the former parent...

  • Page 30
    ...website, our catalog and a fullservice call center in Toano, Virginia. At December 31, 2011, we operated 256 store locations in 46 states and seven store locations in Ontario, Canada. Our customer is primarily the existing homeowner, who we believe represents over 90% of our customer count. The wood...

  • Page 31
    ... of freight charges for in-home delivery In the past two years, we have invested in our executive and operational management team, in our integrated information technology solution, and in our product sourcing, allocation and distribution. During that same time, we aggressively grew our store base...

  • Page 32
    ...Transportation charges between store locations and the cost of delivery to our customers (revenue in net sales). Investments in our quality control procedures; Warranty costs; Changes in finishing costs to produce a unit of our proprietary brands; Inventory shrink; Net costs of producing samples. 26...

  • Page 33
    ... product cost. Through our own international sourcing operations and working directly with our vendor-mill partners, we can better control product cost and quality, enhance forecasting and broaden our product assortment. As aligned with our strategic long-term goals, we utilize our balance sheet...

  • Page 34
    ...Our total labor costs have increased as a percentage of net sales over the last three years due primarily to our store base growth and investments in support infrastructure. Our annual advertising costs have increased as we continue to promote our brand and implement direct sales generation programs...

  • Page 35
    ... from increased sales of moldings and accessories and broadened assortment of engineered hardwoods expanded gross margin. Our sales mix of moldings and accessories increased to 14.6% of total net sales in 2011, from 13.7% in 2010. As part of our sourcing initiatives in the current year, our vendors...

  • Page 36
    ... of stock options and restricted shares to employees and directors was $4.0 million in 2011 and $3.1 million in 2010. As a percentage of net sales, stock-based compensation expense increased to 0.6% in 2011, from 0.5% in 2010, primarily due to equity granted to certain newly-hired executives. Other...

  • Page 37
    ... product lines, including product lines customers expected to be in-stock at a store location, such as laminates, moldings and accessories. Our sales mix of moldings and accessories increased to 13.7% of total net sales in 2010, from 12.7% in 2009. These benefits were partially offset by full year...

  • Page 38
    ... in sales volume, including the sales mix shift to a lower average retail price, and generally higher in-store average inventory levels. Inbound transportation costs capitalized into the unit cost of products sold were generally higher in 2010 than in 2009. International container rates reached...

  • Page 39
    ... under our amended revolving credit facility. We expect to use this liquidity for general corporate purposes, including providing additional long-term capital to support the growth of our business (primarily through opening new stores) and maintaining our existing stores. We believe that our...

  • Page 40
    ... change in accounts payable, customer deposits and store credits and certain other working capital items. The $9.2 million increase in net cash comparing 2010 to 2009 is due primarily to a lower build in merchandise inventories net of the change in accounts payable, the timing of certain tax items...

  • Page 41
    ...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 net of sales and use taxes collected from customers and...

  • Page 42
    ...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 43
    ...engage in the practice of trading derivative securities for profit. Exchange Rate Risk. The majority of our revenue, expense and capital purchasing activities are transacted in U.S. dollars. However, because a portion of our operations consists of activities outside of the U.S., we have transactions...

  • Page 44
    ...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, 2011 and 2010 ...Consolidated Statements of Income for the years ended December 31, 2011, 2010 and 2009...

  • Page 45
    ... the three years in the period ended December 31, 2011, 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...

  • Page 46
    ...over financial reporting as of December 31, 2011, based on the COSO criteria. We also have 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, 2011 and 2010...

  • 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) Year Ended December 31, 2010 2009 2011 Net Sales ...Cost of Sales ...Gross Profit ...Selling, General and Administrative Expenses ...Operating Income ...Other (Income) ...

  • Page 49
    Lumber Liquidators Holdings, Inc. Consolidated Statements of Other Comprehensive Income (in thousands) Year Ended December 31, 2011 2010 2009 Net Income ...Foreign Currency Translation Adjustments ...Comprehensive Income ... $26,256 $26,266 (194) - $26,062 $26,266 $26,924 - $26,924 See ...

  • Page 50
    ... Options ...Excess Tax Benefits on Stock Option Exercises ...Release of Restricted Stock ...Common Stock Purchased Pursuant to Equity Compensation Plans ...Net Income ...Balance, December 31, 2009 ...Stock-Based Compensation Expense ...Exercise of Stock Options ...Excess Tax Benefits on Stock Option...

  • Page 51
    ...773 4,714 Deferred Income Taxes ...2,402 4,300 (956) Stock-Based Compensation Expense ...4,005 3,091 2,955 Changes in Operating Assets and Liabilities: Merchandise Inventories ...(9,197) (21,789) (44,611) Accounts Payable ...4,467 1,136 17,235 Customer Deposits and Store Credits ...6,104 2,234 (613...

  • Page 52
    ... 46 states and seven store locations in Canada at December 31, 2011. In addition to the store locations, the Company's products may be ordered, and customer questions/concerns addressed, through both the call center in Toano, Virginia, and the website, www.lumberliquidators.com. The Company finishes...

  • Page 53
    ...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 balance sheet...

  • Page 54
    ... nil in 2011, $115 in 2010 and $577 in 2009. The Company offers a range of prefinished products with warranties on the durability of the finish ranging from 10 to 100 years. Warranty reserves are based primarily on claims experience, sales history and other considerations, and warranty costs are...

  • Page 55
    Lumber Liquidators Holdings, Inc. Notes to Consolidated Financial Statements-(Continued) (amounts in thousands, except share data and per share amounts) Store Opening Costs Costs to open new store locations are charged to SG&A as incurred. Depreciation and Amortization Property and equipment is ...

  • Page 56
    ... Floorings Inc. ("Sequoia") relating to Sequoia's quality control and assurance, product development, claims management and logistics operations in China. In connection with the agreement, the Company retained certain key Sequoia personnel in Shanghai, China and assumed direct control of sourcing...

  • Page 57
    ... economic benefits arising from other assets acquired that could not be individually identified including workforce additions, growth opportunities and direct servicing of mill relationships. Other liabilities primarily consist of reserves for warranty claims related to mills previously managed by...

  • Page 58
    ... Plan (the "2011 Plan"), which succeeded the Lumber Liquidators Holdings, Inc. 2007 Equity Compensation Plan (the "2007 Plan"). The 2011 Plan is an equity incentive plan for employees, non-employee directors and other service providers from which the Company may grant stock options, restricted stock...

  • Page 59
    ...common stock upon exercise of stock options and vesting of restricted stock awards. The Company also maintains the Lumber Liquidators Holdings, Inc. Outside Directors Deferral Plan (the "Deferral Plan") under which each of the Company's non-employee directors has the opportunity to elect annually to...

  • Page 60
    ... 3.5-7.5 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...

  • Page 61
    Lumber Liquidators Holdings, Inc. Notes to Consolidated Financial Statements-(Continued) (amounts in thousands, except share data and per share amounts) NOTE 8. INCOME TAXES The components of income before income taxes were as follows: Year Ended December 31, 2011 2010 2009 United States ......

  • Page 62
    ...Internal Revenue Service has completed audits of the Company's federal income tax returns for years through 2009. NOTE 9. 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...

  • Page 63
    ... other services. The Company charges CTG for its services at rates believed to be at fair market value. The revenue recognized by the Company from this agreement was not significant in 2011 or 2010. As described in Note 6, the Company leases a number of its store locations and Corporate Headquarters...

  • Page 64
    ... 31, 2011 2011 2011 2011 (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 65
    ... 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 management is responsible for establishing...

  • Page 66
    ... statement for our 2012 annual meeting of shareholders, which will be filed no later than 120 days after December 31, 2011. 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 indirect subsidiaries...

  • Page 67
    ...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, 2011 and 2010 ...Consolidated Statements of Income for the years ended December 31, 2011, 2010 and 2009...

  • Page 68
    ..., the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on February 22, 2012. LUMBER LIQUIDATORS HOLDINGS, INC. By: /s/ ROBERT M. LYNCH Robert M. Lynch President and Chief Executive Officer Pursuant to the requirements of the Securities...

  • Page 69
    ... Liquidators 2006 Equity Plan for Non-Employee Directors (filed as Exhibit 10.2 to the Company's Post-effective Amendment No. 1 to its Registration Statement on Form S-8, filed January 4, 2010 (File No. 333-147247), and incorporated by reference) Lumber Liquidators 2004 Stock Option and Grant Plan...

  • Page 70
    ... of America, N.A. and the related Amended and Restated Revolving Credit Note, dated as of February 21, 2012 Subsidiaries of Lumber Liquidators Holdings, Inc. Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm Certification of Principal Executive Officer of Lumber Liquidators...

  • Page 71
    ... Service Road ฀ ฀ ฀ FLORIDA Daytona (Holly Hill) - 1757 North Nova Road #103 ฀ Fort Lauderdale (Dania) - 1906 Tigertail Boulevard ฀ Fort Myers - 5780 Halifax Avenue ฀ Jacksonville - 624 Beautyrest Avenue ฀ Lakeland (Plant City) - 4017 South Frontage Road ฀ Melbourne - 2525 West New...

  • Page 72
    ...฀ King Of Prussia (Oaks) - North 1420 East Drive; 422 Business Center ฀ Monroeville - 4721 William Penn Highway ฀ Philadelphia - 10500 East Roosevelt Boulevard ฀ Philadelphia (Cherry Hill, NJ) - 1205 Warren Avenue ฀ ฀ Pittsburgh - 4700 Campbells Run Road ฀ Reading - 150 Corporate Drive...

  • Page 73
    ... amazing. The t wo men who installed the flooring even remarked how beautiful it is. One of them took some of the packing material home with him stating he very well may order this flooring for his own home!" Actual Customer, Williamstown, NJ "I believe Lumber Liquidators is a one stop, best price...