Lumber Liquidators 2012 Annual Report Download

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2012 ANNUAL
REPORT
YEAR ENDED
12.31.2012
“I love my floors! I do not miss my carpet at all!
The floors make my house look very classy! I wish
I had done it sooner!”
Actual Customer
“Lumber Liquidators is great! They have
the best prices around and the staff
is extremely informative!”
Actual Customer
“Great product, great service, great selection,
great price.”
Actual Customer

Table of contents

  • Page 1
    2012 ANNUAL REPORT "I love my ï¬,oors! I do not miss my carpet at all! The ï¬,oors make my house look very classy! I wish I had done it sooner!" Actual Customer "Lumber Liquidators is great! They have the best prices around and the staff is extremely informative!" Actual Customer YEAR ENDED 12.31....

  • Page 2
    ...business!" Actual Customer "The employees were knowledgeable and polite. The desired product was available for immediate pickup. All and all, a good experience." Actual Customer "Lumber Liquidators is the only store where I will purchase wood flooring. They have the best prices and quality product...

  • Page 3
    ...us to generate incremental net sales and contributing to our expanded operating margin. In 2012, we completed four Lumber Liquidators University ("LLU") programs across the country through which we were able to provide all of our store managers with in-depth training on products and enhanced selling...

  • Page 4
    Unified Vision and Long-Term Potential In 2013, we remain focused and united on these initiatives to deliver growth, a portion of which is continually reinvested in new opportunities. Lumber Liquidators is a growth retailer with a powerful store model and a strong and unique value proposition that ...

  • Page 5
    ....6 $813.3 Stores Open 263 223 186 150 34 36 37 40 288 25 223 263 Net Income $47.1 $26.9 $22.1 $26.3 $26.3 2008 2009 2010 2011 2012 1% Other 16% Moldings & Accessories 14% Bamboo, Resilient and Cork 47% Solid and Engineered Hardwood 22% Laminates Lumber Liquidators 2012 Product Mix

  • 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 16, 2013, 10:00 am EST Lumber Liquidators...

  • Page 7
    ...Address of principal executive offices) (Registrant's telephone number, including area code) 23168 (Zip Code) (757) 259-4280 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
    ... 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
    ..., 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 10
    ... in 1994, Lumber Liquidators is the largest specialty retailer of hardwood flooring in North America. Our initial public offering was in November 2007, and our common stock trades on the New York Stock Exchange under the symbol "LL". We are a Delaware corporation with headquarters in Toano, Virginia...

  • Page 11
    ...to maintain these prices across our product range as a result of our direct sourcing, supply chain and unique store model. Selection. We offer a broad product assortment of solid and engineered hardwoods, laminates, resilient, bamboo and cork flooring products, moldings and flooring accessories sold...

  • Page 12
    ...our Lumber Liquidators University ("LLU") program, which is an annual training event for all of our regional and store managers that focuses on enhanced selling techniques, in-depth product training and strategic discussions with senior executives. Customer Education and Resources Our sales strategy...

  • Page 13
    ... card, underwritten by GE Money Bank at no recourse to us. We generally utilize the credit program for promotional opportunities, including programs for up to 26 months of deferred interest with payments. Our customers may also use their Lumber Liquidators credit card to tender installation services...

  • Page 14
    ... website and from our call center are the same as the prices in our stores. Once an order is placed, customers may have their purchases delivered or pick them up at a nearby store location. In 2012, approximately 11% of our customers utilized our delivery services. We strive to use our various sales...

  • Page 15
    ... northern red oak, pine and American walnut, and exotic woods, such as bloodwood, cherry, cypress, ebony, koa, mesquite, mahogany, rosewood and teak. We sell our solid hardwood products either prefinished or unfinished, and our engineered hardwood products in either glue down or floating application...

  • Page 16
    ...®, 1-800HARDWOOD®, 1-800-FLOORING®, Dura-Wood®, 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 de Colour Collection® and other product line names. We...

  • 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
    ... in decreased demand for hardwood flooring, in remodeled and new homes, which would harm our business and operating results. Competition could cause price declines, decrease demand for our products and decrease our market share. We operate in the wood flooring industry, which is highly fragmented...

  • Page 19
    ... operations. The cost of the various species of hardwood that are used in our products is important to our profitability. Hardwood lumber costs fluctuate as a result of a number of factors including changes in domestic and international supply and demand, labor costs, competition, market speculation...

  • Page 20
    ... of new markets and store locations; the implementation of and results generated by our new showroom format; 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...

  • Page 21
    ...period-over-period net sales for stores beginning their thirteenth 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...

  • Page 22
    ... 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 experience with that market. We opened our first stores in Canada in 2011 and currently operate nine store locations...

  • Page 23
    ... 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 24
    ... market or industry perception arising from such loss, could damage our business and harm our reputation. Our success depends upon our ability to meet our labor needs. Our success depends in part on our ability to attract, hire, train and retain qualified managers and staff. Buying hardwood flooring...

  • Page 25
    ... 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 other companies in our industry; variations in general...

  • Page 26
    ... future, operating results may fall below the expectations of research analysts and investors, which could cause the price of our common stock to fall. Tom Sullivan has the ability to exercise influence over us and his interests in our business may be different than yours. At December 31, 2012, Tom...

  • Page 27
    ... ...5 Maryland ...Delaware ...3 Massachusetts ...Florida ...19 Michigan ...Georgia ...9 Minnesota ...Idaho ...2 Mississippi ...Illinois ...11 Missouri ...Indiana ...6 Nebraska ... 3 3 4 5 3 5 7 8 5 2 5 2 Nevada ...New Hampshire ...New Jersey ...New Mexico ...New York ...North Carolina ...North...

  • Page 28
    ...100 and no more than $1,000 per violation, punitive damages, attorney's fees and costs, and other relief. We intend to ... operations, financial position or cash flows. We also are, from time to time, subject to claims and disputes arising in the normal course of business. In the opinion of management,...

  • Page 29
    ... the open market at prevailing market rates plus related expenses under our stock repurchase programs. Our initial stock repurchase program, which authorized the repurchase of up to $50 million in common stock, was authorized by our Board of Directors and publicly announced on February 22, 2012. Our...

  • Page 30
    ...stock. Comparison of 5 Year Cumulative Total Return Assumes Initial Investment of $100 December 2012 $600 $500 $400 $300 $200 $100 $0 1 2 /3 1/20 07 1 2 /3 1/20 08 1 2 /3 1/20 09 1 2 /3 1/20 10 1 2 /3 1/20 11 1 2 /3 1/20 12 Lumber Liquidators.../31/2011 12/31/2012 Lumber Liquidators Holdings,...

  • Page 31
    ... opening Includes interest income. 2012 As of December 31, 2011 2010 2009 2008 (dollars in thousands, except average sale data) Balance Sheet Data Cash and cash equivalents ...Merchandise inventories ...Total assets ...Customer deposits and store credits ...Total debt and capital lease obligations...

  • Page 32
    ...business model enables us to offer a broad assortment of high-quality products to our customers at a lower cost than our competitors. At December 31, 2012, we sold our products through 288 Lumber Liquidators stores in 46 states in the U.S. and in Canada, a call center, websites and catalogs. In 2012...

  • Page 33
    ... shares of our common stock through open market purchases, using approximately $49.1 million in cash. Results of Operations Net Sales Year Ended December 31, 2012 2011 2010 (dollars in thousands) Net sales ...Percentage increase ...Number of stores open at end of period ...Number of stores opened...

  • Page 34
    ...the project. In both 2012 and 2011, customer preference for premium products increased, particularly within certain product categories including laminates, engineered hardwood, bamboo, cork and resilient. • The number of customers invoiced in comparable stores has benefited from: • • Greater...

  • Page 35
    ... cost of product was reduced, primarily in 2012, due to both the net cost reduction of owning those services and the benefits of working directly with the mills. Transportation: Gross margin benefited from initiatives launched in 2012 to enhance the efficiency of supply chain operations, including...

  • Page 36
    ...in certain benefit costs and higher commission rates earned by our store management. Salaries, commissions and benefits increased in 2011 primarily due to the growth in our store base and higher total benefit costs. Advertising expenses decreased as a percentage of net sales in both 2012 and 2011 as...

  • Page 37
    ... received from stock option exercises. Merchandise Inventories Merchandise inventory is our most significant asset, and is considered either "available for sale" or "inbound in-transit," based on whether we have physically received and inspected the products at an individual store location, in our...

  • Page 38
    ... for an earlier spring build in 2013 of certain products primarily supplied by Asian mills, thereby increasing the inbound in-transit inventory at December 31, 2012. Cash Flows Operating Activities. Net cash provided by operating activities was $47.3 million for 2012, $44.1 million for 2011 and $17...

  • Page 39
    ...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 40
    ... from estimated amounts for 2012, 2011 or 2010. Stock-Based Compensation We currently maintain a single equity incentive plan under which we may grant non-qualified stock options, restricted shares, stock appreciation rights and other equity awards to employees and non-employee directors. We...

  • Page 41
    ... no intention to do so in the foreseeable future. However, in the future, in an effort to mitigate losses associated with these risks, we may at times engage in transactions involving various derivative instruments to hedge revenues, inventory purchases, assets and liabilities denominated in foreign...

  • Page 42
    ...LLP, Independent Registered Public Accounting Firm, on Internal Control over Financial Reporting ...Consolidated Balance Sheets as of December 31, 2012 and 2011 ...Consolidated Statements of Income for the years ended December 31, 2012, 2011 and 2010 ...Consolidated Statements of Other Comprehensive...

  • Page 43
    Report of Ernst & Young LLP, Independent Registered Public Accounting Firm The Board of Directors and Stockholders of Lumber Liquidators Holdings, Inc. We have audited the accompanying consolidated balance sheets of Lumber Liquidators Holdings, Inc. as of December 31, 2012 and 2011, and the related ...

  • Page 44
    ... financial reporting as of December 31, 2012, 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, 2012 and 2011 and...

  • Page 45
    ... 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; 35...

  • Page 46
    Lumber Liquidators Holdings, Inc. Consolidated Statements of Income (in thousands, except share data and per share amounts) Year Ended December 31, 2011 2010 2012 Net Sales ...Cost of Sales ...Gross Profit ...Selling, General and Administrative Expenses ...Operating Income ...Other (Income) ...

  • Page 47
    Lumber Liquidators Holdings, Inc. Consolidated Statements of Other Comprehensive Income (in thousands) Year Ended December 31, 2012 2011 2010 Net Income ...Foreign Currency Translation Adjustments ...Comprehensive Income ... $47,064 267 $47,331 $26,256 $26,266 (194) - $26,062 $26,266 See ...

  • Page 48
    ...Net Income ...- - Balance, December 31, 2011 ...27,894,543 $ 28 Stock-Based Compensation Expense ...- - Exercise of Stock Options ...937,048 1 Excess Tax Benefits on Stock Option Exercises ...- - Release of Restricted Stock ...43,529 - Common Stock Repurchased ...(1,660,976) - Translation Adjustment...

  • Page 49
    ...8,328 5,773 Deferred Income Taxes ...160 2,402 4,300 Stock-Based Compensation Expense ...3,997 4,005 3,091 Changes in Operating Assets and Liabilities: Merchandise Inventories ...(42,712) (9,197) (21,789) Accounts Payable ...16,756 4,467 1,136 Customer Deposits and Store Credits ...7,626 6,104 2,234...

  • Page 50
    ...nine store locations in Canada at December 31, 2012. 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 the majority of...

  • Page 51
    ... net sales for products purchased at the time the customer takes possession of the merchandise. Service revenue, primarily freight charges for in-home delivery, is included in net sales and recognized when the service has been rendered. The Company reports sales exclusive of sales taxes collected...

  • Page 52
    ... center or store location, any applicable finishing costs related to production of the Company's proprietary brands, the transportation costs from the distribution center to the store locations, transportation costs for the delivery of products from the store locations to customers, any inventory...

  • Page 53
    Lumber Liquidators Holdings, Inc. Notes to Consolidated Financial Statements-(Continued) (amounts in thousands, except share data and per share amounts) Operating Leases The Company has operating leases for its stores, Corporate Headquarters, supplemental office and distribution facilities and ...

  • Page 54
    ... 28, 2011, the Company entered into an agreement to acquire certain assets of Sequoia Floorings Inc. ("Sequoia") relating to Sequoia's quality control and assurance, product development, claims management and logistics operations in China. The acquisition agreement included a purchase price of...

  • Page 55
    Lumber Liquidators Holdings, Inc. Notes to Consolidated Financial Statements-(Continued) (amounts in thousands, except share data and per share amounts) NOTE 6. LEASES The Company has operating leases for its stores, Corporate Headquarters, supplemental office and distribution facilities and ...

  • Page 56
    ... 2012 2011 2010 Stock Options, Restricted Stock Awards and Stock Appreciation Rights ...Regional Manager Plan ...Total ...Overview $3,997 - $3,997 $4,005 - $4,005 $2,962 129 $3,091 On May 6, 2011, the Company's stockholders approved the Lumber Liquidators Holdings, Inc. 2011 Equity Compensation...

  • Page 57
    ... average period of approximately 2.6 years. 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. The weighted average fair value of options granted during 2012, 2011 and 2010 was $12.68, $12.57 and $11.44...

  • Page 58
    ..., December 31, 2012 ...Exercisable at December 31, 2012 ... - 9,796 (165) 9,631 - $ - 24.71 24.35 $24.72 $ - - $- 9.2 - $ 271 $- The fair value method, estimated by management using the Black-Scholes-Merton option pricing model, is used to recognize compensation cost associated with SARs...

  • Page 59
    Lumber Liquidators Holdings, Inc. Notes to Consolidated Financial Statements-(Continued) (amounts in thousands, except share data and per share amounts) NOTE 9. INCOME TAXES The components of income before income taxes were as follows: Year Ended December 31, 2012 2011 2010 United States ...Foreign...

  • Page 60
    ...: December 31, 2012 2011 Deferred Tax Liabilities: Prepaid Expenses ...Depreciation and Amortization ...Other ...Total Gross Deferred Tax Liabilities ...Deferred Tax Assets: Stock-Based Compensation Expense ...Reserves ...Employee Benefits ...Inventory Capitalization ...Foreign Operations ...Other...

  • Page 61
    Lumber Liquidators Holdings, Inc. Notes to Consolidated Financial Statements-(Continued) (amounts in thousands, except share data and per share amounts) As described in Note 6, the Company leases a number of its store locations and Corporate Headquarters from Controlled Companies. NOTE 12. ...

  • Page 62
    ...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 ...Comparable Store Net Sales Increase ...Effective Tax Rate ... $188,034 70,137 56,819...

  • Page 63
    ... 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 64
    ...reference from the definitive proxy statement for our 2013 annual meeting of shareholders, which will be filed no later than 120 days after December 31, 2012. Code of Ethics We have a Code of Conduct, which applies to all employees, officers and directors of Lumber Liquidators Holdings, Inc. and its...

  • Page 65
    ... 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, 2012 and 2011 ...Consolidated...

  • Page 66
    ... undersigned, thereunto duly authorized on February 20, 2013. LUMBER LIQUIDATORS HOLDINGS, INC. By: /s/ ROBERT M. LYNCH Robert M. Lynch President and Chief Executive Officer Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following...

  • Page 67
    ... 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 68
    ... Executive Officer and Principal Financial Officer of Lumber Liquidators Holdings, Inc. pursuant to Section 906 of the Sarbanes-Oxley act of 2002 The following financial statements from the Company's Form 10-K for the year ended December 31, 2012, formatted in XBRL: (i) Consolidated Balance Sheets...

  • Page 69
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  • Page 70
    ... (City Of Industry) - 19555 East Walnut Drive South •฀626.465.1560 Los Angeles (Commerce) - 6548 Telegraph Road •฀323.721.0800 Los Angeles (West LA) - 11612 West Olympic Boulevard •฀213.785.3456 Modesto - 301฀North฀Washington฀Street฀•฀209.554.7291 Moreno Valley - 12125฀Day...

  • Page 71
    ... - 2011 North Cashua Drive •฀843.536.4524 Greenville (Simpsonville) - 3005 Kemet Way •฀864.881.6620 NEVADA Las Vegas (Henderson) - 27 South Stephanie Street, Suite 150 •฀702.893.3338 Reno - 9728 South Virginia Street, Suite D •฀775.851.4949 New Location! SOUTH DAKOTA Sioux Falls...

  • Page 72
    ... down 3/4 Oak between Thanksgiving and Christmas. This is the first time I have put down hardwood and I have to say the room I laid it in is right next to a room that the hardwood was professionally installed - my floor looks just as good. This product [Norge 15 1/2 ga. 2-in-1 Floor Nailer] made the...