Lumber Liquidators 2012 Annual Report Download - page 19

Our ability to offer hardwood flooring, particularly products made of more exotic species, depends on the continued
availability of sufficient suitable hardwood.
Our business strategy depends on offering a wide assortment of hardwood flooring to our customers. We sell flooring
made from species ranging from domestic maple, oak and pine to imported cherry, koa, mahogany and teak. Some of these
species are scarce, and we cannot be assured of their continued availability. Our ability to obtain an adequate volume and
quality of hard-to-find species depends on our suppliers’ ability to furnish those species, which, in turn, could be affected by
many things including events such as forest fires, insect infestation, tree diseases, prolonged drought and other adverse
weather and climate conditions. Government regulations relating to forest management practices also affect our suppliers’
ability to harvest or export timber, and changes to regulations and forest management policies, or the implementation of new
laws or regulations, could impede their ability to do so. If our suppliers cannot deliver sufficient hardwood and we cannot
find replacement suppliers, our net sales and operating results may be negatively impacted.
Our dependence on certain suppliers makes us vulnerable to the extent we rely on them.
We rely on a concentrated number of suppliers for the majority of our supply needs. We generally do not have long-
term contracts with our suppliers, and we typically obtain our hardwood supplies on an order-by-order basis, writing orders
for future deliveries from 90 to 180 days before delivery. In the future, our suppliers may be unable to supply us, or supply us
on acceptable terms, due to various factors, which could include political instability in the supplier’s country, a supplier’s
financial instability, inability or refusal to comply with applicable laws, trade restrictions or tariffs, duties, insufficient
transport capacity and other factors beyond our control. If we can no longer obtain merchandise from our major suppliers, or
they refuse to continue to supply us on commercially reasonable terms or at all, and we 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 suppliers, our ability to obtain
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 believe results from these
relationships, we need to continue to identify, develop and maintain relationships with qualified suppliers that can satisfy our
high standards for quality and our requirements for hardwood in a timely and efficient manner. The need to develop new
relationships will be particularly important as we seek to expand our operations and enhance our product offerings in the
future. Any inability to do so could reduce our competitiveness, slow our plans for further expansion and cause our net sales
and operating results to deteriorate. Moreover, the failure of our suppliers to adhere to the quality standards that we set for
our products could lead to litigation and recalls, which could damage our reputation and our brands, increase our costs, and
otherwise hurt our business.
If our suppliers do not use ethical business practices, comply with applicable laws and regulations and ensure that their
products meet our quality standards, our reputation could be harmed due to negative publicity and we could be subject to
legal risk.
While our suppliers agree to operate in compliance with applicable laws and regulations, including those relating to
environmental and labor practices, we do not control our suppliers. Accordingly, we cannot guarantee that they comply with
such laws and regulations or operate in a legal, ethical and responsible manner. Violation of environmental, labor or other
laws by our suppliers or their failure to operate in a legal, ethical and responsible manner, could reduce demand for our
products if, as a result of such violation or failure, we were to attract negative publicity. Further, such conduct could expose
us to legal risks as a result of our purchase of product from non-compliant suppliers.
Increased hardwood costs could harm our results of 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, product availability, environmental restrictions, government regulation and
trade policies, duties, weather conditions, processing and freight costs, and delivery delays and disruptions. We generally do
not have long-term supply contracts or guaranteed purchase amounts. As a result, we may not be able to anticipate or react to
changing hardwood costs by adjusting our purchasing practices, and we may not always be able to increase the selling prices
of our products in response to increases in supply costs. If we cannot address changing hardwood costs appropriately, it could
cause our operating results to deteriorate.
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