Lumber Liquidators 2013 Annual Report Download

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2013 ANNUAL
REPORT YEAR ENDED
12.31.2013
“Beautiful floor. My husband and
father installed it in 1.5 days!
Great quality at a wonderful
price.”
Actual Customer
“The service at LL was awesome!
The service people were very
friendly and helped us out every
step of the way.”
Actual Customer
“The prices are fantastic and the customer service can’t be beat. Searched high and low
for months before visiting Lumber Liquidators and couldn’t be any happier with the results.
We absolutely LOVE our floors ... can’t wait to tear out all the carpet!!”
Actual Customer
“Very excited about our
purchase through Lumber
Liquidators. Their quality and
pricing cannot be matched.”
Actual Customer

Table of contents

  • Page 1
    2013 ANNUAL REPORT YEAR ENDED 12.31.2013 "The prices are fantastic and the customer service can't be beat. Searched high and low for months before visiting Lumber Liquidators and couldn't be any happier with the results. We absolutely LOVE our ï¬,oors ...can't wait to tear out all the carpet!!" ...

  • Page 2
    ... make my house look very classy! I wish I had done it sooner!" Actual Customer, Phenix City, AL "Everyone at the store was very help ful and wanted to make sure we knew what we were doing, sent emails with instructional videos, great in suggesting what materials we would need. Great service!" Deb...

  • Page 3
    ... assortment at the lowest prices. In mid-August, we announced the latest steps to strengthen the long-term structure of our supply chain through the consolidation and expansion of our distribution facilities. Our new West Coast distribution center was fully operational as of the first quarter...

  • Page 4
    ... 2014, we conducted our second annual Lumber Liquidators University with a focus on enhanced sales training in addition to communicating our unified vision to the entire team. Opportunities for Growth in 2014 and Beyond Lumber Liquidators celebrates its 20th year of operation in 2014, and we are...

  • Page 5
    ... Open 263 223 186 36 37 40 318 288 25 30 223 263 288 Net Income $77.4 $47.1 $45.0 $30.0 $15.0 $0 $26.9 $26.3 $26.3 2009 2010 2011 2012 2013 18% Moldings and Accessories 38% Laminate, Bamboo, Cork and Vinyl Plank 44% Solid and Engineered Hardwood Lumber Liquidators 2013 Product...

  • Page 6
    ... College Station, TX 77842 (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 23, 2014, 10...

  • Page 7
    ...June 30, 2013, the last business day of the Registrant's most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant (based upon the closing sale price of such shares on New York Stock Exchange on June...

  • Page 8

  • Page 9
    LUMBER LIQUIDATORS HOLDINGS, INC. ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS Page Cautionary note regarding forward-looking statements PART I Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Business ...Risk Factors ...Unresolved Staff Comments...Properties ...Legal Proceedings ...Mine Safety ...

  • Page 10
    ..., 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 11
    ... 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 operate in a holding company structure with Lumber Liquidators Holdings, Inc. serving as our parent company and certain direct and indirect...

  • Page 12
    ... levels and our focused supply chain allow our entire assortment to be available to meet our customers' expectations in a manner which we believe is more timely than our competitors. We maintain our best selling products as in-stock inventory at our retail store locations and our distribution...

  • Page 13
    ... centers or stores. Our sourcing mix of ï¬,ooring, exclusive of moldings and accessories, by continent was as follows: Continent Primary Products Sourced 2013 2012 2011 percentage of ï¬,ooring sales (excludes moldings and accessories) Asia North America South America Other Laminate, Bamboo, Cork...

  • Page 14
    ... in our Toano facility. Supply Chain. We are committed to our complete product assortment being available to meet our customers' expectations more timely than our competitors. We have a strategic, multi-year initiative to optimize our supply chain, supporting our continued store base expansion...

  • Page 15
    ...products and high-volume items, as well as customer-specific inventory waiting to be picked up or delivered. In-store merchandise inventory levels are impacted by sales volume, distance from a distribution center, sales mix and warehouse size. At December 31, 2013, in-store inventory ranged as high...

  • Page 16
    ...or ï¬,ooring installation industries. We provide continuous training for our store associates, from topic-specific modules offered on our intranet to participation in our Lumber Liquidators University (''LLU'') program. LLU is an annual training event for all of our regional and store managers that...

  • Page 17
    ... ad campaigns on both a national and local level using both traditional and new media. We work with shows such as HGTV's ''Dream Home Sweepstakes'' and ''This Old House'', which use our products and enable potential customers to see both what our ï¬,ooring will look like after installation and...

  • Page 18
    ...our website, responds to emails from our customers and engages in telemarketing activities. Customers can contact our call center to place an order, to make an inquiry or to order a catalog. Store to Customer Delivery. Once an order is placed, a customer chooses to pick up at a nearby store location...

  • Page 19
    ... 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 Scraped and Distressed Floors௡, Morning Star Bamboo Flooring௡, Dream Home Laminate Floors௡, Builder...

  • Page 20
    ...NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site, www.sec.gov, which contains reports, proxy and information statements, and other information that we file electronically...

  • Page 21
    ...ooring, 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 ï¬,ooring industry, which is highly fragmented and competitive. We face significant...

  • Page 22
    ... customer requirements than we do. Intense competitive pressures from one or more of our competitors could cause price declines, decrease demand for our products and decrease our market share. Hardwood ï¬,ooring may become less popular as compared to other types of ï¬,oor coverings in the future...

  • Page 23
    ... 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...

  • Page 24
    ... to our business. With regard to our products, we may spend significant time and resources in order to comply with applicable advertising, importation, exportation, environmental, health and safety laws and regulations. If we should violate these laws and regulations, we could experience delays in...

  • Page 25
    ... 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 26
    ... ability to stock our stores and deliver products to our customers, and cause our net sales and operating results to deteriorate. Business and operation risks exist in connection with our West Coast distribution center and the construction of our East Coast distribution center. In 2013, we purchased...

  • Page 27
    ... of these services, our net sales, profitability and reputation could be harmed. 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. Our...

  • Page 28
    ... orders, to be lost or delayed, which could result in delays in the delivery of products to our stores and customers or lost sales. Moreover, our entire corporate network, including our telephone lines, is on an Internet-based network. Accordingly, if our network is disrupted, we may experience...

  • Page 29
    ... ï¬,ooring 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 ï¬,ooring. As a result, competition for qualified store managers and sales associates among...

  • Page 30
    ... operating performance and the performance of our competitors; the public's reaction to our filings with the SEC, our press releases and other public announcements; changes in recommendations or earnings estimates by research analysts who follow Lumber Liquidators or other companies in our industry...

  • Page 31
    ...Colorado Connecticut Delaware Florida Georgia Idaho Illinois Indiana 5 5 2 29 6 5 3 20 10 2 15 7 Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Nebraska 3 3 4 5 3 6 9 8 5 2 5 2 Nevada New Hampshire New Jersey New Mexico New York North Carolina...

  • Page 32
    ... of persons in Virginia, Alabama and New York who purchased and installed our wood ï¬,ooring that was sourced, processed or manufactured in China. The Original Plaintiffs claim that we made certain misrepresentations regarding the chemical emission levels of the Chinese ï¬,ooring products that we...

  • Page 33
    We are also, from time to time, subject to claims and disputes arising in the normal course of business. In the opinion of management, while the outcome of any such claims and disputes cannot be predicted with certainty, our ultimate liability in connection with these matters is not expected ...

  • Page 34
    ... price of $119.78 per share, in connection with the net settlement of shares issued as a result of the vesting of restricted stock during the quarter ended December 31, 2013. Except as noted in footnote 1 above, all of the above repurchases were made on the open market at prevailing market rates...

  • Page 35
    ... of our common stock. Comparison of 5 Year Cumulative Total Return Assumes Initial Investment of $100 December 2013 $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 31/ 12/ 200 8 12/ 31/ 200 9 12/ 31/ 201 0 12/ 31/ 201 1 12/ 31/ 201 2 12/ 31/ 201 3 Lumber Liquidators Holdings, Inc. Dow...

  • Page 36
    ...any future period. 2013 Year Ended December 31, 2012 2011 2010 (dollars in thousands, except per share amounts) 2009 Statement of Income Data Net sales ...Comparable store net sales increase (decrease)(1) ...Cost of sales ...Gross profit ...Selling, general and administrative expenses ...Operating...

  • Page 37
    ... Results of Operations. Overview and Trends Lumber Liquidators is the largest specialty retailer of hardwood ï¬,ooring in North America. We believe we have achieved a reputation for offering great value, superior service and a broad selection of high-quality hardwood ï¬,ooring products. We offer an...

  • Page 38
    ... installation services, broaden the implementation of our Best People initiative and incur incremental costs as our distribution facilities are fully implemented. Our Market We operate primarily in the highly fragmented wood ï¬,ooring market for existing homeowners. This market is dependent on home...

  • Page 39
    ... our shareholders, and expresses our long-term confidence in our proven store model and growth potential. Results of Operations Net Sales 2013 Year Ended December 31, 2012 2011 (dollars in thousands) Net sales ...Percentage increase ...Number of stores open at end of period Number of stores opened...

  • Page 40
    ... store base unit count by 10.4%, 9.5% and 17.9% in 2013, 2012 and 2011, respectively, with 25, 17 and 20 locations, respectively, opened in existing markets where brand awareness tends to increase first year net sales per unit relative to a new market. Gross Profit and Gross Margin 2013 Year Ended...

  • Page 41
    ...our total sales mix to 18.1% in 2013 from 16.3% in 2012 and 14.6% in 2011. Greater customer preference for certain premium products, which generally produce a higher gross margin than the entry level or moderate products within a merchandise category. Sourcing initiatives, including line reviews and...

  • Page 42
    ... higher commission rates earned by our store management. Additionally, 2013 included incremental salaries and commissions related to our test of structural installation alternatives and our supply chain optimization, including the start-up of our West Coast distribution center. Advertising expenses...

  • Page 43
    ... open between 30 and 40 new store locations, using up to $10 million of cash; remodel or relocate 25 to 35 existing stores using, up to $6 million of cash; continue to invest in our supply chain, using up to $50 million of cash primarily related to the East Coast and West Coast distribution centers...

  • Page 44
    ... events such as the South American rainy season and Chinese New Year, built safety stock in conjunction with our supply chain optimization and adjusted to updated sales projections for 2014. Year-end inventory levels in both 2012 and 2011 had been impacted by our sourcing initiatives. We believe our...

  • Page 45
    ...nancial position or results of operations to date, a high rate of inï¬,ation in the future may have an adverse effect on our ability to maintain current levels of gross profit and SG&A expenses as a percentage of net sales if the selling prices of our products do not increase with these increased...

  • Page 46
    ... financial 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 installation revenue and freight charges for in-home delivery, when the service has...

  • Page 47
    ... on a combination of historical volatility of our stock price and 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 term of the...

  • Page 48
    We currently do not engage in any interest rate hedging activity and currently have 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 enter into derivative financial instruments, although we have not...

  • Page 49
    ...LLP, Independent Registered Public Accounting Firm, on Internal Control over Financial Reporting ...Consolidated Balance Sheets as of December 31, 2013 and 2012 ...Consolidated Statements of Income for the years ended December 31, 2013, 2012 and 2011 ...Consolidated Statements of Other Comprehensive...

  • Page 50
    ... financial position of Lumber Liquidators Holdings, Inc. at December 31, 2013 and 2012, and the consolidated results of its operations and its cash ï¬,ows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. We...

  • Page 51
    ...nancial reporting as of December 31, 2013, 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, 2013 and 2012, and...

  • Page 52
    Lumber Liquidators Holdings, Inc. Consolidated Balance Sheets (in thousands, except share data) 2013 December 31, 2012...Customer Deposits and Store Credits Accrued Compensation ...Sales and Income Tax...respectively) ...Treasury Stock, at cost (2,133,307 and 1,719,706 shares, respectively) ...statements 42

  • Page 53
    Lumber Liquidators Holdings, Inc. Consolidated Statements of Income (in thousands, except share data and per share amounts) 2013 Year Ended December 31, 2012 2011 Net Sales ...Cost of Sales ...Gross Profit ...Selling, General and Administrative Expenses Operating Income ...Other (Income) Expense ...

  • Page 54
    Lumber Liquidators Holdings, Inc. Consolidated Statements of Other Comprehensive Income (in thousands) 2013 Year Ended December 31, 2012 2011 Net Income ...Foreign Currency Translation Adjustments ...Comprehensive Income ... $77,395 (635) $76,760 $47,064 267 $47,331 $26,256 (194) $26,062 See ...

  • Page 55
    ... of Stock Options . . Excess Tax Benefits on Stock Option Exercises ...Release of Restricted Stock . Common Stock Repurchased Translation Adjustment ...Net Income ...Balance, December 31, 2012 Stock-Based Compensation Expense ...Exercise of Stock Options . . Excess Tax Benefits on Stock Option...

  • Page 56
    Lumber Liquidators Holdings, Inc. Consolidated Statements of Cash Flows (in thousands) 2013 Year Ended December 31, 2012 2011 Cash Flows from Operating Activities: Net Income ...Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization ......

  • Page 57
    ...states and nine store locations in Canada at December 31, 2013. In addition to the store locations, the Company's products may be ordered, and customer questions/concerns addressed, through both its call center in Toano, Virginia, and its website, www.lumberliquidators.com. The Company finishes the...

  • Page 58
    ... was included in other current liabilities, respectively. Recognition of Net Sales The Company recognizes net sales for products purchased at the time the customer takes possession of the merchandise. Service revenue, primarily installation revenue and freight charges for in-home delivery, is 48

  • Page 59
    ... in customer deposits and store credits until the customer takes possession of the merchandise. Cost of Sales Cost of sales includes the cost of the product sold, cost of installation services, transportation costs from vendor to the Company's distribution centers or store locations, any applicable...

  • Page 60
    ... forfeitures estimated at the date of grant based on historical experience and future expectations. Measured compensation cost is recognized ratably over the requisite service period of the entire related stock-based compensation award. Foreign Currency Translation The Company's Canadian operations...

  • Page 61
    ... for 2013, 2012 or 2011. The Company classifies interest and penalties related to income tax matters as a component of income tax expense. Net Income per Common Share Basic net income per common share is determined by dividing net income by the weighted average number of common shares outstanding...

  • Page 62
    ... covenants at December 31, 2013. NOTE 5. LEASES The Company has operating leases for its stores, Corporate Headquarters, Hampton Roads and West Coast distribution centers, supplemental office facilities and certain equipment. The store location leases are operating leases and generally have five...

  • Page 63
    ... 31, 2012 2011 Stock Options ...Restricted Stock Awards ...Stock Repurchase Program 103,329 176 16,969 4,261 845,414 9,414 In 2012, the Company's Board of Directors (''Board'') authorized the repurchase of up to $100,000 of the Company's common stock from time to time on the open market or in...

  • Page 64
    ... issues new shares of 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 under which each of the Company's non-employee directors has the opportunity to elect annually to...

  • Page 65
    ... a combination of historical volatility of the Company's stock price and 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 term of...

  • Page 66
    ... value method, estimated by management using the Black-Scholes-Merton option pricing model, is used to recognize compensation cost associated with SARs. NOTE 8. INCOME TAXES The components of income before income taxes were as follows: 2013 Year Ended December 31, 2012 2011 United States ...Foreign...

  • Page 67
    ... operating loss carryforwards of $7,069 and $5,446, respectively, which begin to expire in 2030. These net operating losses may be carried forward up to 20 years to offset future taxable income. The Company made income tax payments of $30,154, $29,035 and $7,067 in 2013, 2012 and 2011, respectively...

  • Page 68
    ... for its services at rates believed to be at fair market value. The revenue recognized by the Company from this agreement was nil, $55 and $83 in 2013, 2012 and 2011, respectively. As described in Note 5, the Company leases a number of its store locations and Corporate Headquarters from Controlled...

  • Page 69
    ... in Virginia, Alabama and New York who purchased and installed wood ï¬,ooring from the Company that was sourced, processed or manufactured in China. The Original Plaintiffs claim that the Company made certain misrepresentations regarding the chemical emission levels of the Chinese ï¬,ooring products...

  • Page 70
    ... 31, 2013 2013 2013 2013 (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 âˆ' Basic . Net Income per Common Share âˆ' Diluted Number of Stores Opened in Quarter...

  • Page 71
    ... and forms of the SEC and that such information is accumulated 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...

  • Page 72
    ... the definitive proxy statement for our 2014 annual meeting of shareholders, which will be filed no later than 120 days after December 31, 2013. 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 73
    ...LLP, Independent Registered Public Accounting Firm, on Internal Control over Financial Reporting ...Consolidated Balance Sheets as of December 31, 2013 and 2012 ...Consolidated Statements of Income for the years ended December 31, 2013, 2012 and 2011 ...Consolidated Statements of Other Comprehensive...

  • Page 74
    ..., the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on February 19, 2014. 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 75
    ... incorporated by reference) Lumber Liquidators 2004 Stock Option and Grant Plan (filed as Exhibit 10.3 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) Offer Letter Agreement with...

  • Page 76
    ... March 22, 2012 (File No. 001-33767), and incorporated by reference) Amended and Restated Annual Bonus Plan (filed as Exhibit 10.17 to the Company's annual report on Form 10-K, filed on February 20, 2013 (File No. 001-33767), and incorporated by reference) Form of Option Award Agreement, effective...

  • Page 77
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  • Page 78
    ... Rd • 651.967.0260 INDIANA Evansville - 1200 N Willow Rd, Suite 203 • 812.618.1301 Fort Wayne - 2639 Goshen Rd • 260.494.3210 Greenwood - 2117 Independence Dr • 317.522.0076 Indianapolis - 8410 N Michigan Rd • 317.541.1444 Lafayette - 4315 Commerce Dr; Suite 410 • 765.588.3554 Now Open...

  • Page 79
    ... Soon! UTAH Lindon - 1451 West 40 South, Suite 100 • 801.429.9465 Salt Lake City - 515 W Pickett Circle, Suite 100 • 801.886.8878 NEW JERSEY Atlantic City (Pleasantville) - 7034 Black Horse Pike • 609.910.0897 Cherry Hill - 1205 Warren Ave • 856.324.4450 East Brunswick - 2 Claire Rd, Suite...

  • Page 80
    ... Room. It looks great. We get all kinds of compliments on our new floors. Everyone loves the color and comments on the quality of the wood. In the spring, we are planning on installing the Bund Birch in the rest of our house. Delivery was fast and the people at our local Lumber Liquidators store...