Lumber Liquidators 2014 Annual Report Download - page 13

Bellawood. Bellawood is a collection of solid and engineered hardwood flooring, bamboo flooring,
moldings and accessories and is our flagship brand. In 2014, we invested in new finishes to strengthen further
Bellawood as an industry leader in the five key features hardwood flooring is judged: scratch and abrasion
resistance, stain and scuff resistance, and gloss retention. These new finishes featured a lower sheen gloss than
previously offered and we further expanded the assortment with new stains and matte finishes. Across all
flooring lines, Bellawood brands were 16.3% of our flooring sales mix in 2014, up from 15.9% in 2013.
In order to control the quality of our Bellawood brand, we maintain a finishing facility in Toano,
Virginia. In 2014, we finished more than 28 million square feet of flooring, including approximately 92% of
the Bellawood demand. To supplement the Bellawood production needed, we utilize, certify and continually
monitor the finishing processes of certain mills in both North America and South America. In 2014, we
invested in a second finishing line at our Toano facility to more than double our finishing capacity. We have
planned a total investment of approximately $5.1 million in connection with this project, with $4.3 million
expended in 2014, and expect the second line to be operational in the first quarter of 2015.
In addition, we continue to evaluate vertical integration opportunities that may increase the supply of
domestic wood to feed the two finishing lines. We believe increasing our control over the raw material, drying
process and milling will not only lower net product costs, but also provide greater stability in supply and
quality in the finished product. In 2014, we invested approximately $5.2 million in equipment to dry enough
green wood to ultimately yield approximately 10% of our annual hardwood supply. We evaluate investments
in both finishing and vertical integration to improve the quality and costs of our products relative to the
marketplace availability.
Supply Chain. Our supply chain is wholly focused on delivering our complete assortment of products
to our customers more timely than our competitors. Our distribution facilities are located in California and
Virginia. Additionally, we lease the services of a third party consolidation center in China to break bulk
shipments from mills into quantities and assortments that can be sent directly to our store locations, and a
number of our vendors maintain inventory levels for shipment directly to our stores or customers. Our product
is generally transported boxed and palletized, and the weight of our product generally increases our supply
chain costs. Our transportation costs are significant, representing 7.9% of net sales in 2014, and are impacted
by international container rates, customs and duty charges, and domestic costs, including fuel, fuel surcharges
and drivers. Our supply chain initiatives seek the lowest rates, reductions in the number of miles traveled and
the most efficient means to minimize the total cost per mile. Transportation costs include:
• international and domestic inbound transportation to either our distribution centers or stores;
• transportation charges from our distribution centers to our stores; and
• transportation charges between stores.
In the first quarter of 2014, we began operating a 500,000 square foot leased distribution center in
Pomona, California as the primary distribution center for over 90 of our western stores. In the fourth quarter
of 2014, we completed construction of a million square foot distribution center on 110 acres of land we own
in Henrico County, Virginia to consolidate existing distribution facilities located in Hampton Roads, Virginia,
increase the efficiency of our East Coast operations and provide a foundation for future store base expansion.
We began the transition of our operations from these existing facilities to the new facility in the fourth quarter
of 2014, and the facility was fully operational in January 2015.
Our Unique Store Model
Generally, flooring is a considered, well-researched purchase, and we believe our value proposition makes
us a destination location. We generally seek locations with lower rent than those retail concepts requiring high
traffic or impulse purchases and we are able to adapt a range of existing buildings to our format, from
free-standing to strip center to small shopping center. Our stores are approximately 6,000 to 7,000 square feet,
which includes a showroom format designed to emphasize our products and a small warehouse. Our real
estate strategy considers total long-term share within a market over unit-based analysis. We enter into short
leases, generally for a base term of five to seven years with renewal options, to maximize our real estate
flexibility. We believe that our store design and locations reinforce our customers’ belief that they get a good
deal when they buy from us.
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