Cautionary Note Regarding Forward-Looking Statements This report contains forward-looking statements based on management's beliefs and existing information, subject to various unpredictable risks and uncertainties beyond the company's control - Forward-looking statements are based on management's beliefs and existing information, involving the company's future expectations, intentions, plans, and beliefs4 - Statements are subject to various unpredictable risks and uncertainties beyond the company's control4 - Key risks include: new laws and regulations (e.g., tariffs), legal proceeding outcomes, reputational damage, international sourcing (e.g., pandemics and tariffs), compliance obligations, cybersecurity threats, store expansion and capital expenditure capabilities, execution of key initiatives, growth management, transportation costs, asset damage, product distribution disruptions, Canadian and Chinese operations, third-party installer management, lease renewals, supplier adequacy, complex regulatory compliance, product liability claims, hardwood supply, economic conditions, insurance coverage, capital access costs, customer information processing, management information system disruptions, e-commerce competition, marketing strategies, consumer trends, accounting standard changes, deferred tax asset valuation allowances, internal controls, stock price volatility, and anti-takeover provisions4 - The company undertakes no obligation to update these statements unless required by federal securities laws5 PART I Business Overview Lumber Liquidators is North America's leading specialty retailer of hard-surface flooring, offering over 400 products and services through stores and online platforms Company Overview Lumber Liquidators is a leading North American hard-surface flooring retailer offering over 400 products and services to homeowners and contractors - Lumber Liquidators is North America's leading specialty retailer of hard-surface flooring, offering over 400 flooring products, including waterproof vinyl plank, solid and engineered hardwood, laminate, bamboo, tile, and cork flooring7 - The company also provides flooring enhancements and accessories, along with delivery and in-home installation services through third-party independent contractors7 - The company primarily sells products to homeowners or contractors representing homeowners, as well as commercial customers, operating through a network of stores and an online platform7 - The company is known for providing exceptional value, quality service, and a wide selection of high-quality hard-surface flooring products8 - Founded in 1994, the company is headquartered in Richmond, Virginia, and its common stock trades on the New York Stock Exchange under the ticker symbol "LL"9 Market The US installed flooring market was $42 billion in 2018, with hard-surface flooring showing a 6% CAGR from 2014-2018, driven by product improvements and consumer shifts - In 2018, US sales of installed floor covering products (excluding labor) totaled $42 billion, with hardwood, laminate, and vinyl flooring sales accounting for 39% of the total10 - Including installation costs, the overall flooring industry experienced a compound annual growth rate (CAGR) of 3.7% from 2014 to 2018, while hardwood, laminate, and vinyl flooring sales grew at a 6% CAGR during the same period10 - The company believes that product quality and structural improvements, increased resilience and water resistance, ease of installation, wide price points, and a shift from soft to hard surfaces will drive continued market share growth for hard-surface flooring10 Competition The company operates in a highly fragmented market, competing with national home improvement chains, specialty retailers, and local single-store operators - The company competes in a highly fragmented market, with no single retailer holding more than 21% of the consumer flooring market share (including carpet)11 - Competitors include national home improvement chains, national specialty retailers, warehouse clubs, and online retailers, but nearly half of the industry consists of local single-store flooring retailers, small chains, and limited regional chains11 Customers The company targets DIY, DIFM, and Pro customers, offering tailored services including installation and dedicated support - The company targets DIY (Do-It-Yourself), DIFM (Do-It-For-Me), and Pro (Professional) customers, who have different needs for flooring purchases12 - The company offers installation services for DIFM customers, more personalized attention and dedicated call center resources for DIY and Pro customers, and delivery services for all customer segments12 Products and Services The company offers a wide range of hard-surface flooring products, including over 15 private brands, sourced globally and distributed through two large centers - The company offers a wide range of hard-surface flooring products, with over 15 private brands, including its flagship brand Bellawood®13 - Product varieties include different widths, lengths, wood species, wood grades, and durable finishes, with prefinished flooring being the preferred choice for residential customers13 - The company sources directly from factories and suppliers worldwide to offer high-quality private label products at competitive costs; in 2019, approximately 47% of products came from Asia, 6% from Europe and Australia, and 5% from South America14 - The company operates two large distribution centers (1 million square feet in Virginia and 500,000 square feet in California) to efficiently deliver products to customers15 - The company implements a compliance program to ensure product safety, responsible sourcing, and adherence to regulations such as the Lacey Act, EPA, and CARB, controlled through supplier audits, on-site visits, and product testing16 - The company maintains a 1,500-square-foot laboratory at its East Coast distribution center, equipped with temperature and humidity-controlled rooms and emission chambers, to ensure compliance with CARB and EPA requirements17 - Approximately 10% of customers purchase professional installation services through the company, provided by third-party independent contractors, with service revenue recorded as net service sales18 Store Model As of December 31, 2019, the company operated 419 retail stores across 47 US states and Canada, with ongoing adjustments to location strategy - As of December 31, 2019, the company operated 419 retail stores, with 411 located in 47 US states and 8 in Ontario, Canada19 - In 2019, 11 new stores were opened, and 5 stores were closed; stores typically range from 6,500 to 7,500 square feet and are generally leased for 5 to 7 years with renewal options19 - The company is adjusting its store location strategy, shifting from industrial areas to retail corridors, and exploring new store prototypes to optimize profitability and growth potential20 Sales Approach The company employs an integrated multi-channel sales model, emphasizing customer service, product education, and expert assistance across all touchpoints - The company is committed to building an integrated multi-channel sales model, enabling stores, call centers, websites, and catalogs to work synergistically21 - Customers typically conduct extensive research through multiple channels before making a purchase decision, with final sales often completed in stores, assisted by flooring experts21 - The company aims to assist customers throughout the entire purchase cycle, from inspiration to installation, providing everything needed for products, accessories, and maintenance23 - The sales strategy emphasizes customer service by offering quality, convenient educational tools and training store associates on product and installation techniques24 - The call center is staffed with flooring experts who provide sales, customer service, and product support, handling inquiries via phone, online chat, and email25 - The company values recruiting and training employees who are passionate about its business philosophy, with many store managers possessing experience in home improvement, retail flooring, or flooring installation industries2627 Digital / Omni-Channel The company's website and social media platforms provide extensive product information, interactive tools, and real-time support to enhance the customer journey - The company's website offers extensive product and service information, including a comprehensive flooring knowledge base, and has launched tools like "Picture It!" and "Floor Finder" to assist customer purchases28 - The website also provides product reviews, customer before-and-after photos, product information, and installation videos, supporting live chat or phone calls with flooring experts28 - The company maintains an active presence on social media platforms such as Facebook, Instagram, Pinterest, YouTube, and Twitter28 Advertising and Financing The company utilizes diverse advertising channels and offers financing options through third-party institutions for both residential and professional customers - The company uses traditional and online media, e-commerce, direct mail, email, and social media for advertising, balancing product, service, and value messages, and invests in enhancing digital capabilities29 - The company offers financing options for residential customers through a proprietary "Lumber Liquidators credit card" via third-party financial institutions, typically non-recourse, providing deferred interest and product promotions30 - Professional customers can also access commercial credit programs through third-party financial institutions, offering additional service flexibility31 Employees As of December 31, 2019, the company had approximately 2,200 employees, with 95% full-time, primarily in stores and support functions - As of December 31, 2019, the company had approximately 2,200 employees, with 95% being full-time, and none are unionized32 - Employee distribution: 73% work in stores, 18% in corporate store support infrastructure or similar functions (including call centers), and 9% in distribution centers32 Seasonality and Quarterly Results Quarterly operating results fluctuate due to advertising timing and new store revenue, with net sales typically higher in spring and fall - The company's quarterly operating results fluctuate due to the timing of advertising campaigns and new store revenue33 - Net sales are slightly affected by seasonal factors, typically above average in spring and fall (when home improvement activity is higher) and below average in winter and summer (colder or hotter months)33 Intellectual Property and Trademarks The company holds numerous registered trademarks, including Bellawood®, and actively protects its valuable intellectual property through legal means - The company has registered multiple trademarks in the United States, including Lumber Liquidators®, Bellawood®, Coreluxe®, and has registered some trademarks in jurisdictions such as the European Union, Canada, China, Australia, and Japan34 - The company considers its intellectual property to be of significant value and takes measures to protect these brand names, including litigation and administrative actions when necessary to enforce its rights34 Government Regulation The company is subject to extensive federal, provincial, state, and local regulations concerning operations, product sourcing, and compliance obligations - The company is subject to a wide range of federal, provincial, state, and local regulations concerning employee and customer relations, third-party installers, public health and safety, zoning, disability access, and fire codes35 - The company must also comply with compliance obligations in various settlement agreements and operate according to standards and procedures to meet all applicable laws35 - Suppliers must comply with their domestic laws and regulations for products imported into the United States, including labor, forestry, and environmental regulations, and undergo regular compliance audits and on-site visits36 - Imported products are subject to laws and regulations from U.S. Customs and Border Protection and the Canada Border Services Agency, including those related to illegally harvested plants and harmful substance emissions38 Available Information Company reports, including Form 10-K, 10-Q, and 8-K, are freely available on its website and the SEC's website - The company's website, www.lumberliquidators.com, provides annual reports (Form 10-K), quarterly reports (Form 10-Q), current reports (Form 8-K), and amendments thereto, available free of charge39 - Reports and information filed by the company are also available on the U.S. Securities and Exchange Commission (SEC) website, www.sec.gov[39](index=39&type=chunk) Risk Factors The company faces various risks, including legal, operational, supply chain, economic, IT, and competitive factors, which could materially impact its business and financial performance - The risks faced by the company could have a material adverse effect on its business, operating results, financial condition, and cash flows40 - Risk factors include, but are not limited to: adverse allegations, government investigations, and legal proceedings that could harm the company's reputation and hinder business growth; complex compliance programs (such as the Lacey Act compliance program) that are costly, with violations potentially leading to significant fines; insurance coverage and self-insurance reserves that may be insufficient to cover existing or future claims; and changes in or non-compliance with federal, provincial, state, or local laws and regulations (including tariffs) that could increase expenses and restrict business operations41454750 - Growth strategies rely on new store openings, but are affected by various unpredictable factors, such as a slower pace of expansion, low brand recognition in new markets, increased operating costs, and competitive pressures55 - Failure to effectively manage growth could harm the business and operating results, including existing management information systems being unable to support expansion, requiring system enhancements and recruitment/training of personnel56 - Increased transportation costs (e.g., fuel, tariffs, international container rates) could harm operating results; damage, destruction, or disruption of distribution centers could severely impact operations and product distribution5860 - Operating stores in Canada and a representative office in China could pose legal and operational risks; failure to effectively manage third-party installers could lead to regulatory enforcement and litigation6163 - The company's success depends on the efforts and abilities of its employees, and personnel turnover could hinder the achievement of operational goals and damage its reputation66 - The ability to source cost-effective products from China and other international suppliers, as well as the operations of these international suppliers, faces risks including tariffs, political instability, economic instability, currency fluctuations, pandemic impacts, new laws and regulations, and production/transportation disruptions67 - Failure to identify and develop a sufficient number of qualified suppliers could affect the company's ability to obtain products meeting high-quality standards; supplier non-compliance with applicable laws, ethical standards, and quality standards could lead to business interruptions, reduced sales, and reputational and legal risks7174 - Product liability claims could adversely affect reputation, net sales, and profitability; the ability to provide hardwood flooring (especially rare exotic hardwoods) depends on an adequate and cost-effective supply of hardwood7678 - The cyclical nature of the home flooring industry and lack of business line diversity could lead to business volatility and risks; inability to access revolving credit facilities or other capital sources could harm financial condition, liquidity, and operating results8284 - Disruptions to management information systems (including websites or call centers) could disrupt business and reduce net sales; electronic processing, transmission, and storage of confidential customer information face security risks, potentially leading to costs and losses8688 - Alternative e-commerce and online shopping offerings could erode the company's customer base and materially adversely affect business; brand damage or ineffective advertising strategies could lead to reduced customer traffic, impacting net sales and profitability9193 - Competition could lead to price reductions, decreased product demand, and reduced market share; hard-surface flooring may become less popular than other types of floor coverings in the future, and shifts in consumer preferences could lead to decreased product demand9599 - Changes in accounting standards, management's subjective assumptions, estimates, and judgments regarding complex accounting matters, and failures in internal controls could materially affect financial performance100 - The company's common stock price may fluctuate, and a partial or total loss of investment may occur; quarterly operating results may fluctuate significantly and fall below research analyst and investor expectations105107 - Anti-takeover defense provisions could result in the common stock trading at a price lower than it would without such provisions108 Risks Related to Our Operations Operational risks include legal proceedings, compliance costs, growth management, supply chain disruptions, and challenges in managing international business and third-party contractors - Adverse allegations, government investigations, and legal proceedings could harm the company's reputation and hinder business growth41 - The company is involved in multiple legal proceedings, the outcomes of which could adversely affect its business and financial condition, with defense costs being substantial4344 - The overall compliance program (including the Lacey Act compliance program) is complex and costly, and ineffective management could lead to fines, reputational damage, and financial impacts4546 - Insurance coverage and self-insurance reserves may be insufficient to cover existing or future claims, potentially leading to additional losses or significantly increased premiums4749 - Changes in or non-compliance with federal, provincial, state, or local laws and regulations (including tariffs) could increase expenses, restrict business operations, and pose legal risks505254 - Growth strategies rely on new store openings, but are affected by various unpredictable factors, such as a slower pace of expansion, low brand recognition in new markets, increased operating costs, and competitive pressures55 - Failure to effectively manage growth could harm the business and operating results, including existing management information systems being unable to support expansion, requiring system enhancements and recruitment/training of personnel5657 - Increased transportation costs (e.g., fuel, tariffs, international container rates) could harm operating results58 - Damage, destruction, or disruption of distribution centers could severely impact operations and product distribution5960 - Operating stores in Canada and a representative office in China could pose legal and operational risks, including uncertain profitability and increased compliance costs6162 - Failure to effectively manage third-party installers could lead to regulatory enforcement and litigation, harming net sales, profitability, and reputation63 - The company's founder, as landlord for a significant number of leases, presents risks of increased costs or reduced store count upon lease renewals6465 - The company's success depends on the efforts and abilities of its employees, and personnel turnover could hinder the achievement of operational goals and damage its reputation66 Risks Related to Our Suppliers, Products and Product Sourcing Risks include international sourcing challenges, tariffs, supplier concentration, product quality, and the availability and cost of hardwood supply - The company's ability to source cost-effective products from China and other international suppliers, and the operations of these suppliers, face risks beyond the company's control, potentially harming operations and profitability67 - International sourcing risks include: tariffs (antidumping and countervailing duties), political unrest, economic instability, currency exchange rate fluctuations, pandemic impacts (e.g., coronavirus), new laws and regulations, production/transportation disruptions, and differences in product standards and legal environments in countries of origin67 - In 2019, approximately 46% of products originated from China, and US tariffs on Chinese goods (increased from 10% to 25%) have had a significant adverse impact on the company's costs and pricing68 - On November 7, 2019, the Office of the United States Trade Representative (USTR) retroactively excluded certain flooring products imported from China from Section 301 tariffs, but future exclusions remain uncertain68 - In early 2020, the coronavirus outbreak led to extended Chinese New Year holidays and restrictions on people and goods movement by Asian governments, potentially causing labor shortages, delays in raw material supply chains, and difficulties in product transportation69 - Failure to identify and develop a sufficient number of qualified suppliers could affect the company's ability to obtain products meeting high-quality standards, thereby reducing competitiveness and impacting sales and operating results7172 - The company relies on a few concentrated suppliers and typically does not have long-term contracts, meaning suppliers may be unable to provide products due to political instability, insufficient capacity, product failures, financial instability, non-compliance with laws, or trade restrictions73 - Supplier non-compliance with applicable laws, ethical standards, and quality standards could lead to government investigations, litigation, asset write-downs, and recalls, harming the company's reputation and brand, and increasing costs7475 - Product liability claims risks could adversely affect the company's reputation, net sales, and profitability, and insurance coverage may be insufficient7677 - The ability to provide hardwood flooring (especially rare exotic hardwoods) depends on an adequate and cost-effective supply of hardwood, which may be affected by factors such as forest fires, pests, droughts, government regulations, and trade policies787980 - Hardwood costs fluctuate due to various factors including supply and demand, labor costs, competition, market speculation, environmental restrictions, government regulations, and trade policies, and the company may not be able to offset increased costs by adjusting sourcing or raising selling prices81 Risks Related to Economic Factors and Our Access to Capital Risks include the cyclical nature of the home flooring industry, lack of business line diversity, and potential inability to access sufficient capital - The cyclical nature of the home flooring industry and the lack of diversity in the company's business lines could lead to business volatility and risks, as the industry is highly dependent on existing home remodeling and new home construction8283 - A decline in disposable income, home remodeling activity, or new home construction could negatively impact product demand, harming the business and operating results84 - Inability to obtain revolving credit facilities or other capital sources could harm the company's financial condition, liquidity, and operating results, affecting funding needs for working capital, capital expenditures, and legal matters8485 Risks Related to Our Information Technology IT risks encompass system disruptions, data security threats, and competition from e-commerce, potentially impacting sales and operations - Disruptions to management information systems (including websites or call centers) could disrupt business and reduce net sales, potentially caused by system failures, viruses, hacking attacks, leading to information loss or delays8687 - The company faces security risks related to the electronic processing, transmission, and storage of confidential customer information, which could lead to fraudulent transaction claims, litigation, fines, reputational damage, and operational disruptions8889 - Privacy and information security laws and regulations are constantly changing, and compliance with these regulations could lead to increased costs for system modifications and new management processes90 - Alternative e-commerce and online shopping offerings could erode the company's customer base, materially adversely affecting net sales and operating results9192 Risks Relating to Our Competitive Positioning Competitive risks include brand damage, ineffective advertising, intense market competition, and shifts in consumer preferences away from hard-surface flooring - Brand damage or ineffective advertising strategies could lead to reduced customer traffic, thereby impacting net sales and profitability9394 - The company operates in a highly fragmented and competitive hard-surface flooring industry, facing intense competition from national and regional home improvement chains, specialty flooring chains, internet companies, and privately held businesses9596 - Competition is based on price, customer service, store location, and the range, quality, and availability of hard-surface flooring products96 - Some competitors are larger, more established, offer more diverse products, and possess stronger financial, marketing, personnel, and other resources98 - Hard-surface flooring may become less popular than other types of floor coverings in the future, and a shift in consumer preferences could lead to decreased product demand99 Risks Related to Accounting Standards and Internal Controls Risks involve changes in accounting standards, subjective management judgments, and potential failures in internal controls, which could affect financial reporting - Changes in accounting standards, management's subjective assumptions, estimates, and judgments regarding complex accounting matters, and failures in internal controls could materially affect financial performance100101 - Failure to maintain effective internal and disclosure controls could have a material adverse effect on operating results and financial condition, potentially leading to fraud or error losses and reputational damage102104 Risks Relating to Our Common Stock Risks include common stock price volatility, potential loss of investment, and anti-takeover provisions that may affect stock trading prices - The company's common stock price may fluctuate, and a partial or total loss of investment may occur, influenced by factors such as product safety allegations, litigation, government investigations, shareholder trading activity, industry trends, and cyclicality105106 - Quarterly operating results may fluctuate significantly and fall below research analyst and investor expectations, leading to substantial stock price volatility107 - Anti-takeover defense provisions (such as a classified board, blank check preferred stock, and restrictions on shareholders calling special meetings or acting by written consent) could make it more difficult for a third party to acquire the company and may result in the common stock trading at a price lower than it would without such provisions108109 PART II Unresolved Staff Comments This report contains no unresolved staff comments - This report contains no unresolved staff comments114 Properties As of February 20, 2020, the company operates 419 stores and leases its headquarters, while owning one distribution center and leasing another - As of February 20, 2020, the company operates 419 stores in 47 US states and Canada, including 411 in the US and 8 in Ontario, Canada110 - The company leases all its stores and its new headquarters in Richmond, Virginia, which it moved into in the fourth quarter of 2019, covering approximately 53,000 square feet111 - The company owns a 1 million square foot distribution center in Henrico County, Virginia, and leases a 504,016 square foot facility in Pomona, California, serving as its primary distribution centers112 Legal Proceedings The company is involved in multiple legal proceedings, including class-action lawsuits related to bamboo and Chinese laminate flooring, employment cases, and antidumping/countervailing duty investigations - The company is involved in multiple legal proceedings, including cases related to bamboo flooring, Chinese laminate flooring, employee employment, and antidumping and countervailing duties115116123124127130 - The bamboo flooring lawsuit (Gold Litigation) reached a settlement agreement on September 30, 2019, where the company will pay $14 million in cash and provide $14 million in store credit vouchers, totaling up to $30 million; the settlement received preliminary approval on December 18, 2019, with a final approval hearing scheduled for September 24, 2020115 - The Chinese laminate flooring lawsuits (Formaldehyde MDL and Abrasion MDL) settled on March 15, 2018, with the company agreeing to pay $22 million in cash and provide $14 million in store credit vouchers, totaling $36 million; the settlement has been approved by the court but is currently under appeal119120 - The Kramer employment lawsuit settled on September 9, 2019, with the company paying $4.75 million; this settlement received final approval on January 17, 2020129 - Antidumping and countervailing duty investigations involve tariffs on multilayered wood flooring from China, with the company continuously appealing and undergoing annual reviews, leading to adjustments and retroactivity in tariff expenses across multiple periods; as of December 31, 2019, the company has various receivables/payables related to antidumping and countervailing duties130131133135136137139140141 Litigation Relating to Bamboo Flooring A class-action lawsuit regarding defective bamboo flooring reached a preliminary settlement in 2019, involving cash and store credit payments - On December 8, 2014, Dana Gold filed a class-action lawsuit alleging defects in the company's Morning Star bamboo flooring (Strand Bamboo Product)113115 - The lawsuit alleged the company engaged in deceptive trade practices in selling Strand Bamboo products, seeking damages, attorney's fees, notification to all class members, product replacement/repair, and disgorgement of profits or full restitution115 - On September 30, 2019, the parties reached a nationwide class action settlement agreement, where the company will pay $14 million in cash and provide $14 million in store credit vouchers, with a potential additional $2 million in credit vouchers, totaling up to $30 million115 - The settlement agreement does not constitute an admission of any fault or liability by the company; on December 18, 2019, the court preliminarily approved the settlement, with a final approval hearing scheduled for September 24, 2020115 - The company paid $1 million in December 2019 for settlement administration costs; in the fourth quarter of 2018, the company recognized $28 million in litigation expenses115 - The company has notified its insurance carriers and continues to seek coverage, but carriers have denied coverage to date115 - Additionally, there are multiple individual claims and lawsuits involving Strand Bamboo products (Bamboo Flooring Litigation), where the company believes a loss is probable but cannot reasonably estimate the amount115 Litigation Relating to Chinese Laminates Multiple class-action lawsuits concerning formaldehyde emissions and abrasion ratings in Chinese laminate flooring settled in 2018, with an appeal ongoing - Since March 3, 2015, multiple class-action lawsuits have alleged that the company's Chinese-manufactured laminate flooring products had excessive formaldehyde emissions (Formaldehyde MDL) and false abrasion ratings (Abrasion MDL)116118 - Plaintiffs sought declaratory, injunctive relief, and unquantified damages, including restitution, actual, compensatory, consequential, and punitive damages, as well as attorney's fees117118 - On March 15, 2018, the company reached a settlement agreement to pay $22 million in cash and provide $14 million in store credit vouchers, totaling $36 million, to resolve claims for Chinese-manufactured laminate flooring purchased between January 1, 2009, and May 31, 2015119 - The settlement agreement received preliminary approval but is currently under appeal in the Fourth Circuit Court of Appeals; the company has paid $21.5 million as a legal settlement deposit120 - In addition to purchasers who opted out of the settlement, multiple individual claims and lawsuits (Related Laminate Matters) are ongoing; the company recognized expenses of $0.4 million and $2.9 million in 2019 and 2018, respectively121 - A similar class-action lawsuit in Canada (Steele litigation) alleges strict liability, breach of implied warranties, fraudulent concealment, and civil negligence regarding the company's Chinese-manufactured laminate flooring products, with the company unable to reasonably estimate potential losses123 Employment Cases The company faces employment-related lawsuits, including a class-action regarding misclassification of store managers, with one case settling for $4.75 million in 2019 - Mason Litigation: In August 2017, Ashleigh Mason and others filed a class-action lawsuit alleging the company violated the Fair Labor Standards Act (FLSA) and New York Labor Law (NYLL) by misclassifying store managers and other employees as exempt, failing to pay overtime wages124 - Plaintiffs sought class certification and unquantified damages, including unpaid wages, overtime, liquidated damages, and punitive damages; in May 2019, the magistrate judge granted the motion for conditional class certification124125 - The company denies the allegations in the Mason class action and intends to vigorously defend itself, currently unable to estimate potential losses126 - Kramer Litigation: In November 2017, Robert J. Kramer filed a class-action lawsuit alleging the company violated California labor laws by failing to pay wages and overtime to California store managers and engaging in unfair business practices127128 - On September 9, 2019, the company reached a settlement agreement to pay $4.75 million to resolve claims in the Kramer litigation; this settlement received preliminary approval on September 19, 2019, and final approval on January 17, 2020129 - The company recognized an expense of approximately $4.75 million in its second quarter 2019 financial statements129 Antidumping and Countervailing Duties Investigation Ongoing antidumping and countervailing duty investigations on Chinese multilayered wood flooring have resulted in various tariff rate adjustments and appeals - In October 2010, domestic manufacturers of multilayered wood flooring filed antidumping (AD) and countervailing duty (CVD) petitions against imports from China130 - The company believes its imported products were neither dumped nor subsidized and has appealed the AD and CVD orders130 - The U.S. Department of Commerce (DOC) conducts annual administrative reviews of AD and CVD rates, issuing preliminary rates and then final rates after comments, which can lag by a year or more131 - The company pays cash deposits at the prevailing rates at the time of import, with adjustments made once final rates are determined131 - For the first review period (May 2011 to November 2012), the AD rate decreased from 5.92% to 0.73%, resulting in the company reversing $0.8 million in liabilities and recognizing $1.3 million in receivables135 - For the second review period (December 2012 to November 2013), the preliminary AD rate decreased to 6.55% (from an original 13.74%); if finalized, the company's liability would decrease by $2.8 million136 - For the third review period (December 2013 to November 2014), the final AD rate was determined to be 17.37% and the CVD rate 1.38%; the company estimated an additional $5.5 million due, with a remaining liability of $4.7 million as of December 31, 2019137 - For the fifth review period (December 2015 to November 2016), the final AD rate was determined to be 0.00%, and the company recognized $2.6 million in receivables139 - For the sixth review period (December 2016 to November 2017), the final AD rate was determined to be up to 42.57% and the CVD rate up to 3.2%; the company recognized a net liability of $0.8 million, with $0.5 million in receivables and $1.5 million in long-term liabilities140 - For the seventh review period (December 2017 to November 2018), the preliminary AD rate was 0.00% and the preliminary CVD rate was 24.61%; if the CVD rate is finalized, the company expects to recognize approximately $2 million in net liabilities141 - The company recognized $0.6 million in antidumping-related interest expense in 2019143 Other Matters The company faces routine claims and disputes, with management expecting no material adverse impact on operations, financial condition, or liquidity - The company faces claims and disputes arising in the normal course of business from time to time; management believes that, while outcomes are uncertain, the ultimate liability is not expected to have a material adverse effect on the company's operating results, financial condition, or liquidity144 Mine Safety Disclosures This report contains no mine safety disclosures - This report contains no mine safety disclosures144 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE under "LL," with 28.7 million shares outstanding as of February 20, 2020, and a suspended stock repurchase program - The company's common stock trades on the New York Stock Exchange (NYSE) under the ticker symbol "LL"146 - As of February 20, 2020, the company had 28,724,931 shares of common stock outstanding and six record holders146 2019 Fourth Quarter Stock Repurchase Activity | Period | Total Number of Shares Purchased | Average Price Paid Per Share | |:---|:---|:---| | October 1, 2019 to October 31, 2019 | — | — | | November 1, 2019 to November 30, 2019 | — | — | | December 1, 2019 to December 31, 2019 | — | — | | Total | — | — | - The company repurchased 1,610 shares of common stock in the fourth quarter of 2019 at an average price of $9.08 per share, primarily related to net settlement of restricted stock vesting147 - The company previously authorized a stock repurchase program totaling $150 million, but it is currently suspended indefinitely; as of December 31, 2019, approximately $14.7 million remained authorized148 - The company has never paid dividends on its common stock and does not anticipate paying any in the near future149 2014-2019 Company Common Stock vs. Index Performance Comparison | | 12/31/2014 | 12/31/2015 | 12/30/2016 | 12/30/2017 | 12/31/2018 | 12/31/2019 | |:---|:---|:---|:---|:---|:---|:---| | Lumber Liquidators Holdings, Inc. | 100.00 | 26.18 | 23.74 | 47.34 | 14.36 | 14.73 | | NYSE Composite | 100.00 | 96.03 | 107.62 | 127.96 | 116.72 | 146.76 | | Peer Group | 100.00 | 119.54 | 121.43 | 171.80 | 162.11 | 216.75 | - The peer group includes: The Home Depot, Inc., Lowe's Companies, Inc., Floor & Décor Holdings, Inc., Tile Shop Holdings, Inc., The Sherwin-Williams Company, Pier 1 Imports, Inc., Vitamin Shoppe, Inc., Hibbett Sports, Inc., and Haverty Furniture Companies, Inc153 Selected Financial Data This section presents selected consolidated statements of operations and balance sheet data for the five years ended December 31, 2019, highlighting key financial trends Selected Statements of Operations Data (2015-2019) | Metric | 2019 ($) | 2018 ($) | 2017 ($) | 2016 ($) | 2015 ($) | |:---|:---|:---|:---|:---|:---| | Net Sales | $1,092,602 | $1,084,636 | $1,028,933 | $960,588 | $978,776 | | Comparable Store Net Sales (Decrease) Growth | (1.0)% | 2.6% | 5.4% | (4.6)% | (11.1)% | | Cost of Sales | 688,916 | 691,696 | 659,872 | 656,719 | 699,918 | | Gross Profit | 403,686 | 392,940 | 369,061 | 303,869 | 278,858 | | Selling, General and Administrative Expenses | 386,970 | 443,513 | 406,027 | 397,504 | 362,051 | | Operating Income (Loss) | 16,716 | (50,573) | (36,966) | (93,635) | (83,193) | | Other Expense | 3,764 | 2,827 | 1,591 | 638 | 234 | | Income (Loss) Before Income Taxes | 12,952 | (53,400) | (38,557) | (94,273) | (83,427) | | Income Tax Expense (Benefit) | 3,289 | 979 | (734) | (25,710) | (26,994) | | Net Income (Loss) | $9,663 | $(54,379) | $(37,823) | $(68,563) | $(56,433) | | Net Income (Loss) Per Common Share - Basic | $0.34 | $(1.90) | $(1.33) | $(2.51) | $(2.08) | | Net Income (Loss) Per Common Share - Diluted | $0.34 | $(1.90) | $(1.33) | $(2.51) | $(2.08) | | Weighted Average Common Shares Outstanding - Basic | 28,689 | 28,571 | 28,407 | 27,284 | 27,082 | | Weighted Average Common Shares Outstanding - Diluted | 28,793 | 28,571 | 28,407 | 27,284 | 27,082 | - 2019 results include: $1.1 million in unfavorable antidumping and countervailing duty adjustments, $0.8 million in favorable tariff adjustments from prior periods, and approximately $7.6 million in incremental legal and professional fees and settlement expenses related to legal matters defense157 - 2018 results include: $4.9 million in favorable antidumping and countervailing duty adjustments, $1.7 million in favorable tariff adjustments from prior periods, approximately $75.7 million in incremental legal and professional fees and settlement expenses related to legal matters defense, and approximately $1.8 million in asset impairment related to exiting the finishing business158 - 2017 results include: $2.8 million in favorable antidumping and countervailing duty adjustments, a reduction of approximately $1 million in the indoor air quality testing program reserve, approximately $48.3 million in incremental legal and professional fees and settlement expenses related to legal matters defense, and approximately $3.1 million in other expenses related to the disposition of Chinese laminate flooring products and asset impairment from vertical integration initiatives159 Selected Balance Sheet Data (2015-2019) | Metric | 2019 ($) | 2018 ($) | 2017 ($) | 2016 ($) | 2015 ($) | |:---|:---|:---|:---|:---|:---| | Cash and Cash Equivalents | $8,993 | $11,565 | $19,938 | $10,271 | $26,703 | | Merchandise Inventories | 286,369 | 318,272 | 262,280 | 301,892 | 244,402 | | Total Assets | 596,009 | 475,517 | 410,795 | 482,544 | 445,564 | | Customer Deposits and Store Credit | 41,571 | 40,332 | 38,546 | 32,639 | 33,771 | | Total Debt and Capital Lease Obligations | 82,000 | 65,000 | 15,000 | 40,351 | 20,000 | | Total Stockholders' Equity | 161,250 | 147,398 | 197,847 | 230,892 | 277,568 | | Working Capital | 121,007 | 124,179 | 119,835 | 173,683 | 195,044 | | Total Stores Operating (End of Period) | 419 | 413 | 393 | 383 | 374 | | Average Ticket | $1,379 | $1,355 | $1,310 | $1,255 | $1,230 | - Total assets in 2019 were impacted by the adoption of ASC 842 (Leases)163 - Working capital is defined as current assets less current liabilities164 - Average ticket is defined as the average invoiced sales order per quarter, excluding returns and transactions under $100164 Management's Discussion and Analysis of Financial Condition and Results of Operations This section discusses the company's 2019 financial condition and operating results, focusing on strategic initiatives, non-GAAP metrics, liquidity, and key accounting policies - Lumber Liquidators is North America's leading specialty retailer of hard-surface flooring, offering comprehensive sourcing solutions including various hardwoods, laminates, vinyl, and tile, along with installation services and accessories165 - The company uses non-GAAP financial measures (such as Adjusted Gross Profit, Adjusted SG&A, Adjusted Operating Income, and Adjusted Diluted Earnings Per Share) to evaluate operating performance, excluding items management believes do not reflect core operating results, such as regulatory and legal settlements, related legal and operating costs, and changes in prior period antidumping and countervailing duties168169 - In 2019, net sales increased by 0.7% to $1.093 billion, with non-comparable store net sales increasing by $19 million and comparable store net sales decreasing by $11 million; net service sales grew by 6.1%, while merchandise sales remained flat170 - In 2019, the gross margin increased to 36.9% (from 36.2% in 2018), and the Adjusted Gross Margin (non-GAAP) increased from 35.6% in 2018 to 37.0% in 2019, primarily due to an increased mix of higher-margin manufactured products, reduced discounting, merchandise cost reductions, and higher retail prices171 - In 2019, Selling, General and Administrative (SG&A) expenses as a percentage of net sales decreased to 35.4% (from 40.9% in 2018), primarily because the $61 million in legal settlement expenses recorded in 2018 did not recur172 - Operating income in 2019 was $17 million, compared to an operating loss of $51 million in 2018; Adjusted Operating Income (non-GAAP) increased from $20 million in 2018 to $25 million in 2019174 - Net income in 2019 was $9.7 million (diluted earnings per share of $0.34), compared to a net loss of $54 million (diluted loss per share of $1.90) in 2018; Adjusted Diluted Earnings Per Share (non-GAAP) increased from $0.57 in 2018 to $0.58 in 2019175 - In August 2019, the company experienced a cybersecurity incident that rendered information technology systems and data inaccessible, but no loss or disclosure of customer, employee, or company confidential data was identified; the incident resulted in lost sales, and the company estimated related equipment replacement and costs at approximately $3.7 million, with over $2 million in insurance recoveries received176 - Tariffs had a significant impact on year-over-year comparisons; on November 7, 2019, the Office of the United States Trade Representative (USTR) retroactively excluded certain flooring products imported from China from Section 301 tariffs, leading the company to recognize approximately $11 million in operating income and reduce inventory costs by approximately $12 million in the fourth quarter of 2019, while also recognizing $25 million in tariff recovery receivables177 - The company is closely monitoring the coronavirus outbreak and anticipates potential short-term supply chain disruptions, which could have a material impact in the second quarter of 2020178179 - The focus for 2020 will be on improving profitability, increasing store and online traffic, and enhancing the customer experience180 - As of December 31, 2019, the company's liquidity was $111 million, comprising $9 million in cash and $102 million in available revolving loan capacity; merchandise inventories were $286 million, accounts payable were $60 million, and revolving loan borrowings were $82 million181 - The increase in liquidity in 2019 was primarily due to enhanced borrowing capacity under the credit agreement, partially offset by $33 million in DOJ and SEC settlement payments and $20 million in capital expenditures181 Overview Lumber Liquidators is a leading multi-channel specialty retailer of hard-surface flooring, utilizing non-GAAP metrics to assess core operating performance - Lumber Liquidators is North America's leading specialty retailer of hard-surface flooring, offering comprehensive sourcing solutions including a wide variety of hardwood, laminate, vinyl, and tile, as well as installation services and accessories165 - The company sells products through its 419 stores, customer relationship centers, and website, covering 47 US states and Canada165 - The company is known for providing exceptional value, quality service, and a wide selection of high-quality hard-surface flooring products, with its value proposition benefiting from a unique store model, industry expertise, focus on hard-surface flooring, and advertising reach and frequency166167 - The company uses non-GAAP financial measures (such as Adjusted Gross Profit, Adjusted SG&A, Adjusted Operating Income, and Adjusted Diluted Earnings Per Share) to evaluate operating performance, excluding items management believes do not reflect core operating results, such as regulatory and legal settlements, related legal and operating costs, and changes in prior period antidumping and countervailing duties168169 Executive Summary In 2019, the company focused on sales growth, customer experience, and operational efficiency, achieving profitability despite a cybersecurity incident and tariff impacts - In 2019, the company focused on enhancing sales and operating profit and improving the customer shopping experience, with key initiatives including: driving DIY, DIFM, and Pro customer traffic, enhancing customer experience, and continuously improving operational efficiency170 2019 Key Financial Performance | Metric | 2019 | 2018 | Change | |:---|:---|:---|:---|\ | Net Sales | $1,093 million | $1,085 million | 0.7% increase | | Non-Comparable Store Net Sales | $19 million increase | - | - | | Comparable Store Net Sales | $11 million decrease | - | - | | Net Service Sales | 6.1% increase | - | - | | Merchandise Sales | Flat | - | - | | Store Count (End of Period) | 419 | 413 | 11 opened, 5 closed | | Gross Margin (GAAP) | 36.9% | 36.2% | 0.7 percentage point increase | | Adjusted Gross Margin (Non-GAAP) | 37.0% | 35.6% | 1.4 percentage point increase | | SG&A Expenses as % of Net Sales (GAAP) | 35.4% | 40.9% | 5.5 percentage point decrease | | Adjusted SG&A as % of Net Sales (Non-GAAP) | 34.7% | 33.7% | 1.0 percentage point increase | | Legal-Related Costs and Settlement Expenses (in SG&A) | $7.6 million | $76 million | $68.4 million decrease | | Operating Income (Loss) (GAAP) | $17 million | $(51) million | Turnaround to profit | | Adjusted Operating Income (Non-GAAP) | $25 million | $20 million | $5 million increase | | Adjusted Operating Margin (Non-GAAP) | 2.3% | 1.9% | 0.4 percentage point increase | | Net Income (Loss) (GAAP) | $9.7 million | $(54) million | Turnaround to profit | | Diluted Earnings Per Share (GAAP) | $0.34 | $(1.90) | Turnaround to profit | | Adjusted Diluted Earnings Per Share (Non-GAAP) | $0.58 | $0.57 | $0.01 increase | | Cybersecurity Incident Costs (Estimated) | $3.7 million | - | - | | Tariff Recovery Receivable | $25 million | - | - | - The improvement in Adjusted Gross Margin in 2019 was primarily due to an increased mix of higher-margin manufactured products, reduced discounting, merchandise cost reductions, and higher retail prices, despite increased tariff costs and a higher mix of lower-margin installation sales171 - The increase in Adjusted SG&A expenses in 2019 was primarily driven by higher payroll and rent costs associated with new store openings, IT expenses, headquarters relocation costs, and increased advertising spending172 - The turnaround to positive operating income in 2019 was primarily driven by gross margin growth from tariff relief measures, partially offset by the growth in Adjusted SG&A174 - Net income in 2019 benefited from gross margin improvement initiatives, while 2018 was adversely impacted by legal settlements and other legal costs175 - In August 2019, the company experienced a cybersecurity incident that rendered information technology systems and data inaccessible, but no loss or disclosure of customer, employee, or company confidential data was identified; the incident resulted in lost sales, and the company estimated related equipment replacement and costs at approximately $3.7 million, with over $2 million in insurance recoveries received176 - Tariffs had a significant impact on year-over-year comparisons; on November 7, 2019, the Office of the United States Trade Representative (USTR) retroactively excluded certain flooring products imported from China from Section 301 tariffs, leading the company to recognize approximately $11 million in operating income and reduce inventory costs by approximately $12 million in the fourth quarter of 2019, while also recognizing $25 million in tariff recovery receivables177 - The company is closely monitoring the coronavirus outbreak and anticipates potential short-term supply chain disruptions, which could have a material impact in the second quarter of 2020178179 - The focus for 2020 will be on improving profitability, increasing store and online traffic, and enhancing the customer experience180 Working capital and liquidity As of December 31, 2019, the company had $111 million in liquidity, including cash and available revolving loan capacity, to meet operational and settlement obligations - As of December 31, 2019, the company's liquidity was $111 million, including $9 million in cash and $102 million in available capacity under its asset-backed revolving loan (Revolving Loan)181 - During the same period, the company held $286 million in inventory and $60 million in accounts payable, with revolving loan borrowings of $82 million181 - Liquidity in 2019 increased compared to 2018, primarily due to enhanced borrowing capacity under the credit agreement, partially offset by $33 million in DOJ and SEC settlement payments and $20 million in capital expenditures181 Results of Operations In 2019, net sales increased slightly, gross profit improved due to product mix and tariff relief, and operating income turned positive, despite higher adjusted SG&A 2019 vs. 2018 Operating Results Comparison | Metric | 2019 as % of Net Sales | 2018 as % of Net Sales | 2019 vs. 2018 Dollar Amount % Change | |:---|:---|:---|:---|\ | Net Sales | | | | | Net Merchandise Sales | 87.5% | 88.1% | 0.0% | | Net Service Sales | 12.5% | 11.9% | 6.1% | | Total Net Sales | 100.0% | 100.0% | 0.7% | | Gross Profit | 36.9% | 36.2% | 2.7% | | Selling, General and Administrative Expenses | 35.4% | 40.9% | (12.7)% | | Operating Loss | 1.5% | (4.7)% | NM | | Other Expense | 0.3% | 0.2% | 33.1% | | Income (Loss) Before Income Taxes | 1.2% | (4.9)% | NM | | Income Tax Expense | 0.3% | 0.1% | NM | | Net Income (Loss) | 0.9% | (5.0)% | NM | | Selected Sales Data | | | | | Average Ticket | $1,379 | $1,355 | 1.8% | | Average Retail Price Per Unit Sold | 0.2% | (0.8)% | | | Comparable Store Sales (Decrease) Growth (%) | (1.0)% | 2.6% | | | Store Count (End of Period) | 419 | 413 | | | New Stores Opened (Net) During Period | 11 | 20 | | | Stores Relocated During Period | 3 | 1 | | | Comparable Stores (% Change from Prior Year): | | | | | Number of Invoiced Customers | (2.8)% | (0.8)% | | | Net Sales for Stores Operating 13 to 36 Months | 8.3% | 13.1% | | | Net Sales for Stores Operating Over 36 Months | (1.3)% | 2.3% | | | Net Sales for All Stores in Comparable Market (No Cannibalization) | (0.3)% | 3.4% | | - Net sales in 2019 increased by 0.7%, primarily due to a $19 million increase in non-comparable store net sales, partially offset by an $11 million decrease in comparable store net sales; the decline in comparable store sales was due to a 2.8% decrease in customer traffic, which was not fully offset by a 1.8% increase in average ticket size188 - Net service sales (installation and freight) increased by 6.1% year-over-year, while merchandise sales remained flat; sales to professional customers grew significantly faster than the company's total sales188 - Sales of manufactured products (es
LL Flooring (LL) - 2019 Q4 - Annual Report