Sally Beauty Supply 2011 Annual Report Download - page 16

exclusive-label products we sell. We purchase our products from a limited number of
manufacturers. As is typical in distribution businesses (particularly in our industry), these
relationships are subject to change from time to time (including the expansion or loss of distribution
rights in various geographies and the addition or loss of product lines). Since we purchase products
from many manufacturers on an at-will basis, under contracts which can generally be terminated
without cause upon 90 days’ notice or less or which expire without express rights of renewal, such
manufacturers could discontinue sales to us at any time or upon the expiration of the distribution
period. Some of our contracts with manufacturers may be terminated by such manufacturers if we
fail to meet specified minimum purchase requirements. In such cases, we do not have contractual
assurances of continued supply, pricing or access to new products and vendors may change the
terms upon which they sell. Infrequently, a supplier will seek to terminate a distribution relationship
through legal action. For example, in 2007 Farouk Systems, Inc. filed an action seeking a declaratory
judgment that it was entitled to terminate a long-term distribution agreement with Armstrong
McCall. In 2010 that matter was settled and BSG now sells Farouk products in many territories.
Changes in our relationships with suppliers occur often and could positively or negatively impact
our net sales and operating profits. Although we focus on developing new revenue and cost
management initiatives to mitigate the negative effects resulting from unfavorable changes in our
supplier relationships, there can be no assurance that our efforts will continue to completely offset
the loss of these or other distribution rights. Please see ‘‘Risk Factors—We depend upon
manufacturers who may be unable to provide products of adequate quality or who may be unwilling
to continue to supply products to us.’’
We expect to continue to expand our product line offerings and to gain additional distribution rights
over time through either further negotiation with suppliers or by acquisitions of existing
distributors. Although we are focused on developing new revenue and cost management initiatives,
there can be no assurance that our efforts will partially or completely offset any potential loss of
distribution rights in the future. Please see ‘‘Risk Factors—We depend upon manufacturers who
may be unable to provide products of adequate quality or who may be unwilling to continue to
supply products to us.’’
•High level of competition. Sally Beauty Supply competes with other domestic and international
beauty product wholesale and retail outlets, including local and regional open-line beauty supply
stores, professional-only beauty supply stores, salons, mass merchandisers, drug stores and
supermarkets, as well as sellers on the internet and salons retailing hair care items. BSG competes
with other domestic and international beauty product wholesale and retail suppliers and
manufacturers selling professional beauty products directly to salons and individual salon
professionals. We also face competition from authorized and unauthorized retailers and internet
sites offering professional salon-only products. The increasing availability of unauthorized
professional salon products in large format retail stores such as drug stores, grocery stores and
others could also have a negative impact on our business. Please see ‘‘Risk Factors—The beauty
products distribution industry is highly competitive and is consolidating.’’
•Economic conditions. We appeal to a wide demographic consumer profile and offer a broad
selection of professional beauty products sold directly to retail consumers, and salons and salon
professionals. Historically, these factors have provided us with reduced exposure to downturns in
economic conditions in the countries in which we operate. However, a downturn in the economy,
especially for an extended period of time, could adversely impact consumer demand of
discretionary items such as beauty products and salon services, particularly affecting our electrical
products category and our full-service sales business. In addition, higher freight costs resulting from
increases in the cost of fuel, especially for an extended period of time, may impact our expenses at
levels that we cannot pass through to our customers. These factors could have a material adverse
effect on our business, financial condition and results of operations. Please see ‘‘Risk Factors—The
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