Sally Beauty Supply 2011 Annual Report Download - page 32

requirements. If minimum purchase requirements are not met, we do not have contractual assurances of
continued supply. In lieu of termination, a manufacturer may also change the terms upon which it sells, for
example, by raising prices or broadening distribution to third parties. Infrequently, a supplier will seek to
terminate a distribution relationship through legal action. For these and other reasons, we may not be able
to acquire desired merchandise in sufficient quantities or on acceptable terms in the future.
Changes in Sally Beauty Supply’s and BSG’s relationships with suppliers occur often, and could positively
or negatively impact the net sales and operating profits of both business segments. Some of our suppliers
may seek to decrease their reliance on distribution intermediaries, including full-service/exclusive and
open-line distributors like BSG and Sally Beauty Supply, by promoting their own distribution channels, as
discussed above. These suppliers may offer advantages, such as lower prices, when their products are
purchased from distribution channels they control. If our access to supplier-provided products were to
diminish relative to our competitors or we were not able to purchase products at the same prices as our
competitors, our business could be materially and adversely affected. Also, consolidation among suppliers
may increase their negotiating leverage, thereby providing them with competitive advantages that may
increase our costs and reduce our revenues, adversely affecting our business, financial condition and
results of operations.
As discussed above, L’Oreal directly competes with BSG, and there can be no assurance that there will not
be revenue losses over time at BSG, due to potential losses of additional L’Oreal related products as well
as from the increased competition from L’Oreal-affiliated distribution networks. For example, L’Oreal
could attempt to terminate our contracts to carry certain of their products in BSG stores, which accounted
for approximately $108.0 million in U.S. sales for the fiscal year 2011 and expire in 2012. Therefore, there
can be no assurance that the impact of these developments, if they were to occur, will not adversely impact
revenue to a greater degree than we currently expect or that our efforts to mitigate the impact of these
developments will be successful. If the impact of these developments is greater than we expect or our
efforts to mitigate the impact of these developments are not successful, this could have a material adverse
effect on our business, financial condition or results of operations.
Although we plan to mitigate the negative effects resulting from potential unfavorable changes in our
relationships with suppliers, such as L’Oreal, there can be no assurance that our efforts will partially or
completely offset the loss of these distribution rights.
Any significant interruption in the supply of products by manufacturers and fillers could disrupt our ability to
deliver merchandise to our stores and customers in a timely manner, which could have a material adverse effect on
our business, financial condition and results of operations.
Manufacturers and exclusive-label fillers of beauty supply products are subject to certain risks that could
adversely impact their ability to provide us with their products on a timely basis, including inability to
procure ingredients, industrial accidents, environmental events, strikes and other labor disputes, union
organizing activity, disruptions in logistics or information systems, loss or impairment of key manufacturing
sites, product quality control, safety, and licensing requirements and other regulatory issues, as well as
natural disasters and other external factors over which neither they nor we have control. In addition, our
operating results depend to some extent on the orderly operation of our receiving and distribution
processes, which depend on manufacturers’ adherence to shipping schedules and our effective
management of our distribution facilities and capacity.
If a material interruption of supply occurs, or a significant manufacturer or filler ceases to supply us or
materially decreases its supply to us, we may not be able to acquire products with similar quality and
consumer brand name recognition as the products we currently sell or to acquire such products in
sufficient quantities to meet our customers’ demands or on favorable terms to our business, any of which
could adversely impact our business, financial condition and results of operations.
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