Sally Beauty Supply 2011 Annual Report Download - page 53

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Industry and Business Trends
We operate primarily within the large and growing U.S. professional beauty supply industry. Potential
growth in the industry is expected to be driven by increases in consumer demand for hair color, hair loss
prevention and hair styling products. We believe the following key industry and business trends and
characteristics will influence our business and our financial results going forward:
•High level of marketplace fragmentation. The U.S. salon channel is highly fragmented with nearly
250,000 salons and barbershops. Given the fragmented and small-scale nature of the salon industry,
we believe that salon operators will continue to depend on full-service/exclusive distributors and
open-line channels for a majority of their beauty supply purchases.
•Growth in booth renting and frequent stocking needs. Salon professionals primarily rely on
just-in-time inventory due to capital constraints and a lack of warehouse and shelf space at salons.
In addition, booth renters, who comprise a significant percentage of total U.S. salon professionals,
are often responsible for purchasing their own supplies. Historically, booth renters have
significantly increased as a percentage of total salon professionals, and we expect this trend to
continue. Given their smaller individual purchases and relative lack of financial resources, booth
renters are likely to be dependent on frequent trips to professional beauty supply stores, like BSG
and Sally Beauty Supply. We expect that these factors will continue to drive demand for
conveniently located professional beauty supply stores.
•Increasing use of exclusive-label products. We offer a broad range of exclusive-label products. As our
lines of exclusive-label products have matured and become better known in our retail stores, we
have seen an increase in sales of these products. Generally, our exclusive-label products have higher
gross margins for us than the leading third-party branded products and, accordingly, we believe that
the growth in sales of these products will likely enhance our overall gross margins. 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.’’
•Favorable demographic and consumer trends. We expect the aging baby-boomer population to drive
future growth in professional beauty supply sales through an increase in the usage of hair color and
hair loss products. Additionally, continuously changing fashion-related trends that drive new hair
styles are expected to result in continued demand for hair styling products. Changes in consumer
tastes and fashion trends can have an impact on our financial performance. Our continued success
depends largely on our ability to anticipate, gauge and react in a timely and effective manner to
changes in consumer spending patterns and preferences for beauty products. We continuously adapt
our marketing and merchandising initiatives in an effort to expand our market reach or to respond
to changing consumer preferences. If we are unable to anticipate and respond to trends in the
marketplace for beauty products and changing consumer demands, our business could suffer. Please
see ‘‘Risk Factors—We may be unable to anticipate changes in consumer preferences and buying
trends or manage our product lines and inventory commensurate with consumer demand.’’
•International growth strategies. A key element of our growth strategy depends on our ability to
capitalize on growth opportunities in the international marketplace and to grow our current level of
non-U.S. operations. For example, in December 2009, we acquired Sinelco, a wholesale distributor
of professional beauty products located in Belgium with sales throughout Europe and, in September
2009, we acquired Intersalon, a distributor of premier beauty supply products then with 16 stores
located in Chile. These acquisitions furthered our expansion plans in Europe and Latin America,
key targets of the Company’s international growth initiative. We intend to continue to identify and
evaluate non-U.S. acquisition and/or organic international growth targets. Our ability to grow our
non-U.S. operations, integrate our new non-U.S. acquisitions and successfully pursue additional
non-U.S. acquisition and/or organic international growth targets may be affected by business, legal,
regulatory and economic risks. Please see ‘‘Risk Factors—We may not be able to successfully
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