Sally Beauty Supply 2011 Annual Report Download - page 54

identify acquisition candidates or successfully complete desirable acquisitions,’’ ‘‘If we acquire any
businesses in the future, they could prove difficult to integrate, disrupt our business or have an
adverse effect on our results of operations’’ and ‘‘Our ability to conduct business in international
marketplaces may be affected by legal, regulatory and economic risks.’’
•Continuing consolidation. There is continuing consolidation among professional beauty product
distributors and professional beauty product manufacturers. We plan to continue to examine ways
in which we can benefit from this trend, including the evaluation of opportunities to shift business
from competitive distributors to the BSG network as well as seeking opportunistic, value-added
acquisitions which complement our long-term growth strategy. We believe that suppliers are
increasingly likely to focus on larger distributors and retailers with a broader scale and retail
footprint. We also believe that we are well positioned to capitalize on this trend as well as
participate in the ongoing consolidation at the distributor/retail level. However, changes often occur
in our relationships with suppliers that may materially affect the net sales and operating earnings of
our business segments. Consolidation among suppliers could exacerbate the effects of these
relationship changes and could increase pricing pressures. For example, as we announced in the
fiscal year 2007, one of our largest suppliers, L’Oreal, moved a material amount of revenue out of
our BSG distribution network and into regional distribution networks that compete with BSG.
More recently, L’Oreal acquired distributors that compete with BSG in the Midwest, Southeast and
West Coast regions of the U.S. and, as a result, L’Oreal directly competes with BSG in certain
geographic areas. If L’Oreal acquired other distributors or suppliers that conduct significant
business with BSG, we could lose related revenue. There can be no assurance that BSG will not lose
further revenue over time (including within its franchise-based business) due to potential losses of
additional products (both from L’Oreal and from other suppliers) as well as from the increased
competition from L’Oreal-affiliated distribution networks. Please see ‘‘Risk Factors—The beauty
products distribution industry is highly competitive and is consolidating’’ and ‘‘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.’’
•Relationships with suppliers. Sally Beauty Supply/BSG and their respective suppliers are dependent
on each other for the distribution of beauty products. We do not manufacture the brand name or
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.’’
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