Sally Beauty Supply 2006 Annual Report Download - page 13

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Table of Contents
Open New Stores and Explore New Services and Concepts
In fiscal year 2006, we opened 92 and 6 net new stores for Sally Beauty Supply and BSG, respectively. Because of the limited initial
capital outlay, rapid payback, and highly attractive return on capital, we intend to continue to expand our Sally Beauty Supply and
BSG store base. We are also exploring several new retail and distribution concepts intended to increase our product offering to
existing customers and penetrate new customer segments. For example, in the U.K., Sally Beauty Supply is currently testing a format
that combines traditional salon services with a retail offering of exclusive salon-only product lines. We expect new store openings and
the introduction of new services and concepts to be an important aspect of our future growth opportunities.
Increase Sales of Private Label Products
We intend to grow private label sales in both Sally Beauty Supply and BSG. We believe our customers view our private label
products as high-quality, recognizable brands, which are competitive with leading third-party branded merchandise. Private label
products are currently sold through our Sally Beauty Supply stores, with very limited private label offerings at BSG. Private label
products account for a substantial amount of the Sally Beauty Supply segment net sales and generate a gross margin greater than that
of the leading third-party brands sold through our stores. Potential growth for such products is believed to be significant. In addition,
our broad private label product offering minimizes our dependence on any one brand or supplier. We believe private label presents
opportunities to grow profits and also increase store loyalty.
Increase Operating Efficiency and Profitability
We believe there are numerous opportunities to increase the profitability of operations. For example, we believe there are meaningful
opportunities to further streamline the supply chain by consolidating North American warehousing and more effectively managing
inbound and outbound freight expenses. Other identified opportunities include (i) improvement of sales force training programs and
revision of current compensation structures, (ii) centralization of certain administrative functions, and (iii) targeted overhead
reductions. In addition, we intend to implement working capital improvement initiatives that are focused on the strict management of
receivables, inventory and payables to further maximize our free cash flow. We also intend to undertake a full review of our supplier
base and procurement strategy. This initiative is intended to (i) eliminate duplicative product sourcing efforts between Sally Beauty
Supply and BSG, and (ii) identify low cost alternative sources of supply in certain product categories from countries with low
manufacturing costs. We are identifying economics of scale that will allow us to improve our procurement strategy and maximize our
margin potential.
Pursue Strategic Acquisitions
We have completed more than 25 acquisitions over the last 10 years, predominantly in our BSG segment. We believe our experience
in identifying attractive acquisition targets, our proven integration process, and our highly scalable infrastructure have created a strong
platform for future acquisitions, subject to (i) restrictions on our ability to finance acquisitions by incurring additional debt under our
debt agreements, and (ii) restrictions on the amount of equity that we can issue to make acquisitions for at least two years following
the transaction separating our company from Alberto-Culver. We will continue to identify and evaluate acquisition targets both
domestically and internationally, with a focus on expanding our exclusive BSG territories.
Competition
Although there are a limited number of sizable direct competitors to our business, the beauty industry is highly competitive. In each
area in which we operate, we experience domestic and international competition, including mass merchandisers, drug stores,
supermarkets and other chains, offering similar or substitute beauty products at comparable prices. Our business also faces
competition from department stores. In addition, our business competes with local and regional cash-and-carry beauty supply stores
and full-service distributors selling directly to salons and salon professionals through both professional distributor sales consultants
and outlets open only to salons and salon professionals. Our business also faces increasing competition from certain manufacturers
that use their own sales forces to distribute their professional beauty products directly or align themselves with our competitors. Our
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