Sally Beauty Supply 2006 Annual Report Download - page 20

Table of Contents
BSG. For instance, in 2006 L’ Oreal acquired a 30% stake in Beauty Alliance, one of our principal competitors. Our failure to
continue to compete effectively in our markets could adversely impact our business, financial condition and results of operations.
We may be unable to anticipate changes in consumer preferences and buying trends or manage our product lines and inventory
commensurate with consumer demand.
Our success depends in part on our ability to anticipate and offer products and services that appeal to the changing needs and
preferences of our customers. If we do not anticipate and respond to changes in customer preferences in a timely manner, our sales
may decline significantly and we may be required to mark down certain products to sell the resulting excess inventory at prices which
can be significantly lower than the normal retail or wholesale price, which could adversely impact our business, financial condition
and results of operations. In addition, we depend on our inventory management and information technology systems in order to
replenish inventories and deliver products to store locations in response to customer demands. Any systems-related problems could
result in difficulties satisfying the demands of customers which, in turn, could adversely affect our sales and profitability.
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 do not manufacture the brand name or private label products we sell, and instead purchase our products from manufacturers and
fillers. We depend on a limited number of manufacturers for a significant percentage of the products we sell. Sally Beauty Supply’ s
five largest suppliers provided it with 40.9% and 41.3% of the products Sally Beauty Supply purchased in fiscal years 2006 and 2005,
respectively. BSG’ s five largest suppliers provided it with 59.2% and 59.7% of the products BSG purchased in fiscal years 2006 and
2005, respectively.
In addition, since we purchase products from many manufacturers and fillers on an at-will basis, under contracts which can be
terminated without cause upon 90 days notice or less or which expire without express rights of renewal, such manufacturers and fillers
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.
We may not be able to acquire desired merchandise in sufficient quantities or on acceptable terms in the future.
Changes in Sally Beauty Supply and BSG’ s relationships with suppliers occur often, and could positively or negatively impact the net
sales and operating profits of both business segments. For example, net sales and operating profits of Sally Beauty Supply and BSG
were negatively affected in fiscal year 2005 by the decision of certain suppliers of the BSG business to begin selling their products
directly to salons in most markets.
Subsequently, in fiscal year 2006 one of those suppliers agreed to have BSG once again sell its product lines in BSG stores. In
addition, 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. If our access to supplier-
provided products were to be diminished relative to 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 over us
that may increase our costs and reduce our revenues, adversely affecting our business, financial condition and results of operations.
On December 19, 2006, we announced that (1) BSG, other than its Armstrong-McCall division, will not retain its rights to distribute
the professional products of L’ Oreal through its distributor sales consultants (effective January 30, 2007, with exclusivity ending
December 31, 2006) or in its stores on an exclusive basis (effective January 1, 2007) in those geographic areas within the U.S. in
which BSG currently has distribution rights, and (2) BSG’ s Armstrong McCall division will not retain the rights to distribute Redken
professional products through distributor sales consultants or its stores. In replacement of these rights, BSG entered into long-term
agreements with L’ Oreal under which, as of January 1, 2007, BSG will have non-exclusive rights to distribute the same L’ Oreal
professional products in its stores that it previously had exclusive rights to in its stores and through its sales consultants. Armstrong
McCall will retain its exclusive rights to distribute Matrix professional products in its territories. We expect the impact of the loss of
BSG’ s exclusive rights to distribute L’ Oreal professional products in
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