Sally Beauty Supply 2006 Annual Report Download - page 36

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Table of Contents
segment operating profit were $953.8 million and $66.9 million, respectively, representing 40.2% and 26.2% of consolidated net sales
and segment operating profit, respectively.
Market and Industry Trends
We operate within the large and growing U.S. professional beauty supply industry. Potential growth in the industry is expected to be
driven by increases in hair color, hair loss prevention and hair styling products. We believe the following key industry trends and
characteristics will influence our business going forward:
• High level of customer fragmentation. The U.S. salon market is highly fragmented with over 230,000 salons
in the U.S. 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. Booth renters are 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.
• Frequent re-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. These factors are key to driving demand for
conveniently located professional beauty supply stores.
• Continuing consolidation. There is continuing consolidation among professional beauty product distributors
and professional beauty product manufacturers. We believe that suppliers are increasingly likely to focus on
larger distributors and retailers with 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 can materially affect the net
sales and operating profits of our business segments. Consolidation among suppliers could exacerbate the
effects of these relationship changes and could increase pricing pressures.
• High level of competition. Sally Beauty Supply competes with other domestic and international beauty
product wholesale and retail outlets, including local and regional cash-and-carry beauty supply stores,
professional-only beauty supply stores, salons, mass merchandisers, drug stores and supermarkets, as well as
sellers on the Internet and salons retailing hair care items. BSG competes with other domestic and
international beauty product wholesale and retail suppliers and manufacturers selling professional beauty
products directly to salons and individual salon professionals. We also face competition from authorized and
unauthorized retailers and Internet sites offering professional salon-only products.
• Favorable demographic and consumer trends. The aging baby-boomer population is expected 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.
Relationships With Suppliers
Most of the net sales of Sally Beauty Supply and BSG are generated through retail stores with respect to the Sally Beauty Supply
business and both professional only stores and professional distribution sales consultants with respect to the BSG business. In
addition, BSG has a number of franchisees located primarily in the south and southwestern portions of the United States and in
Mexico, which buy products directly from BSG for resale in their assigned territories. A very small percentage of sales are generated
through sub-distributors (primarily in Europe), which also buy products directly from BSG for resale in their assigned territories. Sally
Beauty Supply / BSG and their suppliers are dependent on each other for the distribution of beauty products. As is typical in
distribution businesses, 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 products lines). Changes in our relationships with suppliers occur often, and
could positively or negatively impact our net sales and operating profits. For
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