Sally Beauty Supply 2006 Annual Report Download - page 37

Table of Contents
example, as discussed in “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, our net sales and operating profits 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.
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 BSG stores and by its distributor sales consultants to negatively
impact our consolidated revenue by approximately $110 million during the last nine months of our 2007 fiscal year. This number
includes anticipated ancillary impact on revenue from other products that may be indirectly affected by these developments.
We believe that we can mitigate some of the negative impact resulting from unfavorable changes in our relationship with L’ Oreal by
taking the following steps: (i) BSG intends to begin marketing certain product lines that were previously unavailable through its
outlets and also to expand existing product lines in new territories; (ii) BSG will be exploring ways to maximize the efficiency of its
structure to mitigate the impact of these developments; (iii) BSG will encourage, through financial incentives, the retention of
distributor sales consultants needed to effect the new business plan; (iv) BSG expects to shift a portion of its L’ Oreal distribution
business into stores, and (v) BSG intends to continue expanding its business into underserved geographic areas, including Florida.
Recent Acquisitions
We made three significant acquisitions during the last three fiscal years. In December 2004, we acquired several commonly-owned
full-service distributors of professional beauty products doing business under various brand names, including “CosmoProf”, for an
aggregate purchase price of $91.2 million. This acquisition opened the Los Angeles, California and Hawaii markets to BSG, as well as
strengthened its position in the Pacific Northwest. In December, 2003, we acquired substantially all of the assets of West Coast Beauty
Supply, a full-service distributor of professional beauty products based in Benicia, California, for an aggregate purchase price of
$139.3 million. These acquisitions expanded the geographic area served by BSG into the western United States and moved us closer to
our goal of making BSG a nationwide full-service distributor.
In addition, during June 2006, we acquired Salon Success, a U.K. based distributor of professional beauty products in order to expand
BSG’ s presence in the U.K. and expand the geographic area served by BSG into other portions of Europe. This acquisition enabled
BSG to enter new markets in Europe, including the U.K., Spain and the Netherlands and to expand its operations in Florida. The total
purchase price at September 30, 2006 was $22.2 million. Approximately $1.8 million of the estimated purchase price will be paid in
equal annual amounts over the three years following the closing of the acquisition. In accordance with the purchase agreement,
additional consideration of up to $2.1 million may be paid over the same three-year period based on sales to a specific customer.
Our Separation from Alberto-Culver
Our business historically constituted two operating segments within the consolidated financial statements of Alberto-Culver. On
November 16, 2006, we separated from Alberto-Culver, pursuant to the Investment Agreement, dated as of June 19, 2006, as
amended, among us, Alberto-Culver, CDRS and others, which we refer to as the investment agreement. As a result of the separation,
(i) we own and operate the Sally Beauty Supply and BSG distribution businesses that were owned and operated by Alberto-Culver
prior to the separation, (ii) at the closing of
31