Sally Beauty Supply 2006 Annual Report Download - page 6

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Table of Contents
In this report, references to “the Company”, “our company”, “we”, “our”, “ours” and “us” refer to Sally Beauty Holdings, Inc. and its
consolidated subsidiaries for periods after the separation from Alberto-Culver Company (“Alberto Culver”) and to Sally Holdings,
Inc. and its consolidated subsidiaries for periods prior to the separation from Alberto-Culver unless otherwise indicated or context
otherwise requires.
PART I
ITEM 1. BUSINESS
Introduction
We are the largest distributor of professional beauty supplies in the United States based on store count. We operate primarily through
two business units, Sally Beauty Supply and Beauty Systems Group, which we refer to as BSG. Through Sally Beauty Supply and
BSG, we operated a multi-channel platform of 3,169 stores and supplied 170 franchised stores in North America as well as selected
European countries and Japan, as of September 30, 2006. As of September 30, 2006, Sally Beauty Supply owned and operated 2,181
stores in the United States and 2,511 stores worldwide and BSG operated 658 company-owned stores and supplied 170 franchised
stores. Within BSG, we also have one of the largest networks of professional distributor sales consultants in North America, with
approximately 1,200 professional distributor sales consultants who sell directly to salons and salon professionals. We provide our
customers with a wide variety of leading third-party branded and private/control label professional beauty supplies, including hair care
products, styling appliances, skin and nail care products and other beauty items. Sally Beauty Supply stores target retail consumers
and salon professionals, while BSG exclusively targets salons and salon professionals. Over 90% of our net sales were in the U.S. and
Canada for each of the last three fiscal years. For the year ended September 30, 2006 our net sales were $2,373.1 million.
Sally Beauty Supply began as a single store in New Orleans in 1964 and was purchased in 1969 by our former parent company,
Alberto-Culver Company, or Alberto-Culver. BSG became a subsidiary of Alberto-Culver in 1985. On November 16, 2006, we
separated from Alberto-Culver and became an independent company traded on the New York Stock Exchange. Our separation from
Alberto-Culver and its consumer products-focused business was pursuant to an investment agreement, dated as of June 19, 2006, as
amended, among us, Alberto-Culver, CDRS Acquisition LLC and others. We were formed as a Delaware corporation in June of 2006
in connection with this transaction to be the ultimate parent of Sally Beauty Supply and BSG and other subsidiaries following the
separation. When we refer to Alberto-Culver, we mean Alberto-Culver Company prior to the separation or the company from which
we separated, which is currently a separate public company, as the context requires.
In connection with the separation from Alberto-Culver, CDRS Acquisition LLC, or CDRS, and CD&R Parallel Fund VII, L.P., which
we refer to as Parallel Fund and which we refer to together with CDRS as the CDR investors, invested an aggregate of $575 million in
cash equity, representing ownership subsequent to the separation of approximately 48% of the outstanding shares of our common
stock on an undiluted basis. CDRS, which owns approximately 47.7% of the outstanding shares of our common stock on an undiluted
basis, is a Delaware limited liability company organized by Clayton, Dubilier & Rice Fund VII, L.P., a private investment fund
managed by Clayton, Dubilier & Rice, Inc. Also in connection with the separation from Alberto-Culver, certain of our subsidiaries
incurred approximately $1.85 billion of indebtedness, as more fully described below.
Professional Beauty Supply Industry
We operate primarily within the large and growing U.S. professional beauty supply industry. Potential growth in the industry is
expected to be driven by demographic and fashion trends, which we expect will lead to increased usage of hair color, hair-loss
prevention products and hair styling products.
The professional beauty supply industry serves end-users through four channels: full-service exclusive distribution, open-line
distribution, direct and mega-salon stores.