Sally Beauty Supply 2007 Annual Report Download - page 23

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benefits as a consequence of our separation from Alberto-Culver could have an adverse effect on our business, results of operations and financial condition. For
example, it is possible that some costs will be greater for us than they were for Alberto-Culver due to the loss of volume discounts and the position of being a
large customer to service providers and vendors. In addition, the separation eliminated Alberto-Culver's diversification that resulted from operating the consumer
products business of Alberto-Culver alongside our distribution business that tended to mitigate financial and operations volatility. As a result, we may experience
increased volatility in terms of cash flow, operating results, working capital and financing requirements.
We are a holding company, with no operations of our own, and we depend on our subsidiaries for cash.
We are a holding company and do not have any material assets or operations other than ownership of equity interests of our subsidiaries. Our operations are
conducted almost entirely through our subsidiaries, and our ability to generate cash to meet our obligations or to pay dividends is highly dependent on the
earnings of, and receipt of funds from, our subsidiaries through dividends or intercompany loans. However, none of our subsidiaries are obligated to make funds
available to us for payment of dividends. Furthermore, we and our subsidiaries may be able to incur substantial additional indebtedness in the future that may
severely restrict or prohibit our subsidiaries from making distributions, paying dividends or making loans to us.
The beauty products distribution industry is highly competitive and is consolidating.
The beauty products distribution industry is highly fragmented and there are few significant barriers to entry into the markets for most of the types of products
and services we sell. Sally Beauty Supply competes with other domestic and international beauty product wholesale and retail outlets, including local and
regional open line beauty supply stores, professional-only beauty supply stores, salons, mass merchandisers, drug stores and supermarkets. BSG competes with
other domestic and international beauty product wholesale and retail suppliers and with 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.
The increasing availability of unauthorized professional salon products in large format retail stores such as drug stores, grocery stores and others could have a
negative impact on our business. The primary competitive factors in the beauty products distribution industry are the price at which we purchase products from
manufacturers, quality, perceived value, consumer brand name recognition, packaging and mix of the products we sell; customer service; the efficiency of our
distribution network; and the availability of desirable store locations. Competitive conditions may limit our ability to maintain prices or may require us to reduce
prices to retain business or marketplace share. Some of our competitors are larger and have greater financial and other resources than we do, and are less
leveraged than our business, and may therefore be able to spend more aggressively on advertising and promotional activities and respond more effectively to
changing business and economic conditions. We expect existing competitors, business partners and new entrants to the beauty products distribution industry to
constantly revise or improve their business models in response to challenges from competing businesses, including ours. If these competitors introduce changes
or developments that we cannot meet in a timely or cost-effective manner, our business may be adversely affected.
In addition, our industry is consolidating, which may give our competitors increased negotiating leverage and greater marketing resources, thereby providing
corresponding competitive advantages over us. For instance, we may lose customers if our competitors that own national chains acquire additional salons that are
BSG customers or if professional beauty supply manufacturers align themselves with other beauty product wholesale and retail suppliers who compete with
BSG. For example our largest supplier, L'Oreal, has moved a material amount of revenue out of the BSG nationwide distribution network and into competitive
regional distribution networks. More recently, L'Oreal has also announced the acquisition of distributors competitive with BSG in the southeastern U.S. as well
as the west coast of the U.S. As a result,
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Source: Sally Beauty Holding, 10-K, November 29, 2007