Sally Beauty Supply 2007 Annual Report Download - page 25

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.
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, as discussed above. These suppliers may offer advantages, such as discounted prices, when
their products are purchased from distribution channels they control. 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: (i) BSG, other than its Armstrong McCall division, would 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 had distribution rights; and (ii) BSG's Armstrong McCall division would not
retain the rights to distribute Redken professional products through its franchises. In an effort to replace these rights, BSG entered into long-term agreements with
L'Oreal under which, as of January 1, 2007, BSG had 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 retained its exclusive rights to distribute Matrix professional products in its
territories.
Although we plan to mitigate the negative effects resulting from unfavorable changes in our relationships with suppliers, such as L'Oreal, there can be no
assurance that our efforts will partially or completely offset the loss of these distribution rights. BSG's loss of distribution rights through its distributor sales
consultants, as well as the loss of exclusive rights to distribute L'Oreal products in its stores, has also resulted in margin pressure on BSG's remaining L'Oreal
revenues, and this pressure is currently projected to continue during fiscal year 2008. In addition, one of our key strategies in dealing with the loss of the L'Oreal
distribution rights has been to attempt to shift a portion of the L'Oreal purchases by BSG customers previously served by the distributor sales consultants to our
BSG stores. We did not significantly shift a portion of L'Oreal purchases by BSG customers previously served by the distribution sales consultants to stores
during fiscal year 2007, and we no longer expect to do so in the future. As discussed above, L'Oreal is entering into direct competition with BSG and there can be
no assurance that there will not be further revenue losses over time at BSG, due to potential losses of additional L'Oreal related products as well as from the
increased competition from L'Oreal-affiliated distribution networks. For example, L'Oreal could attempt to terminate our contracts to carry certain of their
products in BSG stores, which brought in revenues of approximately $121 million in U.S. sales for fiscal year 2007 and have expiration dates at the end of 2012.
Therefore, there can be no assurance that the impact of these developments will not adversely impact revenue to a greater degree than we currently expect, or that
our efforts to mitigate the impact of these developments will be successful. If the impact of these developments is greater than we expect or our efforts to
mitigate the impact of these developments are not successful, this could have a material adverse effect on our business, financial condition or results of
operations.
Manufacturers and fillers of beauty supply products are subject to certain risks that could adversely impact their ability to provide us with their products on a
timely basis, including industrial accidents, environmental events, strikes and other labor disputes, union organizing activity, disruptions in logistics or
information systems, loss or impairment of key manufacturing sites, product quality control, safety, and licensing requirements and other regulatory issues, as
well as natural disasters and other external factors
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Source: Sally Beauty Holding, 10-K, November 29, 2007