Sally Beauty Supply 2007 Annual Report Download - page 47

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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.
•
Increasing Use of Exclusive-Label Products. We offer a broad range of private label and control label products, which we generally refer to
collectively as exclusive label products. Exclusive label products are brands for which we own or license the trademark and in some
instances the formula. Control label products are brands that are owned by the manufacturer, but for which we have been granted sole
distribution rights. Generally, our exclusive label products have higher gross margins than the leading third-party branded products and we
believe this area offers potential growth.
•
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 plan to continue to examine ways in which we can benefit from this trend, including reviewing opportunities to
shift business from competitive distributors to the BSG network as well as seeking opportunistic value-added acquisitions. 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 earnings of our business
segments. Consolidation among suppliers could exacerbate the effects of these relationship changes and could increase pricing pressures.
For example, as we announced in December 2006, 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 and west coast of the U.S. In addition, L'Oreal has announced the
acquisition of a supplier (Pureology) that does not currently do business with BSG. If L'Oreal acquired another supplier that conducts
significant business with BSG, we could lose that revenue as well. As a result, 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.
•
High level of competition. 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, 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. 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.
•
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
39
Source: Sally Beauty Holding, 10-K, November 29, 2007