Sally Beauty Supply 2007 Annual Report Download - page 48

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hair-loss products. Additionally, continuously changing fashion-related trends that drive new hair styles are expected to result in continued
demand for hair styling products. Changes in consumer tastes and fashion trends can have an impact on our financial performance. Our
continued success depends in large part on our ability to anticipate, gauge and react in a timely and effective manner to changes in
consumer spending patterns and preferences for beauty products. If we are unable to anticipate and respond to trends in the market for
beauty products and changing consumer demands, our business could suffer.
•
Controlling expenses. Another important aspect of our business is our ability to control costs, especially in our BSG business by
right-sizing the business (including some targeted reductions-in-force) and maximizing the efficiency of our structure. In response to the
loss of L'Oreal related revenue discussed below, BSG made certain changes with its distributor sales consultants. BSG's sales force was
reduced and the remaining affected distributor sales consultants were offered certain compensation related incentives to stay with BSG as
BSG seeks to replace lost L'Oreal revenue. BSG has substantially completed a store re-branding project that repositioned all of its North
American company-owned stores under a common name and store identity, CosmoProf. This project is expected to provide brand
consistency, save on advertising and promotional costs and allow for a more focused marketing strategy. Further, we continue to study our
distribution function as we seek to rationalize our infrastructure. During fiscal year 2007, we began implementing a two-year, $19.0 million
capital spending program to consolidate warehouses and reduce administrative expenses related to BSG's distribution network optimization
program. We currently believe that this plan could produce significant annual expense savings within the next two years.
•
Relationships with suppliers. We do not manufacture the brand name or exclusive label products we sell, and instead purchase our products
from manufacturers. We depend upon a limited number of manufacturers for a significant percentage of the products we sell, and our
relationships with these suppliers change often. Please see the next section for more information on this trend.
Relationships With Suppliers
Most of the net sales of Sally Beauty Supply and BSG are generated through retail stores with respect to the Sally Beauty Supply business, and both professional
only stores and professional distribution sales consultants with respect to the BSG business. In addition, BSG has a number of franchisees located primarily in the
south and southwestern portions of the U.S. and in Mexico, which buy products directly from BSG for resale in their assigned territories. A very small percentage
of sales are generated through franchisees or sub-distributors (primarily in Europe), which also buy products directly from Sally Beauty Supply or BSG for
resale. Sally Beauty Supply/BSG and their suppliers are dependent on each other for the distribution of beauty products. As is typical in distribution businesses,
these relationships are subject to change from time to time (including the expansion or loss of distribution rights in various geographies and the addition or loss
of products lines). Changes in our relationships with suppliers occur often, and could positively or negatively impact our net sales and operating profits. For
example, during the second quarter of 2007, Farouk Systems, Inc., or Farouk Systems, terminated its distribution agreement with us. Subsequently, effective
July 2007, BSG stores and professional distributor sales consultants were once again given approval to distribute Farouk Systems products, with an expanded
distribution area.
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
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Source: Sally Beauty Holding, 10-K, November 29, 2007