Sally Beauty Supply 2011 Annual Report Download - page 34

Laws and regulations impact our business in many areas that have no direct relation to the products we
sell. For example, as a public company, we are subject to a number of laws and regulations related to the
disclosure of financial and other information about us, as well as the issuance and sale of our securities.
Another area of intense regulation is that of the relationships we have with our employees, including
compliance with many different wage and hour and nondiscrimination related regulatory schemes.
Violation of any of the laws or regulations governing our business or the assertion of individual or
class-wide claims could have an adverse effect on our business, financial condition and results of
operations.
Product diversion could have an adverse impact on our revenues.
The majority of the products that BSG sells, including those sold by our Armstrong McCall franchisees, are
meant to be used exclusively by salons and individual salon professionals or are meant to be sold
exclusively by the purchasers, such as salons, to their retail consumers. However, despite our efforts to
prevent diversion, incidents of product diversion occur, whereby our products are sold by these purchasers
(and possibly by other bulk purchasers such as franchisees) to wholesalers and ultimately to general
merchandise retailers, among others. These retailers, in turn, sell such products to consumers. The
diverted product may be old, tainted or damaged and sold through unapproved outlets, all of which could
diminish the value of the particular brand. In addition, such diversion may result in lower net sales for BSG
should consumers choose to purchase diverted products from retailers rather than purchasing from our
customers, or choose other products altogether because of the perceived loss of brand prestige.
In the BSG arena, product diversion is generally prohibited under our manufacturers’ contracts, and we
are often under a contractual obligation to stop selling to salons, salon professionals and other bulk
purchasers which engage in product diversion. If we fail to comply with our anti-diversion obligations
under these manufacturers’ contracts, (including any known diversion of products sold through our
Armstrong McCall franchisees), these contracts could be adversely affected or even terminated. In
addition, our investigation and enforcement of our anti-diversion obligations may result in reduced sales to
our customer base, thereby decreasing our revenues and profitability.
BSG’s financial results are affected by the financial results of BSG’s franchised-based business (Armstrong
McCall).
BSG receives revenue from products purchased by Armstrong McCall franchisees. Accordingly, a portion
of BSG’s financial results is to an extent dependent upon the operational and financial success of these
franchisees, including their implementation of BSG’s strategic plans. If sales trends or economic conditions
worsen for Armstrong McCall’s franchisees, their financial results may worsen. Additionally, the failure of
Armstrong McCall franchisees to renew their franchise agreements, any requirement that Armstrong
McCall restructure its franchise agreements in connection with such renewals, or any failure of Armstrong
McCall to meet its obligations under its franchise agreements, could result in decreased revenues for BSG
or create legal issues with our franchisees or with manufacturers.
Our internet-based business may be unsuccessful or may cause internal channel conflict.
We offer many of our beauty products for sale through our websites in the U.S. (such as
www.sallybeauty.com, www.cosmoprofbeauty.com and www.ebobdirect.com) and abroad. Therefore, we
encounter risks and difficulties frequently experienced in internet-based businesses, including risks related
to our ability to attract and retain customers on a cost-effective basis and our ability to operate, support,
expand and develop our internet operations, websites and software and other related operational systems.
In addition, our internet-based business may reduce the financial performance of our Sally Beauty Supply
and other stores. For example, customers may choose to shop online rather than purchasing products from
our Sally Beauty Supply stores. Although we believe that our participation in both e-commerce and
physical store sales is a distinct advantage for us due to synergies and the potential for new customers,
conflicts between these offerings could create issues that have the potential to adversely affect our results
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