Sally Beauty Supply 2013 Annual Report Download - page 19

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for sale to salons and salon professionals through the Company’s websites (www.cosmoprofbeauty.com,
www.cosmoprofequipment.com and www.ebobdirect.com) and other e-commerce platforms.
Mega-Salon Stores
In this channel, large-format salons are supplied directly by manufacturers due to their large scale.
Key Industry and Business Trends
We operate primarily within the large and growing U.S. professional beauty supply industry. Potential
growth in the industry is expected to be driven by increases in consumer demand for hair color and hair
care products. We believe the following key industry and business trends and characteristics will influence
our business and our financial results going forward:
High level of marketplace fragmentation. The U.S. salon channel is highly fragmented with nearly 290,000
salons and barbershops. Given the fragmented and small-scale nature of the salon industry, we believe that
salon 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 and frequent 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. In addition, booth
renters, who comprise a significant percentage of total U.S. salon professionals, are often 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. We expect that these factors will
continue to drive demand for conveniently located professional beauty supply stores.
Increasing use of exclusive-label products. We offer an extensive range of exclusive-label professional
beauty products, predominantly in our Sally Beauty Supply segment. As our lines of exclusive-label
products have matured and become better known in our retail stores, we have seen an increase in sales of
these products. Generally, our exclusive-label products have higher gross margins for us than the leading
third-party branded products and, accordingly, we believe that the growth in sales of these products will
likely enhance our overall gross margins. Please see ‘‘Risk Factors—We depend upon manufacturers who
may be unable to provide products of adequate quality or who may be unwilling to continue to supply
products to us.’’
Favorable demographic and consumer trends. We expect the aging baby-boomer population to drive future
growth in professional beauty supply sales through an increase in the usage of hair color and 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 largely 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. We continuously adapt our marketing and merchandising
initiatives in an effort to expand our market reach or to respond to changing consumer preferences. If we
are unable to anticipate and respond to trends in the marketplace for beauty products and changing
consumer demands, our business could suffer. Please see ‘‘Risk Factors—We may be unable to anticipate
changes in consumer preferences and buying trends or manage our product lines and inventory
commensurate with consumer demand.’’
International growth strategies. A key element of our growth strategy depends on our ability to capitalize
on international growth opportunities and to grow our current level of non-U.S. operations. For example,
from September 30, 2012 to September 30, 2013 our international company-operated stores increased
from 742 stores to 789 stores. In addition, we have completed a number of international acquisitions over
2