Sally Beauty Supply 2013 Annual Report Download - page 38

loss of sales of certain products due to more stringent or new laws and regulations could adversely affect
our business, financial condition and results of operations.
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, for
example, compliance with many different wage and hour and nondiscrimination related regulatory
schemes and, in the U.S., compliance with the recently enacted Affordable Care Act. 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.
Our e-commerce business may be unsuccessful or, if successful, may divert sales from our stores.
We offer many of our beauty products for sale through our websites in the U.S. (such as
www.sallybeauty.com and www.cosmoprofbeauty.com) and abroad. As a result, we encounter risks and
difficulties frequently experienced by 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. 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, supporting product offerings through both of these
channels could create issues that have the potential to adversely affect our results of operations. For
example, if our e-commerce business successfully grows, it may do so in part by attracting existing
customers, rather than new customers, who choose to purchase products from us online rather than from
our physical stores, thereby reducing the financial performance of our stores. In addition, offering different
products through each channel could cause conflicts and cause some of our current or potential internet
customers to consider competing distributors of beauty products. In addition, offering products through
our internet channels (particularly directly to consumers through our professional business) could cause
some of our current or potential vendors to consider competing internet offerings of their products either
on their own or through competing distributors. As we continue to grow our e-commerce business, the
impact of attracting existing rather than new customers, of conflicts between product offerings online and
through our stores, and of opening up our channels to increased internet competition could have a
material adverse impact on our business, financial condition and results of operations, including future
growth and same store sales.
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
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