Sally Beauty Supply 2013 Annual Report Download - page 56

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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 a broad range of exclusive-label professional
beauty products, primarily 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, during the fiscal year ended 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 the past three years that increased our European and
South American footprint. We intend to continue to identify and evaluate non-U.S. acquisition
and/or organic international growth opportunities. Our ability to grow our non-U.S. operations,
integrate our new non-U.S. acquisitions and successfully pursue additional non-U.S. acquisition
and/or organic international growth opportunities may be affected by business, legal, regulatory and
economic risks. Please see ‘‘Risk Factors—We may not be able to successfully identify acquisition
39