Inside the OpEx Awards: CD&R's Sally Beauty

A buyout that didn't go the way the firm expected it to turned out to be a CD&R success story. Here's how the firm navigated the twists and turns.

Shortly after Clayton Dubilier & Rice closed the deal to acquire Sally Beauty in 2006, the business lost its largest supplier, L’Oreal.

This was enough to worry any owner, but especially one that had just spent $571 million acquiring a majority stake. To add to its woes, L’Oreal acquired distributors that competed with Sally Beauty in certain regions.

As a result, the company expected a negative impact on consolidated revenue of about $110 million in the last nine months of fiscal 2007.

Under CD&R’s leadership, Sally Beauty took immediate steps to mitigate the losses, including adding new products to replace lines with distributor sales consultants. Also, the company added new products to Sally Beauty stores, expanded existing product lines into new regions and “right-sized” the business, which included some targeted layoffs.

Grew store count by 75%

Gross margins up 350 bpts

56% increase in headcount

With the changes in place, Sally Beauty was able to replace the lost revenue, which overall increased from by 6 percent year-on-year in 2007, despite the negative impact of L’Oreal.

“The company’s strong performance during our ownership was underpinned by solid execution of key operational improvement initiatives, including increasing customer traffic, expanding gross margins and growing the business internationally,” said Richard Schnall, a CD&R partner.

Sally Beauty was a deal reflective of CD&R’s model. The business was a corporate orphan, a unit of The Alberto-Culver Company, which specialises in distributing professional beauty supplies. The firm evaluated the business for several years and became convinced it represented a solid opportunity, in which a portion of the firm’s expected return could be achieved through operational improvements.

Those improvements would be realised through enhanced management practices, product innovation, international growth, enhanced marketing and customer relationship management, as well as cost and productivity initiatives like low-cost sourcing, increased private label use and expanded internet sales channels.

Under CD&R’s stewardship, the company achieved those goals in various ways. For example, Sally Beauty

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increased customer traffic in the US by investing in a customer relationship management system, a customer loyalty programme called the “Beauty Club Card” and hiring a vice president of marketing to focus on certain customer segments.

Sally Beauty also launched new products targeting a younger audience, grew its store count by 75 percent and built its presence internationally, specifically in Western Europe and Latin America. The company completed add-on acquisitions in those markets, including Salon Services, a beauty supply company catering to professionals in the UK, Ireland, Germany and Spain; Pro-Duo, Europe’s largest wholesale distributor of professional hair and beauty products; and InterSalon, a beauty education company in Chile.

The company improved gross margins by more than 350 basis points globally and by 520 basis points in the US. Significantly, Sally Beauty retained high-performing sales associates, right-sized its infrastructure, attracted new suppliers, expanded its store network and optimised its distribution network.

“Sometimes I consider greater value-add to be able to take a situation that may not have developed according to plan, tweaking and refining, and eventually getting there. That put CD&R at the top of the list,” said judge David Turner of Guardian Life.

Private Equity International will be featuring all award winners over coming weeks.