The first summer with my female I used one of those squirt-on-the-shoulder fleas/tick medications. A day later all her hair was gone in that same spot - the Rx burned it off and it never really grew back completely. Since then I've only used herbal sprays (like citronella) and have had no problems. Until this weekend - the "burn spot" is once again looking like it's balding. Could she be developing a resistence to the citronella?
Some dogs do react to the meds that apply to the skin. Perhaps her response to it just indicates very sensitive skin and she is getting a reaction to the other stuff. If so, she might react to almost anything. I would consider going with the pill flea meds for a dog like that. I don't say that lightly– I really do not like giving my dogs internal meds to stop external issues-- but then mine have never had any issue with frontline spray.