Leslie's, Inc. (LESL) Q2 2021 Earnings Call Transcript

Good afternoon, and welcome to the Second Quarter of Fiscal 2021 Conference Call for Leslie's Inc. At this time, all participants are in a listen-only mode. Following the prepared remarks, management will conduct a question-and-answer session. As a reminder, this conference call is being recorded and will be available for replay later today on the Company's website. I will now turn the call over to Caitlin Churchill, Investor Relations. Please go ahead.

Thank you, and good afternoon. I would like to remind everyone that comments made today may include forward-looking statements, which are subject to significant risks and uncertainties that could cause the company's actual results to differ materially from management's current expectations. These statements speak as of today and will not be updated in the future if circumstances change. Please review the cautionary statements and risk factors contained in the company's earnings press release and recent filings with the SEC. During the call today, management will refer to certain non-GAAP financial measures. A reconciliation between GAAP and non-GAAP financial measures can be found in the company's earnings press release, which was furnished to the SEC today and posted to the Investor Relations section of Leslie's website at ir.lesliespool.com. On the call today from Leslie's Inc. is Mike Egeck, Chief Executive Officer; and Steve Weddell, Chief Financial Officer. With that, I will turn the call over to Mike.

Thanks, Caitlin, and good afternoon, everyone. Thank you all for joining us today. I'm pleased to report that our performance in Q2 exceeded our internal expectations and produced record results for the quarter. Those results include sales of $192.4 million, a comparable sales increase of 51.3% on a reported basis and 35.5% on a calendar adjusted basis. Comparables accelerated each month of the quarter year-over-year and on a 2-year stack. This quarter represents our 8th consecutive quarter of sequential improvement and positive comparables. The gross margin rate for the quarter expanded by 576 basis points, and adjusted EBITDA grew by $17.6 million. Our record sales and profit for the quarter continued to be driven by the three pillars that make our business compelling. First, the predictable, recurring, and nondiscretionary nature of demand in our industry. The industry was further advantaged in the second quarter by the continuation of several key macro trends. We saw consumers continue to focus their time and investment on their homes, pursue healthy outdoor lifestyles, migrate to the suburbs and exurbs, and maintain an elevated attention to safety and sanitization. The continuation of these macro trends resulted in elevated levels of pool usage, interest in pool ownership, new pool permits, and pool construction backlogs. Second, the competitive advantage derived from our integrated system of physical and digital assets. In the quarter, we successfully completed our rollout of omnichannel capabilities—buy online pick up in store, ship from store, and ship to store. These new capabilities significantly strengthen our ecosystem and enable our consumers to shop Leslie's whenever, wherever, and however they choose. In the first six weeks since go-live, 30% of our Leslie's e-commerce transactions have been enabled by our new omnichannel capabilities. Third, the significant intangible growth opportunities available to us as the market leader. We continue to make great progress on the key drivers of our growth strategy, including consumer file growth. We continue to grow our consumer file driven by new consumer acquisition. Total target file growth was 12% in the quarter. New consumers grew by 35%. During the quarter, we shifted marketing spend away from our lower-margin sites and increased spend on our targeted higher-margin sites and higher-value consumers. We continue to generate high levels of ROI with our marketing spend and we'll continue to invest in our targeted marketing tactics to capture market share. We also drove growth in our loyalty program. In Q2, we grew our total loyalty members by 10% year-over-year, driven by a strong increase in new members. The number of new members added in Q2 of this year increased 44% compared to the new members added in Q2 of last year. Our new loyalty program 2.0, which we have named Pool Perks, is in final testing, and we look forward to launching this exciting and important initiative this pool season. We believe our consumers will love the new program benefits and experience, and we look forward to accelerating the growth and value of our member file with its launch. Regarding the Pro market, we have completed the conversion of our first 10 residential locations to Pro locations. In the first eight weeks post-conversion, they are outperforming our pro forma expectations. In addition, three new Pro locations remain on track to open in the third quarter. We also launched our Pro affiliate program and have already signed up affiliate partners in several hundred of our locations. These new affiliates are spending 80% more with Leslie's after signing up for the program. We are continuing to add new affiliates across our locations. The last component of our Pro initiatives, our Pro e-commerce site, is still in beta testing. During testing, we received valuable feedback from our Pro testers and are fine-tuning the site for mobile optimization and search. We are still on track for the full launch this season and feel we have materially improved the product through this process. With regard to our residential market opportunity, we have opened three new stores year-to-date and plan to open up to seven additional stores this fiscal year. Additionally, AccuBlue Home, our connected pool technology solution and subscription service, remains on track for a limited launch of version 1.0 during the third quarter. On the M&A front, we closed on the acquisition of International Hot Tub in the quarter. IHT operates four retail locations in the Greater Denver, Colorado area, and we welcome the newest member of our hot tub business. With the acquisition, we now have a total of 943 physical locations and add Colorado as our 38th state of operations. We continue to see numerous acquisition opportunities across the highly fragmented pool and hot tub industry, and we are managing an active pipeline of targets. Accordingly, we have entered into a letter of intent with another tuck-in opportunity, which we expect to close in the third quarter. Regarding corporate governance, I'd like to note that in the quarter, Brad Gazaway, our Chief Legal Officer, took on the executive leadership of our ESG initiatives. In addition, we hired a Director of ESG and formed a sustainability working group comprised of internal resources and external advisers. This group will work at the direction of the Board and management to assess material ESG factors and develop our inaugural ESG disclosure framework and report. We'll keep you updated on our progress in this important initiative in future calls. Finally, I'd like to comment on two remarkable industry dynamics that occurred in the quarter. First, chlorine supply remains constrained for the industry and is driving higher average retail pricing. Current residential chlorine pricing is approximately 40% higher than a year ago. As we discussed in the last call, we remain confident in our supply chain and in our ability to serve both our existing consumers as well as the new consumers we are acquiring with our growth initiatives. Regarding supply and cost, we remain in good shape. In terms of retail pricing, we are continuing to see increases across the industry. In the second quarter, chlorine retail inflation accounted for approximately 300 basis points of our reported sales growth. We continue to monitor chlorine product pricing across online and physical competitors and modify our prices as appropriate. Though what prices will do as we get further into the pool season remains uncertain, we now expect chlorine supply to continue to be constrained and chlorine price inflation to be more durable than we had anticipated in our last call. The second extraordinary event in the quarter was the severe weather conditions in Texas and the South Central U.S. This was an unprecedented event. The event significantly increased our service volume and equipment sales in the region and drove total equipment sales up approximately 85% in the period. For the quarter, we estimate that the freeze accounted for approximately $10 million of incremental sales, and it is clear that we will continue to have opportunities to help consumers with damaged equipment and water sanitation needs into the third quarter. To wrap up, we are very pleased with our record results for the quarter. More importantly, we're gaining traction in our growth initiatives and feel very well prepared for what we see as a strong 2021 pool season in the back half of the year. With confidence in our team continuing to execute at a high level, our detailed preparations for the season, and a favorable industry backdrop, we have, as you have seen in the press release, revised our guidance for the year upward. With that, I'll hand it over to Steve to discuss the quarter and outlook in more detail. Steve?

Thank you, Mike, and good afternoon, everyone. The strong start to our fiscal year continued in the second quarter as we remain focused on our growth initiatives and prepare for the season. We generated record second quarter results that exceeded our expectations, and we're proud of all of our associates as they continue to deliver against our strategic priorities and generate the results we're reporting today. Today, we'll review our second quarter of fiscal 2021 performance and our upward revision to our full year fiscal 2021 guidance. Before I get started, just a reminder on the calendar this year. As a result of fiscal 2020 having 53 weeks, there are calendar shifts in fiscal 2021 that impact our quarterly comparisons on a year-over-year basis. In the second quarter of fiscal 2021, we replaced a lower volume week at the end of December with a higher volume week at the end of March. This shift impacted sales by approximately $15 million during the second quarter. So on to our second quarter results. Our second quarter included 13 weeks and ended on April 3, 2021. We delivered strong results for the second quarter, with momentum throughout our business and our P&L. Total sales for the 13-week period increased by 52.3% to $192.4 million from $126.4 million in the second quarter of fiscal 2020. Our comparable sales on a reported or unshifted basis increased by 51.3%. Due to the 53rd week in fiscal 2020, our comparable sales growth in 2021 is impacted by a one-week shift. Using a realigned period in 2020 for comparability, our comparable sales on a shifted basis for the second quarter of 2021 increased by 35.5%. This represents an acceleration of growth following the comparable sales growth of 25.7% that we reported on a shifted basis in the first quarter of fiscal 2021 and a 23.3% increase that we reported in the fourth quarter of fiscal 2020. On a 2-year stack calendar basis, our comparable sales grew 49.1% during the second quarter of fiscal 2021. We generated strong results across consumer types, product categories, geographies, and, as Mike mentioned, during each period in the quarter. We also continued to see higher-than-expected retail price inflation, primarily related to chemical products, channel management by major equipment manufacturers, higher input costs, and less discounting across product categories. Our gross profit increased by 79.6% to $71.7 million from $39.9 million in the second quarter of fiscal 2020. Gross margin rate increased by 567 basis points to 37.2%, from 31.6% in the prior year, primarily due to occupancy leverage, product margin improvements, and partially offset by business mix. SG&A increased by $14.4 million to $70.4 million from $56.0 million in the second quarter of fiscal 2020. The increase in SG&A was driven primarily by the sales increases and investments to support our growth. Higher compensation accruals and an increase in non-cash equity-based compensation were also drivers of the increase. As a percentage of sales, total SG&A decreased by 778 basis points to 36.6% in the second quarter of fiscal 2021 compared to 44.4% in the prior year period. It is important to note that during the current year quarter, we also absorbed new public company costs in our reported results. Adjusted EBITDA improved by $17.6 million to positive $9.5 million from a loss of $8.1 million in the second quarter of fiscal 2020. During the current year quarter, we converted the increase in sales at a higher gross margin and leveraged our costs even as we invested against our key strategic priorities. As a result, we generated a positive EBITDA quarter, whereas the second quarter has historically represented approximately negative 5% of annual EBITDA. The adjusted net loss was negative $2.8 million compared to a loss of negative $28.8 million in the prior year, an improvement of $26.0 million. The improvement was due to a $17.4 million increase in operating income and a $14.6 million reduction in interest expense, partially offset by a $5.9 million reduction in income tax benefit. Our lower interest expense, when compared to the prior year, was a result of our repayment of outstanding senior unsecured notes in November of 2020, lower LIBOR on our floating rate debt, and no borrowings on our revolver in the current year period. Diluted adjusted loss per share improved by $0.17 per share to a loss of $0.01 per share in the second quarter of fiscal 2021 compared to a loss of $0.18 in the second quarter of fiscal 2020. Now I'll turn briefly to year-to-date results. Following are a few highlights. Total sales for the 26-week period increased by 35.3% to $337.4 million from $249.4 million in the prior year, an increase of $88.0 million. Our comparable sales on a reported or unshifted basis increased by 33.7%. On a shifted basis, to factor in the one-week calendar shift, our comparable sales grew by approximately the same amount at a total of 31.1%. This compares to comparable sales growth of 8.4% in the first half of fiscal 2020 and represents comparable sales growth on a 2-year stack basis of 39.5%. Gross profit increased by 52.4% or $42.4 million to $123.4 million from $81.0 million in the second quarter of fiscal 2020. Gross margin rate increased by 409 basis points to 36.6% from 32.5% in the prior year. Adjusted EBITDA improved by $26.4 million to a positive $9.3 million from a loss of $17.1 million in the first half of fiscal 2020. Diluted adjusted loss per share improved by $0.27 per share to positive $0.07 in the first half of fiscal 2021 compared to a loss of $0.34 in the first half of fiscal 2020. Moving now on to the balance sheet. We finished the second quarter of fiscal 2021 with cash and cash equivalents of $90.3 million. We had no borrowings on our revolver compared to cash and cash equivalents of $11.9 million and borrowings on our revolver of $50 million at the end of the second quarter of fiscal 2020. Cash and cash equivalents, net of revolver borrowings on a year-over-year basis, improved by $128.4 million. Regarding inventory, we finished the quarter with $277.9 million compared to $244.7 million at the prior year quarter end, an increase of $33.2 million. As a reminder, at the end of our first quarter, total inventory was $10.6 million lower than the prior year. We have proactively worked with existing and new vendors globally to identify opportunities to strategically invest in inventory. We're pleased with our higher inventory position when compared to the prior year in the current environment of heightened consumer demand and especially in light of the tight industry supply situation across multiple product areas that our teams have been working hard to navigate. Finally, on inventory, we continue to work closely with our vendor partners to maintain the efficient flow of products to prepare for the season. With regard to debt, at the end of the second quarter of fiscal 2021, total funded debt was $810 million compared to $1.207 billion at the end of the second quarter of fiscal 2020. The $397 million reduction was due to the repayment of our senior unsecured notes and quarterly amortization payments on our outstanding term loan. During the second quarter of fiscal 2021, we amended our $810 million term loan agreement, and I want to highlight a couple of key points. First, we extended the maturity to March of 2028 from August of 2023. And second, we lowered our interest to LIBOR plus 275 with a 50 basis point floor, where previously, interest was LIBOR plus 350 and no floor. In addition, after the end of the second quarter of fiscal 2021, we amended our $200 million ABL credit facility to reduce our rate to LIBOR plus a range from 125 to 175 basis points based on percentage utilization. Previously, our rate was LIBOR plus a range from 175 to 200 basis points. We also reduced our unused fee from 37.5 basis points to 25 basis points, and the maturity on our revolver remains August of 2025. No amounts were outstanding on our ABL credit facility as of April 3, 2021. Next, I'd like to turn to our outlook. Today, we're raising our full year fiscal 2021 guidance to reflect the first half beat to our internal expectations, progress against our growth initiatives, our view that inflation will be higher than previously expected for the full year, and considerations of the additional service volume and equipment sales in Texas and South Central U.S. resulting from the winter freeze. Our fiscal 2021 includes 52 weeks and ends on October 2, 2021. For the year, we're providing the following guidance. First, sales of $1.250 billion to $1.270 billion, which is an increase of $75 million at the midpoint for a year-on-year increase in the mid-teens range, excluding the impact of the 53rd week in the prior year. This compares to our prior expectation of high single-digit growth on the same basis. As we look at the second half of fiscal 2021, our guidance reflects confidence that our comparable sales growth on a 2-year stack calendar basis will remain above 30%. Second, adjusted EBITDA of $225 million to $235 million, an increase of $25 million at the midpoint for a 33% increase year-over-year, excluding the impact of the 53rd week in 2020 and adjusting for public company costs. The high end of our range represents a 36% increase over the prior year on the same basis. This compares to our prior expectation of high-teens growth. Next, diluted adjusted net income of $125 million to $135 million, an increase of $19 million at the midpoint. And finally, diluted adjusted net income per share of $0.65 to $0.70 for an increase of $0.10 at the midpoint. In summary, the second quarter of fiscal 2021 was a record quarter, with $192 million in total sales, and we drove strong financial results throughout our profit and loss statement. Our entire organization continued to execute against our growth initiatives as we prepare for the pool season in 2021 amidst heightened consumer demand. Lastly, we will continue our relentless focus on enhancing consumer experience and executing our initiatives to drive growth and market share gains. I will now hand it over to the operator to open the lines for Q&A. Thank you.

Our first question comes from Ryan Merkel of William Blair.

Congrats on another big quarter. First off, full year guidance still feels a little conservative to me. I realize the season is just starting. But where could there be some upside?

Sure. Why don't I kick that off, Mike, and you can follow on. So when you think about guidance, similar process we went through in the first quarter, Ryan. About two-thirds of the guidance raised was flow-through from the second-quarter outperformance, which means the remaining one-third or about $25 million is related to our current view on inflationary opportunities as well as just recent trends. So when you think about the first quarter, we had a $10 million flow-through from internal expectations and another $10 million from inflation as well. We continue to be very optimistic about our opportunities. As you said, it is still early from a season perspective. Based on current trends, we certainly have opportunities to the upside, but I feel very confident in the guidance that we provided today in our release.

Okay. That's helpful. And then, Mike, you mentioned that 30% of transactions were enabled by omnichannel, I think. Can you just expand on this a little bit more?

Yes. It means that through the fulfillment, right, it was either ship to store, ship from store, or buy online pick up in store. I think the other way to look at that is 13% of it was shipped from store. The way we have the omnichannel filter set up, those are all incremental sales. So we're looking at it as a very encouraging start. It's scaling faster than we anticipated, and the shipped from store or incremental part is higher than we anticipated. But I need to put a caveat on all of that—it's very early days, right? We're really just six weeks into it. But it is working as designed and scaling faster than we anticipated. So we're happy.

Our next question comes from Peter Benedict of Baird.

Can you provide insight on how retail prices typically adjust in the sector as commodity costs decrease following a significant increase? While prices are currently rising, what does historical data indicate will happen when commodity costs eventually decline?

Sure, happy to. So look, I think time will tell, obviously. I think when you think about what's out there in the current public markets, the duration of the supply disruptions is going to continue for quite a while here with potentially some normalization as we get late into season next year. But again, too many unknowns to know at this point. I think when we look at pricing a little bit further back, I have not seen material reductions in pricing from a competitive position. But I do believe that current pricing likely won't be sustained once full supply comes back online. As we think about the opportunity in front of us today, it is really about our opportunity to engage with existing and new consumers. We're seeing, based on some of the recent news around shortages, that we're attracting a lot of first-time consumers to Leslie's and introducing them to the experience and what we have to offer. So the durability of the opportunity for us is really about wrapping our arms around those consumers and showing them more than just the supply of chlorine this season.

Yes. I would just add that it's a tough question to answer because it's really an unprecedented disruption and run-up. The industry for years has not been very inflationary in chemicals. So we believe it will be somewhat sticky in terms of what the industry is able to retain. To Steve's other point, it's still unclear when production levels for the industry will return to normal. So we have two big unknowns: the timing of production catch-up and the unprecedented run-up and how consumers will react to that going forward.

Yes, I think everyone understands that, and it makes sense. I appreciate the insights you both just provided. My next question is regarding the initial Pro affiliate customers you are signing up. Can you provide any information about them? How do they compare to your traditional Pro customers? Are they similar? And regarding the 80% increase in spending, what is that based on? How do the baskets look? Any additional information would be helpful. I know it's early, but I'm curious about what you can share on that.

Yes. Sure, Peter. Look, to your last comment, it's still really early, right? So we're not drawing conclusions. But similar to the omnichannel go-live implementation of the Pro affiliate program, we're very pleased with the start. We have signed up about 20% of our goal for the year-to-date, so we're ahead of plan there. The basket size is much higher than they were spending with us before joining the program. And I said it's about 80%. It is, as you might expect right now, primarily driven by chemicals and equipment, which are in high demand. But we're receiving very positive feedback from the affiliate members who are signing up. We're also continuing to add new partners at a good rate. So it’s very early, but all positive news there.

Our next question comes from Jonathan Matuszewski of Jefferies.

Great quarter. First one was just on the cadence throughout the quarter. You mentioned strengthening trends. Obviously, a unique quarter with the inclement weather in the South Central. Just curious if you could help us frame how comps trended on a monthly basis.

Yes. Thank you for the question. I certainly appreciate it, Jonathan. I'd characterize it as consistently improving. It wasn't a spike midpoint in February, from a weather perspective. As Mike mentioned, about $10 million of incremental sales came from that weather event, and that's on $190 million in overall sales. Additionally, as we discussed regarding chemical inflation, chemical inflation was a few hundred basis points, which was mid-single digits from millions of dollars of increase. The core driver of the performance for the quarter was really across our product categories, regions, and businesses that led to the beat. I'm very pleased on both the current year as well as the 2-year stack basis to see improvement in January, February, and then in March.

Got you. That's helpful. And then a follow-up question, just on the new customer acquisition. Impressive numbers in what you stated. Is there a way to frame how much new customers acquired were influenced by some better in-stock position than what you had compared to your peers? And a second question related to that was, those customers who came in and maybe bought chlorine from you for the first time. Have you seen any indicators regarding repeat purchases? Do you have indications that they're demonstrating loyalty after their first purchase?

Yes. Jonathan, I'll answer that in a couple of ways. First, I'd say, I was a little surprised that we weren't adding more new customers strictly based on chlorine. The chlorine purchases from new customers were very much in line with the balance of our file. So it was not the driver we anticipated. It's really coming down to digital spend. And what you said regarding better in-stock positions across categories than some of our competitors is accurate. We've noted that the loyalty program is growing at the same time, which we find very encouraging because we are launching what we believe is a much improved program. To get that kind of growth from the existing program, driven by sign-ups in stores, is considered a very positive trend. When you think about the file growth, it was led by new customers, but we had increases across new customers, reactivated customers, and retained customers. We're quite happy with that trifecta and the trends across those three portions of the file.

Our next question comes from Peter Keith of Piper Sandler.

Great results, guys. One number that really jumped out to us was the inventory growth because we do hear about all these shortages. In the context of chlorine shortages, do you feel like you're going to have enough to last the season, therefore maybe enhancing your competitive position as we move forward? Or do you think everyone is going to start running out at some point?

Yes. Well, Peter, thanks for the question. We feel confident in our inventory levels. Now, I will say this last week, we set an all-time record for chemical sales. As I'm sure everybody noticed, there were a number of news articles talking about a shortage, and that certainly spiked demand. We consider it kind of a temporary spike, if you will. Right now, though we're at a bit of a low point in chlorine, we have plenty of supply in the pipeline. We think we're in an advantaged position versus competition. When we get further into the season, we'll find out. But we are focused on using our in-stock positions across categories to continue to add new customers.

And Peter, I'd add on to that. We have more chlorine this year than we had in prior years. So again, opportunistically going out and procuring supply from a global network has put us in a great position. That being said, with the overall industry shortages, we'll certainly have a lot of attention on availability. I would like to remind you as well that when you talk about alternatives, whether it's salt chlorine generators or liquid bleach or other alternative sanitizers, we provide the total solution. We can install equipment in the backyard when it comes to salt chlorine generators, and we sell alternative sanitizers in our stores every day. So chlorine is an important part of the sanitation products for the industry, but there are certainly a lot of alternatives that will continue to help consumers keep their pools clean and safe.

Okay. That sounds interesting. And on the inventory availability, if I could pivot away from chlorine and maybe towards pool equipment and pool parts, there is chatter indicating that there's also some inventory constraints in these areas because of the demand surge in Texas. Are these rumors true? How do you feel about your competitive positioning in the pool parts categories?

Yes. I would characterize it as a tight supply situation. I think that's correct. As you know, the major equipment suppliers are beginning to report, and they are stating really strong numbers. That's not unexpected for us because we know what we're buying from them. We're confident because we, very early in the year, in pre-season, got aggressive with forward-looking projections for equipment and chemicals. Our sales with the major vendors are outpacing their sales. So we feel positive in that sense that we're capturing increased market share from their production, and that should serve us well as we go further into the season.

Our next question comes from Steven Forbes of Guggenheim Securities.

I wanted to follow up on the Pro. So Mike or Steve, can you discuss how Pro sales growth compared to the average during the quarter? Any context, right ratio or however you want to reference it. In regards to the pipeline, right, both in terms of new stores and conversions, how far out are you sort of planning the pipeline as we think back to sort of just the expectation on an annual basis for the number of openings? Has that changed given the strength that you're seeing?

Yes. I will say that in terms of our wholesale business growth, it grew about twice our average rate for the total company. So we are seeing strong growth there. The converted stores—we're very pleased with the initial results. Again, it's early days there, around eight weeks. We have a second tranche of stores identified—it's about 25—but we are going to wait to see how the stores perform once we get deeper into the season before we start any additional conversions.

Helpful. And then maybe just a quick follow-up since you mentioned the closing of the acquisition and the new LOI. I'm curious if you could just comment, in general, as it pertains to the M&A pipeline and the general appetite for deals in the marketplace, given the supply challenges, if the supply challenges have somewhat created this elongated pipeline for you guys?

Yes. I think it's a combination of having to deal with the pandemic and tight supply, and of course, they're related. There's a dynamic in the industry where a lot of smaller operators are looking to monetize and exit. It has been a very arduous 14 or 15 months now, and that's driving some of the pipeline for sure. Most of our pipeline, as we've mentioned before, is really incoming. We're seeing a lot of interest.

From an inventory perspective, I would just make the comment that, look, these are tuck-in acquisitions that we've done. It can handle the inventory flow well. In other cases, we are certainly ensuring we have conversations with the supplier base in connection with the discussions around M&A. It's worth focusing on it, and we don't think it will inhibit our ability to close on deals.

Our next question comes from Elizabeth Suzuki of Bank of America.

Are you seeing anything in Southern markets, in particular, where pools may be opening up that would indicate an earlier start to the season than last year, particularly given the more favorable weather this year?

Yes. Just one comment on weather to start, Liz, outside of Texas, the weather wasn't actually stable this quarter. There were pockets of favorable weather. Regarding pool openings, we're running about 20% to 30% ahead of last year. So it is true that people are looking to get their pools open earlier and start enjoying them.

Great. And are there any industry statistics you can point to concerning the sustainability of demand for new pools, like permit applications and the backlog? I know that has been running pretty hot. Is that still the case? Or, as markets are opening up and people can divert money towards travel and things away from home, are you starting to see that tailing off at all?

No. Actually, the data we're seeing is indicating increased permit activity forecasts, close to last year's level and this year's level through 2025 now. Those are forecasts, but they're industry forecasts. We certainly haven't seen anything in terms of velocity or interest or demand that would tell us otherwise.

Yes. It's a great tailwind. Others have reported, and they have discussed supply and backlog, continuing well through the end of this season into next season for new pool builds—at higher levels than we talked about in the past. This trend certainly appears to have continued momentum and is a great leading indicator as we prepare to take care of those pools and maintenance needs for the next 30 years.

Our next question comes from Dana Telsey of Telsey Advisory Group.

Congratulations on the terrific report. Just digging more into loyalty, given that loyalty was up around 10%, what is the profile of these new customers? And how is the sales penetration of those loyalty members year-over-year? And then I have a follow-up.

Yes. The loyalty members coming in are predominantly the same demographic profiles as the existing loyalty base. We're not seeing anything that indicates a dramatic shift in age, income, or even geography. So, to a degree, the story there is a bit more of the same. We are seeing increased penetration of loyalty into our total sales base. It had been running about 70%, and last quarter, it ticked up to nearly 80%. We consider that a good sign. We are really looking forward to launching the new loyalty program, and we believe we can accelerate the growth from what we saw last quarter for sure.

Got it. And then when you think about the Pro program, the Pro affiliate program—what are you noticing there? What are they spending on? Is that a flywheel to attracting more Pros?

Yes, we believe it is. We knew we had many Pro customers, and we had talked about that before. What we had was very small share of wallet from them. We anticipated that our agreement has minimum spend requirements, but they are reaching those minimums quite rapidly. We feel very good about the wallet share we're capturing. It is working for the reasons we laid out when we started: Convenience is paramount. These are smaller Pros, often sole operators. Their time is essentially their money. When they're at a pool with a customer and need something, our stores are almost always the closest stores, by definition. This convenience plus our pricing and expanded assortment of Pro-specific products, along with referrals, is proving to be a very powerful combination in attracting Pros into the affiliate program and increasing the wallet share we're achieving from them.

Our next question comes from David Bellinger of Wolfe Research.

Great quarter here. First one, just on the southern markets being elevated following the Texas storms. Is that tailwind expected to continue into Q3? Are there any historical precedents you can reference in terms of how long these protracted sales gains last? And also, any comments on how much stronger the south was in Q2 compared to other parts of the country?

Yes. We are seeing continued high levels of demand from Texas and the South Central region into Q3 to date. There are various forecasts and speculation on how long this will last. Equipment manufacturers and parts manufacturers, in particular, are producing products as quickly as they can, and it's being absorbed by the markets. A lot of repair work done early on in the freeze was not complete due to parts or equipment shortages. So a lot of that work will likely go through now. But I believe there's a second wave where people will want to add in the new parts that may not have been available earlier.

I'd add that on the timing of when that occurred in February—it's not core pool season. As water temperatures heat up, that market is going to experience significant issues with regard to algae and other blooms. To Mike's point, we may have experienced a slowdown during the actual event as people focused on their safety, but then they return quickly to take care of their property, and it can last for quarters. We stated previously that it had an impact in Q2 and expect this to continue through Q3 and likely throughout the rest of the year.

Yes. David, I'll give you a couple of points on that. When we saw the situation unfold, we increased our service team personnel by 70% in Texas. We also transferred additional inventory into the area. We are still sitting on a backlog of service requests that is five times normal. So at this moment, we continue to see a lot of demand.

Got it. Thanks for all the detail there. And then just separately, regarding the outlook for gross margins in the back half of the year. How sustainable is the margin expansion that you observed in Q2, following another improvement coming off of Q1? How much of that can continue into the second half?

Yes. As we look at the back half of the year, and again, we don't provide specific guidance on gross margins, but we're confident that our margins are going to be higher from a growth rate perspective than our long-term growth algorithm, right? We talked about flat to a 25 basis point increase year-on-year basis. It will certainly be elevated from there. When considering the 567 basis points, fixed occupancy comes into play with our current fleet and footprint. So we did experience significant leverage as a result of a 50% increase plus on the top line, which yielded very strong leverage for the quarter. We certainly anticipate a moderation but overall, a very positive story as we continue to see leverage across most aspects of our business.

Our next question comes from Garik Shmois of Loop Capital.

Congratulations on the quarter. I wanted to follow up on the topic of alternatives to chlorine. You touched on this a little bit. But are you actually starting to see pool owners aggressively seeking out these alternatives? If so, would there be any impact—whether in sales or margin—just from a change in mix at all?

Yes, Garik, that's a fascinating question. We are observing an increase in sales of salt cells, around 30%. Combined sales of other alternative sanitizers, aside from salt cells, remain flat. We have not seen a significant shift so far, and we're prepared for it. The margin profiles are comparable. We can be very agnostic in what chemicals or methods our consumers choose to use for pool sanitation. But we have not yet noticed a significant shift.

Great. That's helpful. My follow-up question is just regarding the outlook for the back half. You've stated previously that about 45% of your full year sales happen in third quarter, about 35% in fourth quarter. Obviously, this year's dynamic is skewed given how strong the first half has been. I was just wondering if there’s anything from a high level to call out regarding the cadence in the second half of the year relative to your guidance.

Yes. It’s a good question, Garik. When you think about historical performance, it's been around 10% to 12% for both the first and second quarters, leading to about 20% for the first half. For this year, based on the guidance, we indicated that about 26% of total sales will occur in the first half of the year. That effectively means around 74% will come in the second half of the year. It skews more towards the front half of the year, given the growth rates. However, I don't have any reason to believe that the flow or trend should be different between the two quarters in the back half.

Our next question comes from Alex Maroccia of Berenberg.

My first question is on the Pro store rollout. What have you learned operationally with these first use store openings? And how can it improve some of the new greenfield or converted locations going forward?

Yes. We've learned a couple of things. One is the increased assortment is driving about one-third of the lift that we're observing. Extended store hours contribute close to another one-third. The final third seems to be from stores that now say “Leslie's Pros” and our Pro affiliate program, which is significantly raising awareness of our Pro program in the trading region.

Okay. Understood. And then secondly, I’m sure your team wasn’t anticipating a chlorine shortage during the AccuBlue Home rollout. Could more widespread rollout be impacted at all by pricing pressures or inventory constraints?

Well, we've indicated that we’re going to limit this initial version 1.0 in a pretty significant way. In some respects, it's like a broader beta test, and we will focus it on our loyalty customers. Regarding our modeling for the supply that AccuBlue Home customers will need, we will be in good shape. We believe we will be fine. Version 2.0, which we anticipate scaling to a more significant volume, is scheduled for the second half of next year. As far as we can tell at this moment, chlorine supply should be more normalized by then.

This concludes today's question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

I would like to thank everyone for joining us today. It was a good quarter, and we look forward to presenting Q3 and Q4 when we get to those points. Thank you very much.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.