Earnings Call Transcript - LESL Q2 2023

Operator, Operator

Greetings and welcome to the Leslie's, Inc. Q2 2023 Earnings Conference Call. It is now my pleasure to introduce your host, Caitlin Churchill of Investor Relations. Thank you, and you may proceed, ma'am.

Caitlin Churchill, Investor Relations

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 may refer to certain non-GAAP financial measures. A reconciliation between the 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. On the call today from Leslie’s, is Mike Egeck, Chief Executive Officer; and Steven Weddell, Chief Financial Officer. With that, I will turn the call over to Mike.

Mike Egeck, CEO

Thanks, Caitlin, and good afternoon, everyone. Thank you for joining us today. Please note that we have posted a Q2 2023 earnings deck to the Leslie's IR site and that we will be referring to certain pages in that deck during our call. I'd like to start by saying that Q2 came in at the low end of our expectations for the top and bottom line as the performance of our non-comp business only partially offset a return to more normalized pre-pandemic seasonal consumer purchase patterns as well as unexpected weather headwinds. With regard to consumer purchase patterns, the seasonal normalization was anticipated, but not to the degree we saw in the quarter. As a result, it had a more significant impact on comp sales and gross margin. Prior to the pandemic, Q2 historically contributed about 12% to 12.5% of our total year sales and the first half contributed about 25% of total year sales. However, last year, Q2 2022 represented an outsized contribution of 14.6% of total year sales as pandemic-driven supply chain disruptions and product shortages resulted in consumers buying earlier than normal. We estimate this 210 basis point shift in contribution increased last year's Q2 sales by about $33 million and created a corresponding 14% comp headwind in this year's Q2. With supply chain issues largely behind us and inventory for most products in the pool industry now readily available, we believe we are seeing a return to a more normalized pre-pandemic revenue contribution breakdown with 25% in the first half of the year and 75% in the second half. To be clear, we believe this change in seasonal consumer purchasing behavior is a timing shift and not a reduction in underlying demand for the year. With regard to weather, in Q2, we saw the continuation of challenging weather conditions across the West and Southwest, which includes the important California, Arizona and Nevada markets. As you will recall from our Q1 call, our weather reporting service calculated that weather was a 5% headwind to comps in the first quarter. At the time, we also shared that we were projecting more normalized weather for our fiscal Q2. That prediction proved to be incorrect and the impact of weather to our Q2 comps was negative 3% or $7 million in the quarter. We are encouraged that in Texas and Florida, where weather followed more normal seasonal patterns, we had double-digit positive comps. Moving to our Q2 results. Sales for the quarter decreased 7% to $213 million. First half sales of $408 million decreased 1%. Transactions for the quarter grew 1%, and average order value was down 8%. Our customer file was flat and average revenue per customer was down 7% in the quarter. By Consumer Group, PRO Pool grew 3%, Residential Hot Tub sales decreased 8% and Residential Pool sales decreased 9%. Comp sales decreased 14% for the quarter, resulting in a flat two-year stack comp and a three-year stack comp of 35%. The comp from the first half was minus 9%, inclusive of a 4% weather headwind. The two-year comp sales stack was 7% and the three-year stack was 38%. Gross profit for the quarter was $71 million, and gross margin rate was down 410 basis points. In total, 210 basis points of our gross margin decline was related to deleverage of fixed costs resulting from our comp sales decline. Adjusted EBITDA for the quarter was negative $8 million and adjusted diluted earnings per share were negative $0.14. As we noted at our Investor Day in November and during our Q1 earnings call, we expected Q2 and the first half to generate negative comps, reduced gross margin rates, and negative EBITDA. Given that our second quarter and first half results were in line with the low end of the range contemplated by our initial full-year guidance and that we expect that 75% of our annual performance is in front of us, our outlook for the full year remains unchanged. Moving to the chart on page nine of the deck. For the quarter, total comp sales were down $31 million or 14% due to weather and the shift back to normalized seasonal consumer purchase patterns. Sales for nondiscretionary products excluding Trichlor were down $3 million or 2% in the quarter. Trichlor sales were down $10 million or 29% in the quarter. As a reminder, Trichlor sales were comping against plus 96% in Q2 2022 as customers bought early in anticipation of in-season shortages. Trichlor retail pricing remained stable. Discretionary product sales were down $18 million or 38%. The decrease in Discretionary product sales was driven by hot tubs and above-ground pools as consumer confidence, weather, tax refunds, and interest rates all impacted demand for these high-ticket items. And non-comp sales contributed plus $16 million or 7% to the quarter driven by the performance of our programmatic M&A initiatives and new store builds as we continue to invest in our opportunity for increased location count. Page 10 has the same bridge for the first half. Total comp sales were down $39 million or 9% due to a 4% weather headwind and the normalization of seasonal purchase patterns that we believe we are seeing. Nondiscretionary product sales excluding Trichlor were down $8 million or 3%. Trichlor sales were down $9 million or 17%. Discretionary product sales were down $22 million or 25%. And non-comp sales contributed plus $34 million or 8% of sales in the half. Moving to the industry backdrop. Sales across the pool and hot tub industry were down in the quarter. As you can see on Page 11 of the deck, third-party aggregated credit card data indicates specialty pool retailers experienced a sales decline of 11% in the quarter. This was due to three primary drivers: first, as we discussed concerning our own results, weather was a significant negative factor year-over-year for key markets; second, we believe the specialty pool and retail industry is experiencing the same shift to normalized seasonal consumer purchase patterns that we are seeing in our business; third, consumers were less confident based on the challenging macroeconomic backdrop, which included higher interest rates, materially reduced tax refunds, and concerns around the stability of the banking system. Against this backdrop of lower demand, we grew market share again. The competitive advantages derived from our integrated system of physical and digital assets and our associates' strong execution of our diversified growth initiatives drove nearly 500 basis points of sales outperformance in the quarter. Turning now to the performance of our strategic growth initiatives. First, despite the macroeconomic and weather challenges in the quarter, our customer file was flat versus the prior year's quarter. Average revenue per customer was down 7% in the quarter driven primarily by decreases in big-ticket items, specifically hot tubs and above-ground pools. The number of loyalty members increased 14% over the prior year's quarter as consumers continue to react favorably to the benefits of our Pool Perks loyalty program. With regard to our PRO initiative, we ended the quarter with more than 3,300 PRO contracts in place and completed the conversion of 15 residential stores to our PRO format. In addition, we opened two new PRO locations in the quarter and remain on track to open the third. We are currently operating 98 PRO locations. PRO Consumer Group sales grew 3% in the quarter with comp sales down 10%. Our PRO comps were impacted by the same factors we discussed for our overall business. We also saw some softening in Trichlor wholesale prices from certain distributors. Given the 2023 Trichlor cost structure and the industry history of rational PRO pricing, we expect prices to firm up as we move into pool season. M&A was a strong contributor to the quarter, accounting for $14 million in non-comp sales. Year-to-date, we have closed on four acquisitions that added 10 locations, and we have another two acquisitions under LOI. Our deal pipeline is robust, and we plan to continue to accelerate this initiative. Regarding residential white space. In the quarter, we opened four new stores, and in April, we were pleased to announce the opening of our 1,000th store, an important and gratifying milestone for our business and team members. For AccuBlue Home, we have received our first production shipments of the Version 2.0 device and look forward to launching this initiative later this month. Now I'll turn it over to Steve to share more detail on our Q2 financial results.

Steve Weddell, CFO

Thank you, Mike, and good afternoon, everyone. For the second quarter, we reported sales of $213 million, a decrease of 7% or $15 million when compared to the second quarter of fiscal 2022. Our comparable sales decreased 14% or $31 million. Our comparable sales growth on a two-year stack basis was flat and on a three-year stack basis was positive 35%. Our noncomparable sales totaled $16 million in the second quarter of fiscal 2023, which was driven by eight completed acquisitions that added 27 stores as well as 11 net new store openings since the end of the first quarter of fiscal 2022. Our comparable sales decreased by 11% for Residential Pool, 10% for PRO pool, and 35% for Residential Hot Tub. On a two-year stack basis, we generated comparable sales growth of positive 2% for Residential Pool, positive 7% for PRO Pool, and negative 18% for Residential Hot Tub. Mike discussed the impact of unfavorable weather and more normalized seasonal customer purchasing patterns. With product more available across the industry this year, we believe consumers are more closely aligning their purchases with their need for product during the primary pool season, which runs from May to September. This behavior would be more consistent with seasonal purchasing patterns prior to supply chain challenges created by the pandemic. It's important to note that we believe this behavior impacts the timing of sales, not the absolute dollars expected to be generated this year. Gross profit decreased 17% or $14 million when compared to the second quarter of fiscal 2022, and gross margin rate was down 410 basis points to 33.4% from 37.5% in the prior year period. Page 12 of our supplemental deck illustrates our Q2 gross margin rate bridge in more detail. During the quarter, gross margins were impacted by the following: first, business mix lowered gross margins by 45 basis points, primarily related to M&A completed during the last 12 months; second, lower product margins due to higher input costs had a 60 basis point impact. During the quarter, promotional activity was stable and did not materially impact gross margins; third, incremental distribution expenses lowered gross margin by 75 basis points, of which 55 basis points was due to the decline in comparable sales. Similar to the first quarter, distribution expenses were elevated as we executed on our plans to receive and distribute more product to our store network earlier than last year. And finally, occupancy and other costs deleveraged by 230 basis points, of which 155 basis points was due to the decline in comparable sales. Now I'll turn to SG&A. SG&A increased 8% or $7 million when compared to the second quarter of fiscal 2022. We have been focused on maximizing efficiencies in the business and driving ongoing organizational optimization. As a result, in Q2, we reduced core SG&A costs by $4 million, which was offset by $5 million of noncomparable costs associated with acquired businesses, higher inflationary costs of $4 million primarily related to increased investments in our associates, and $2 million of costs associated with the organizational optimization. Adjusted EBITDA was negative $8 million for the second quarter of fiscal 2023. Adjusted net loss was $26 million in the second quarter of fiscal 2023 compared to an adjusted net loss of $3 million in the second quarter of fiscal 2022. Interest expense increased to $17 million during the quarter from $7 million in the second quarter of fiscal 2022, and our effective tax rate decreased to 25.7% compared to 33.0% in the second quarter of fiscal 2022. Adjusted diluted loss per share was $0.14 in the second quarter of fiscal 2023 compared to an adjusted net loss of $0.01 in the prior year. And basic and diluted weighted average shares outstanding were 184 million in the second quarter of fiscal 2023 compared to 183 million shares in the second quarter of fiscal 2022. Now I'll turn to year-to-date results. Total sales for the 26-week period decreased $5 million or 1% to $408 million from $413 million in the prior year. Our comparable sales decreased 9% or $39 million. Our first half comparable sales growth was positive 7% and positive 38% on a two- and three-year stack basis, respectively. Gross profit decreased 11% or $16 million to $136 million from $152 million in the first half of fiscal 2022. Gross margin rate decreased by 360 basis points to 33.5% from 37.0% in the prior year, of which 145 basis points was due to negative comparable sales growth in the first half of fiscal 2023. Adjusted EBITDA was negative $20 million for the first half of fiscal 2023. Adjusted net loss was $51 million in the first half of fiscal 2023 compared to an adjusted net loss of $14 million in the prior year. Interest expense increased to $31 million during the first half of 2023 from $14 million in the prior year. And adjusted diluted loss per share was $0.28 in the first half of fiscal 2023 compared to an adjusted net loss of $0.07 in the prior year. Moving to the balance sheet. We finished the second quarter of fiscal 2023 with cash of $9 million, and we had $172 million outstanding on our revolver compared to cash of $52 million and $45 million outstanding on our revolver at the end of the second quarter of fiscal 2022. The reduction in net cash was primarily due to investments in inventory and higher M&A activity during the past 12 months. We ended the second quarter of fiscal 2023 with $492 million of inventory, an increase of $147 million as compared to the second quarter of fiscal 2022. This is a lower increase in inventory in both dollars and percentage terms on a sequential and on a year-over-year basis. Similar to prior quarters, the increase in inventory was primarily related to chemicals, equipment, M&A, and inflation. Both the chemical and equipment product categories are nondiscretionary in nature and are not subject to technology or fashion risk. As previously stated, our first priority has been to put the company in a position to meet consumer demand for the upcoming pool season, and the decision whether to invest in inventory ahead of the season or as the season progresses was a question of timing. We continue to view our current inventory position as appropriate to deliver on our full-year plan and believe that inventory levels have peaked for fiscal 2023. At the end of the second quarter of fiscal 2023, we had $794 million outstanding on our secured term loan facility compared to $802 million at the end of Q2 last year. The applicable rate on our term loan for the second quarter was LIBOR plus 250 basis points, and our effective interest rate was 7.2% compared to an effective interest rate of 3.0% for the prior year quarter. In March 2023, we amended our ABL credit facility to replace the existing LIBOR-based rate with a term SOFR-based rate as an interest rate benchmark and to increase our revolving credit commitments to $250 million from $200 million to account for our growth over the last few years. Other material terms of the facility remain substantially unchanged, including the maturity date of August 2025. At the end of the second quarter, we had availability of $67 million on our revolver. We believe borrowings on our revolver have peaked, and we expect to fully repay all ABL borrowings during the third quarter. Before I wrap up on our year-to-date performance, I'd like to share a final preseason update on our supply chain readiness. In November, we discussed specific actions we were taking to improve our supply chain across three key areas: first, expanding capacity by implementing a two-shift seven-day-a-week model during pool season for our distribution centers and by adding additional third-party logistics providers to our network; second, stocking more inventory across our network; and third, diversifying our supplier base. Basing the efforts of our associates and in collaboration with our vendor partners, we've significantly improved our preparedness for pool season by executing these initiatives, and our team is focused on and well prepared to meet consumer demand across our entire network. Before I turn to our outlook, I want to put our first-half performance in context and speak to the natural seasonality within our business. Our primary selling season occurs during our fiscal third and fourth quarters, which span April through September. We invest in our business throughout the year, including in operating expenses, working capital, and capital expenditures related to our initiatives. While investments made during the first half of the fiscal year impact reported earnings and cash flow, they are critical for driving performance and share gains during our primary selling season in the third and fourth quarter. Based on performance for the first half of the year, which is in line with historical seasonal trends prior to the pandemic, we are reaffirming our outlook. And while we are tracking within the dollar ranges on the line items included in our outlook, the early read from first-half gross margins suggest we could experience some incremental pressure on the range of gross margin rates for the year. With 75% of our annual sales and all of our profit ahead of us, our teams remain steadfastly focused on superior execution for pool season 2023. We are excited to kick off pool season, and we're grateful for our team who continues to tirelessly execute against our initiatives and focus on serving our customers. And with that, I'll hand it back over to Mike.

Mike Egeck, CEO

Thank you, Steve. The pool and spa industry has proven over time to be one of the most durable and advantaged consumer products categories. And the fundamental drivers of the aftermarket pool business remain intact. Pool care is complex. Pools require routine ongoing needs-based maintenance, and the installed base of pools in the U.S. has grown every year for 51 years and continues to grow. Also importantly, there are secular tailwinds that will continue to drive industry growth. Consumers are investing in their homes and backyards, moving to the sunbelt, pursuing outdoor lifestyles, working from home, increasing attention to safety and standardization, and adopting new technologies. Despite the fundamental long-term advantages of our industry and the ongoing secular tailwinds, Q2 and the first half performance for Leslie's and the industry were influenced by unfavorable weather and the greater-than-anticipated normalization of consumer purchase behavior, the latter which we believe is simply a timing factor. These dynamics notwithstanding, we are encouraged that applying a normalized pre-pandemic first half, second half contribution split to our first half results indicates our full-year sales and earnings guidance is still appropriate. We feel good about our first half execution and the continued market share gains we have delivered in the face of an unpredictable backdrop for our industry. Our results are a testament to our team's continuing to perform at a high level, the competitive advantages of our integrated ecosystem, and to the ability of our diversified strategic initiatives to drive market share gains even against a very dynamic backdrop. Importantly, we feel very good about the investments we have made in preparation for the 2023 pool season. Specifically, investments in inventory. After three years of intermittent out of stocks, our teams are thrilled to have their stores full and to know that we have replenishment stock ready to go. Investments in our supply chain, new leadership, new talent, new processes, such as two shifts, seven-day-a-week operation at our distribution centers. New infrastructure, a third-party logistics partner for the Northeast region and additional chemical warehousing in Texas. And investments in our marketing initiatives that have given us more customers, more PRO partners, and more loyalty members to serve. With these investments and the return to more normalized industry conditions, our store and digital teams are confident about winning this pool season, and the leadership team and I share that confidence. With that, I will hand it back to the operator for Q&A.

Operator, Operator

Thank you. The first question comes from Steven Forbes from Guggenheim Partners. Please go ahead with your question, Steven.

Steven Forbes, Analyst

Hi, good afternoon. Mike, I wanted to start with customer file trends. So curious if you could sort of talk about the file performance during the quarter because I think flat was better than the internal expectation. Maybe confirm that. And then, Steve, if you can, just comment on what gives you confidence, right, to reiterate the sales guidance? Because I also believe the expectation was file growth returning in the back half of the year. So just any comments on file growth and the trajectory of it.

Mike Egeck, CEO

Yes. Sure, Steven. Thanks for the question. Yes, we're pleased with the customer file being flat for the quarter. Weather was a headwind, but not as significant a headwind as was the shift in consumer purchase patterns. So to be flat, we feel good about. I think what we're seeing is that people continue to come into the stores and onto the sites; traffic is down slightly but not anything significant. What we're seeing instead is smaller purchases, and you can see that reflected in the average order value. The bigger question, and I think the question for the quarter is your second one on why do we feel confident in maintaining our outlook. And I'll frame it up this way: we expected some return to a more normalized purchase behavior once the supply chain issues were handled in the industry. And for sure, pool owners have said pandemic supply chain issues are over. They see that the stores have plenty of inventory, online has plenty of inventory from us and from our competitors. So given that return, I think the best proxy to how we're thinking about our year and what gives us confidence in delivering it is to go back and look at 2019, the last year pre-pandemic, it's public information in our S1. And what you'll see there is the first half, second half split on sales 25% to 75%. You'll see our first half, second half split to EBITDA of minus seven and 107. If you apply those splits to our first half results, you'll see that we're solidly in the range of our outlook. Steve, I don't know if you want to add anything more to that explanation.

Steve Weddell, CFO

Yes, that's well said. I think I'll put a finer point on it. When you think about the shift that we saw in the second quarter last year, it was about 14.6% of the year, and you compare that to pre-pandemic, probably closer to 12% to 12.5%. So we look at it being about a 200 basis point shift on a $1.6 billion rounded number for the year that gets you about $33 million. So those are purchases we expect to get. But as Mike said, those purchases are likely going to occur closer to pool season. What we've seen year-to-date is folks buying some of the smaller sizes as they buy to their need.

Steven Forbes, Analyst

And then just a quick follow-up. Steve, the caveat on gross margin potential for some incremental pressure. Can you provide some additional context on what sort of pressure points that would be? It seems like it may be occupancy and merchandise margin, but any color on what you're trying to call out there.

Steve Weddell, CFO

Sure. Thanks for the question. So fairly consistent with how we talked about the second half back in February as we look at and go through all the four main components we always discuss. Business mix, we expect that to continue to moderate as we get into the second half given the acquisitions become a much smaller part of the overall business in the second half. DC expense in the second half of last year was elevated due to the challenges we had in the New Jersey distribution center and the vendor delivery cadence overall. This year, we brought in a lot of that inventory early in position across the network. So you’re not going to have the same cadence of spend from a distribution perspective. Occupancy normalizes as well as we get into the back half of the year, larger sales, improved comps will help that moderate. And the final piece is really around product rate. And this is the area that we highlighted as potentially driving some of the exposure. Our expectation is that we'll continue to see some pressure related to the industry cost increases based on current retail pricing levels. Expectation is that we will see some retail price increases prior to the season, but we've not seen it occur, and so it's too early to update the formal guide, given we're not at the Memorial Day yet, and we haven't kicked off the season, but that's where we would see potential pressure in the back half of the year.

Steven Forbes, Analyst

Thank you.

Operator, Operator

Thank you. The next question comes from Simeon Gutman from Morgan Stanley. Please proceed with your question, Simon.

Hannah Pittock, Analyst

Hi, thanks for taking the question. This is Hannah Pittock on for Simeon. If you had to kind of quantify the relative impact of unfavorable weather versus the shift back to a more historically normal seasonal cadence independent of weather, how would you parse those out? And if it's primarily one or the other, how does that impact your expectations to recapture those sales? And if there's any historical context of a similar kind of weather push, should we think about that demand getting pushed into next quarter versus poor weather leading to some destruction of demand?

Mike Egeck, CEO

Thank you for the question, Hannah. The best way to look at it is in two parts. For the first half, the weather had a negative impact calculated at 4% due to weather-related factors, based on our weather service provider, Planalytics. The change in consumer purchasing behavior in the first half created an additional 8% negative impact. While we had anticipated a return to more typical purchasing behavior during the quarter, it seems that this shift has mostly occurred later than expected, which we believe is fine, and we do expect to see recovery in the second half. Additionally, the weather effects to date should also be recoverable, especially since early season conditions have pushed back events like pool openings. Pool openings in the first half were down 36% compared to the previous year. However, our pool opening schedule, which we have insight into due to having forward orders, is up 48% in the second half. This is a positive indicator of that shift, and we are confident that we will see an increase in our pool opening business for the year. If poor weather persists into the pool season, we may risk losing some pool days. Historically, a similar situation occurred in 2018 and 2019, and we expect to recover most of this in the second half.

Hannah Pittock, Analyst

Understood. That's helpful. And maybe as a quick follow-up. You mentioned some softness in those high-ticket durables, which we're kind of seeing across a lot of sectors. Would you think that's being driven by consumer weakness, maybe high inflation and that demand is maybe being pushed out? Or is this kind of a continued digestion of demand that was pulled forward during kind of peak pandemic time?

Mike Egeck, CEO

Yes. I think our comp for hot tubs and above-ground pools in the first half last year was plus 46%, which is outside of the seasonal norm. The first half this year, we're down 11%. So it didn't give all of it back but gave some of it back. And what's driving the decreases in the half for a big-ticket item like this, a good portion of our hot tubs, which have an average price point of over $8,000 are actually financed with interest rates where they are, we have seen that to be a headwind to the business.

Hannah Pittock, Analyst

Understood. Thank you.

Operator, Operator

Thank you. The next question comes from Dana Telsey from Telsey Advisory Group. Please proceed with your question.

Dana Telsey, Analyst

You may proceed with your question. If your line is muted, please unmute your line, so that we can hear your question. Unfortunately, we cannot hear anything from Dana. We will move on to the next question, which comes from Garik Shmois from Loop Capital Markets. Please proceed with your question, Garik.

Garik Shmois, Analyst

Hi, thank you for taking my question. I wanted to ask about some of the stronger markets you mentioned, Texas and Florida. If I heard you correctly, those markets were not affected by weather and you had double-digit comparisons there. I was curious about what was driving the growth in these stronger markets and if you could share any insights regarding the overall underlying health of the business.

Mike Egeck, CEO

Yes, Garik, great question. Like I said in our prepared remarks, we're very encouraged by what we saw in Texas and in Florida, where weather was what I would call normal. Those are significant markets for us, and we saw sales in those markets given some of our M&A actually up in the low teens on a comp basis. They were double digit. And I think what it's telling us is and what we're seeing as the season progresses is where we get normalized weather, we're seeing nice reactions from our consumers and nice healthy growth.

Garik Shmois, Analyst

Could you provide an update on how April has progressed and share any recent data points that might support your sales outlook?

Mike Egeck, CEO

Yes. I would say April is showing similar trends to Florida and Texas in the second quarter. In regions with favorable weather, the results have been positive. However, I want to emphasize that the weather in the first three weeks of April was not ideal. It improved in the last week, leading to some recoveries. California faced significant challenges with a decline of 21% in the second quarter, but we noticed some improvement in April. On the other hand, the weather in Texas became more difficult due to storms. Overall, we conclude that while weather has certainly posed challenges, areas with good weather have yielded favorable results.

Operator, Operator

Thank you. The next question comes from Jonathan Matuszewski from Jefferies. Please proceed with your question, Jonathan.

Jonathan Matuszewski, Analyst

Hey, good afternoon, thanks for taking my question. First one was on inventory just related to the end of quarter balance there. It sounds like PRO customers seem still resolute in believing Trichlor prices will come down? Presumably, they've been maybe relying more on safety stock until that happens. Do you have a sense of how much safety stock your PRO customers have to run through before they need to purchase in greater quantities? And I guess, a similar question for the homeowner, although I presume safety stock is less of a relevant concept here. But just trying to get a sense of kind of it sounds like this is going to be the peak for inventory and you're going to kind of focus on working down that inventory and convert to cash flow. So just trying to get some sense around that dynamic. Thanks.

Mike Egeck, CEO

Yes. Steve, why don't you take inventory, then I'll address the PRO Trichlor situation.

Steve Weddell, CFO

Sure. Inventory reached $492 million for the quarter, an increase of $147 million compared to last year. This represents a smaller rise than what we experienced in the first quarter. Analyzing the inventory increases in the latter half of last year, we saw positive growth in both Q3 and Q4, which is quite unusual. In my tenure here, we have never increased inventory in the latter half of the year. Due to supply chain challenges and shortages, we accepted that inventory and began building up for the season. We are confident in our position as we enter the season, especially when considering the year-on-year change in Q2, mainly regarding chemicals. Reflecting on the past few quarters, much of our dialogue has revolved around the inventory growth related to equipment. As we move into the season, which sees the most chemical usage, we are pleased with our current inventory levels. The primary contributors to the inventory increase remain in the chemical and equipment categories, both of which we have identified as essential. Therefore, we are satisfied with our current status. As I mentioned earlier, I believe we have reached peak inventory and have a chance to significantly reduce our inventory levels by year-end and beyond.

Mike Egeck, CEO

And Jonathan, for the second part of your question, the cost structure for Trichlor in 2023 is definitely up. There is, I would say, some probable carryover inventory from the prior year, very hard for us to tell how much that would be. But I think dynamically we see is with higher costs, we actually expect PRO Trichlor pricing to go up as we get into the season. The PROs themselves are expecting Trichlor prices to go down. So we have a little bit of a standoff going, I think, in the industry there. It will work itself out as we get into season. For right now, it is meeting results, I would say.

Jonathan Matuszewski, Analyst

Got you. That's helpful. And I guess just a quick follow-up on that last point. The midpoint of your guide assumes Trichlor pricing down, I think, around 12.5%, looks like a 50-pound bucket of three-inch tabs is still sitting around $250 today, so not far off from all-time peak prices. So I guess, should we anticipate a revision to guidance maybe going into next quarter, just given expectations for Trichlor deflation across all three scenarios?

Mike Egeck, CEO

Yes. The answer, Jonathan, is we're really not going to have great insight into pricing until we get into Memorial Day weekend. That's true of every season, I'd say, particularly true of this season. However, year-to-date, we've seen very stable pricing in Trichlor in the residential markets. We haven't seen any reason for that not to continue. As I said, in the PRO markets, we would actually expect now Trichlor to potentially go up some. It hasn't. We'll have to wait to see how the season plays out. Right now, we're feeling very positive about the direction of Trichlor pricing, both residential and we believe PRO as we get into the season.

Jonathan Matuszewski, Analyst

That's helpful. Best of luck. Thank you.

Operator, Operator

Thank you. The next question comes from Kate McShane from Goldman Sachs. Please proceed with your question, Kate.

Kate McShane, Analyst

Hi, good afternoon, thanks for taking our question. We wanted to ask a question around market share gains. I think you had mentioned in the prepared comments you had gained around 500 basis points of market share during the quarter. We wondered if you could help us understand what the assumption is in your guidance for market share gains, if you've seen any kind of acceleration, and is this a like-for-like comparison, meaning you're not incorporating M&A when accounting for the market share gain?

Mike Egeck, CEO

Yes, thanks, Kate. This is Mike. I appreciate the question. I'll address the second part first. We consider mergers and acquisitions as part of our market share growth. Since our IPO, we've been clear that programmatic M&A is a key part of our growth strategy, and we view it as a means of increasing market share, so it's reflected in our numbers. Just to clarify, the 500 basis points indicates our sales outperformance relative to the industry; it doesn't precisely equate to market share gains, but it definitely indicates that we are gaining share. We assess this based on aggregated credit card data that we receive from the industry, particularly for specialty pool retailers. I believe that answers your question regarding our perspective on sales and sales outperformance leading to market share gains, as well as the role of M&A. In terms of our outlook, we do not inherently factor in market share gains, but we clearly aim to grow faster than the market each year.

Operator, Operator

Thank you. The next question comes from Peter Keith from Piper Sandler. Please proceed with your question, Peter.

Peter Keith, Analyst

Hi, thanks, good afternoon, everyone. I wanted to ask about inflation. So obviously, there's always a lot of focus on Trichlor, but I guess I was curious around other pockets of your business, other areas of chemicals or equipment if you're seeing inflation? And maybe, Steve, it sounds like you are and that's contributing to what could be gross margin pressure. So just wondering if you could frame up some of those other categories for us and what you're seeing with the pricing and the magnitude?

Mike Egeck, CEO

Yes. Peter, maybe I'll start on just overall inflation, and we can talk about inflation on the cost side, which Steve mentioned around margins. We had put in our outlook about 5% inflation over the course of the year. We expect it to come out a little higher than that and moderate during the year. That's what we're seeing. In the first half, we had inflation, I would say, in the high single digits. It's coming down. And we do expect our 5% inflation factor in our outlook to still be a reasonable assumption for the full year.

Steve Weddell, CFO

Yes. From a product category perspective, this year is mainly focused on chemicals. There were some typical price increases in equipment, but the significant price changes were primarily related to Trichlor and Cal Hypo. On the cost side, we have observed consistent trends, including increases in labor and payroll, as well as higher digital marketing costs. Looking back over the last 12 months, it's important to remember that most of the inflation-related costs below the line for SG&A began rising in the third and fourth quarters. Hence, in the first half of the year, we are comparing against lower figures. While there was some increased inflation in the second quarter in terms of SG&A, I anticipate that it will ease as we move into the second half of the year.

Peter Keith, Analyst

Okay, that's helpful. I wanted to go back to inventory. Following up on what Jonathan was asking, supply chains have normalized, and you've kept elevated inventory to mitigate supply chain risks. Can you provide insight on where you expect inventory to be by the end of the year and even further out? How should we think about targeted inventory levels in terms of inventory returns or days of inventory?

Steve Weddell, CFO

Yes, that's a great question. I'll address that, and then Mike can chime in as well. Currently, our inventory position is elevated compared to pre-pandemic levels and is quite intentional. Typically, we would buy in early June to ensure we have enough supply for the season and then focus on replenishment. This year, we've purchased inventory through June and into early July, but we still need to replenish significantly to cover the rest of the year. With $492 million in inventory against over $900 million in total goods cost for the year, we have ample procurement capacity. We've brought in inventory earlier to better control our replenishment cycle, especially at the start of the season where we faced issues last year. Moving forward, we have implemented a new inventory system and merchandise financial planning system, which we expect to provide substantial benefits for procurement, purchasing, and analytics down to the SKU level and gross margin return on investment. Today, we believe we can reduce our inventory significantly compared to last year. The purchasing cadence this year will be markedly different than it was last year, especially since we increased inventory in the second half of last year, which is unusual for our typical seasonal strategy. The team is closely monitoring inventory on a weekly and monthly basis and is focused on recovering our investments now that the season is approaching.

Mike Egeck, CEO

No, Peter, I didn't have anything to add. So thank you.

Peter Keith, Analyst

Okay, thank you. Appreciate it.

Operator, Operator

Thank you. The next question comes from Andrew Carter from Stifel. Please proceed with your question, Andrew.

Andrew Carter, Analyst

Thanks. Just wanted to ask about the product margin. I know that it's early in the season, but if I'm not mistaken, product margin actually deteriorated from Q1 to Q2. Was that mix driven or a greater imbalance between price and inflation? And I know that you've stated Trichlor has been steady. But the other side of it is there's a lot of inflation on other chemicals. I know your plans are to get pricing in that, but you're also very market by market. So are there a lot of markets out there where you're just not seeing the pricing and not taking it? Are there select, anything you can help us with, with that kind of key point in your gross margin guidance for the year?

Steve Weddell, CFO

Sequentially, Q1 versus Q2, it is related to increased product costs. We saw some product cost increases in late Q1, early part of Q2. And so that absolutely is having an impact on the quarter-over-quarter impact for the year or for the first half. We would expect that trend to continue as we get into Q3 and Q4 as well, which is why we've talked about some of the potential pressure in the back half of the year. As you think about pricing across the country and as you talk about from a market-by-market perspective, that's generally more from a PRO perspective, from an overall company perspective on the residential side. Based on the omnichannel approach, we've got more consistent pricing. Pricing will deviate when we go on promotion, but it's typically more consistent across the country. We've been very proactive, raising prices, testing into prices. One of the comments we made back in November was that our expectation was that prices would increase. But if they don't, we've got the ability to compete, and that's what we're doing. So taking a very tactical approach as you say, market by market, to ensure that we are price leaders on the way up and not on the way down, but making sure that we remain competitive in the markets in which we operate.

Andrew Carter, Analyst

Thank you. Yes, I'll pass it on.

Operator, Operator

Thank you. The next question comes from David Bellinger from MKM ROTH. Please proceed with your question, David.

David Bellinger, Analyst

Sure, the question. Going back to the full-year guidance, you mentioned the normalization back to 2020 levels, expectations for 75% of sales still left heavier this year. If that's the case, the full-year revenues could be tracking towards the upper end of your guidance range. And I know that's a sensitive calculation to make oversimplifying, but why could that be the case given the slower first half and just some of the weather comments for April? It seems like trends improved somewhat to date, but not a clear acceleration into Q3. Can you just help us square all that away and what it means in terms of the guide for the balance of the year?

Mike Egeck, CEO

Yes. David, the first thing I'd like to clarify is I was quoting 2019. The last of the pre-pandemic years, if you would, in the last year that was unlike the last three really impacted in terms of purchase timing due to the supply chain challenges and product shortages. I mean '21 and '22, consumers were very concerned about scarcity of product during pool season, as were we. We actually sent a letter to our loyalty file, saying we couldn't guarantee product availability in the second half and encouraged them to purchase early prior to the pool season. And whether on their own or because of that letter, we saw a lot of that. That was that 210 to 260 basis points increase in last year's Q2 in terms of the total year's contribution. When we're thinking about this year, we really need to go back to 2019 products readily available now, and pool owners are buying to need. That is historically, we have multi-year decades of a very similar contribution pattern on sales of 25-75. Let me say, last year was the first year in Q1 that the company had positive EBITDA, that's also not the norm. The first half historically has been a minus 7% range, and the second half has been plus 107. So as I said to the first question of this afternoon, if you apply our first half results to those ratios for a normalized pre-pandemic year, yes, that does give us quite a bit of confidence in our current outlook despite some of the challenges we're seeing early in the season with regard to weather.

David Bellinger, Analyst

That's one. Thank you very much.

Operator, Operator

At this time, there are no further questions. I'd like to turn the call back to Mr. Mike Egeck for closing remarks. Thank you, sir.

Mike Egeck, CEO

Yes. Thank you, Claudia, and thank you all for joining us. We look forward to getting back in front of you in August. We can report on the pool season, which will be in full swing at that time. Thank you very much.

Operator, Operator

Thank you very much, sir. Ladies and gentlemen, that does conclude today's teleconference. Thank you very much for joining us. You may now disconnect your lines.