LESLQ 10-Q
Leslie's, Inc. (LESLQ)
9184
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO |
Commission File Number:
(Exact Name of Registrant as Specified in its Charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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The |
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of August 2, 2024, the Registrant had
Table of Contents
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Page |
PART I |
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Item 1. |
2 |
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2 |
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3 |
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4 |
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5 |
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Notes to the Unaudited Condensed Consolidated Financial Statements |
6 |
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
15 |
Item 3. |
24 |
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Item 4. |
24 |
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PART II |
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Item 1. |
26 |
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Item 1A. |
26 |
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Item 2. |
26 |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
27 |
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28 |
i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations or financial condition, business strategy, legal proceedings, competitive advantages, market size, growth opportunities, industry expectations, and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” or “would,” or the negative of these words or other similar terms or expressions. Our actual results or outcomes could differ materially from those indicated in these forward-looking statements for a variety of reasons, including, among others:
You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, and operating results. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2023 and in our other filings with the SEC. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. The results, events, and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results or outcomes could differ materially from those described in the forward-looking statements.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q, and, while we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.
The forward-looking statements made in this Quarterly Report on Form 10-Q are based on events or circumstances as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information, changed expectations, the occurrence of unanticipated events or otherwise, except as required by law. We may not actually achieve the plans, intentions, outcomes, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments.
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
LESLIE’S, INC.
CONDENSED Consolidated Balance Sheets
(Amounts in Thousands, Except Share and Per Share Amounts)
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June 29, 2024 |
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September 30, 2023 |
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July 1, 2023 |
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(Unaudited) |
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(Audited) |
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(Unaudited) |
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Assets |
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Current assets |
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Cash and cash equivalents |
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$ |
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$ |
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$ |
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Accounts and other receivables, net |
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Inventories |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Operating lease right-of-use assets |
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Goodwill and other intangibles, net |
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Deferred tax assets |
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Other assets |
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Total assets |
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$ |
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$ |
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$ |
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Liabilities and stockholders’ deficit |
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Current liabilities |
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Accounts payable |
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$ |
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$ |
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$ |
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Accrued expenses and other current liabilities |
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Operating lease liabilities |
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Income taxes payable |
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Current portion of long-term debt |
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Total current liabilities |
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Operating lease liabilities, noncurrent |
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Revolving Credit Facility |
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Long-term debt, net |
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Other long-term liabilities |
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Total liabilities |
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Stockholders’ deficit |
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Common stock, $ |
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Additional paid in capital |
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Retained deficit |
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( |
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( |
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( |
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Total stockholders’ deficit |
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( |
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( |
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( |
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Total liabilities and stockholders’ deficit |
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$ |
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$ |
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$ |
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See accompanying notes which are an integral part of these condensed consolidated financial statements.
2
LESLIE’S, INC.
CONDENSED Consolidated Statements of Operations
(Amounts in Thousands, Except Per Share Amounts)
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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June 29, 2024 |
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July 1, 2023 |
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June 29, 2024 |
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July 1, 2023 |
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Sales |
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$ |
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$ |
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$ |
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$ |
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Cost of merchandise and services sold |
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Gross profit |
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Selling, general and administrative expenses |
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Operating income |
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Other expense: |
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Interest expense |
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Total other expense |
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Income (loss) before taxes |
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( |
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Income tax expense (benefit) |
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( |
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Net income (loss) |
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$ |
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$ |
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$ |
( |
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$ |
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Earnings per share: |
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Basic |
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$ |
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$ |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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$ |
( |
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$ |
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Weighted average shares outstanding: |
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Basic |
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Diluted |
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See accompanying notes which are an integral part of these condensed consolidated financial statements.
3
LESLIE’S, INC.
CONDENSED Consolidated Statements of Stockholders’ Deficit
(Amounts in Thousands)
(Unaudited)
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Common Stock |
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Additional |
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Total |
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Shares |
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Amount |
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Paid in Capital |
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Retained Deficit |
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Stockholders’ Deficit |
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Balance, April 1, 2023 |
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$ |
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$ |
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$ |
( |
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$ |
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Issuance of common stock under the Plan |
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— |
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— |
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— |
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— |
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Equity-based compensation |
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— |
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Restricted stock units surrendered in lieu of withholding taxes |
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( |
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( |
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( |
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Net income |
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— |
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Balance, July 1, 2023 |
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$ |
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$ |
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$ |
( |
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$ |
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Balance, March 31, 2024 |
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$ |
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$ |
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$ |
( |
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Issuance of common stock under the Plan |
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— |
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— |
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— |
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— |
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Equity-based compensation |
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— |
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Restricted stock units surrendered in lieu of withholding taxes |
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( |
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( |
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( |
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Net income |
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— |
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Balance, June 29, 2024 |
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$ |
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$ |
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$ |
( |
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$ |
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Common Stock |
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Additional |
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Total |
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Shares |
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Amount |
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Paid in Capital |
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Retained Deficit |
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Stockholders’ Deficit |
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Balance, October 1, 2022 |
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$ |
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$ |
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$ |
( |
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$ |
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Issuance of common stock under the Plan |
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Equity-based compensation |
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— |
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Restricted stock units surrendered in lieu of withholding taxes |
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( |
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( |
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( |
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Net income |
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— |
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Balance, July 1, 2023 |
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$ |
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$ |
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$ |
( |
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$ |
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Balance, September 30, 2023 |
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$ |
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$ |
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$ |
( |
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$ |
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Issuance of common stock under the Plan |
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Equity-based compensation |
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— |
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Restricted stock units surrendered in lieu of withholding taxes |
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( |
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( |
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( |
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Net loss |
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— |
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( |
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( |
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Balance, June 29, 2024 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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See accompanying notes which are an integral part of these condensed consolidated financial statements.
4
LESLIE’S, INC.
CONDENSED Consolidated Statements of Cash Flows
(Amounts in Thousands)
(Unaudited)
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Nine Months Ended |
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June 29, 2024 |
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July 1, 2023 |
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Operating Activities |
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Net income (loss) |
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$ |
( |
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$ |
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Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
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Equity-based compensation |
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Amortization of deferred financing costs and debt discounts |
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Provision for doubtful accounts |
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Deferred income taxes |
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( |
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Loss on asset dispositions |
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Changes in operating assets and liabilities: |
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Accounts and other receivables |
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( |
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( |
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Inventories |
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( |
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Prepaid expenses and other current assets |
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( |
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( |
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Other assets |
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( |
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Accounts payable |
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( |
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Accrued expenses and other current liabilities |
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( |
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Income taxes payable |
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( |
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( |
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Operating lease assets and liabilities, net |
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Net cash provided by (used in) operating activities |
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( |
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Investing Activities |
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Purchases of property and equipment |
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( |
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( |
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Business acquisitions, net of cash acquired |
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( |
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Proceeds from asset dispositions |
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Net cash used in investing activities |
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( |
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( |
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Financing Activities |
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Borrowings on Revolving Credit Facility |
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Payments on Revolving Credit Facility |
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( |
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( |
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Repayment of long-term debt |
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( |
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( |
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Payment of deferred financing costs |
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( |
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( |
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Payments of employee tax withholdings related to restricted stock vesting |
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( |
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( |
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Net cash (used in) provided by financing activities |
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( |
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Net increase (decrease) in cash and cash equivalents |
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( |
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Cash and cash equivalents, beginning of period |
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Cash and cash equivalents, end of period |
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$ |
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$ |
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Supplemental Information: |
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Cash paid for interest |
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$ |
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$ |
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Cash paid for income taxes, net of refunds received |
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See accompanying notes which are an integral part of these condensed consolidated financial statements.
5
LESLIE’S, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1—Business and Operations
Note 2—Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
We prepared the accompanying interim condensed consolidated financial statements following United States generally accepted accounting principles (“GAAP”). The financial statements include all normal and recurring adjustments that are necessary for a fair presentation of our financial position and operating results. The interim condensed consolidated financial statements include the accounts of Leslie’s, Inc. and our subsidiaries. All significant intercompany accounts and transactions have been eliminated. These interim condensed consolidated financial statements and the related notes should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended September 30, 2023.
Reclassification
Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on our results of operations.
Fiscal Periods
Use of Estimates
Management is required to make certain estimates and assumptions during the preparation of the condensed consolidated financial statements in accordance with GAAP. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the condensed consolidated financial statements. They also impact the reported amount of net income (loss) during any period. Actual results could differ from those estimates.
Significant estimates underlying the accompanying condensed consolidated financial statements include inventory reserves, lease assumptions, vendor rebate programs, our loyalty program, the determination of income taxes payable and deferred income taxes, sales returns reserve, self-insurance liabilities, the recoverability of intangible assets and goodwill, fair value of assets acquired in a business combination, and contingent consideration related to business combinations.
Seasonality
Our business is highly seasonal. Sales and earnings are highest during our third and fourth fiscal quarters, being April through September, which represent the peak months of swimming pool use. Sales are substantially lower during our first and second fiscal quarters.
Summary of Other Significant Accounting Policies
There have been no changes to our Significant Accounting Policies since our Annual Report on Form 10-K for the year ended September 30, 2023. For more information regarding our Significant Accounting Policies and Estimates, see Note 2—Summary of Significant Accounting Policies included in our Annual Report on Form 10-K for the year ended September 30, 2023.
6
Recent Accounting Pronouncements
In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which includes amendments that further enhance income tax disclosures, primarily through standardization and disaggregation of rate reconciliation categories and income taxes paid by jurisdiction. This update is effective for annual periods beginning after December 15, 2024, though early adoption is permitted. We are currently evaluating the ASU to determine its impact on our disclosures; however, we do not expect there to be a material impact.
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which require an entity to disclose the title and position of the Chief Operating Decision Maker (“CODM”) and the significant segment expenses that are regularly provided to the CODM and included within each reported measure of segment profit or loss. This update is effective for annual periods beginning after December 15, 2023 and interim disclosures beginning after December 15, 2024, though early adoption is permitted. This update is effective retrospectively upon adoption to all periods presented in the financial statements. We are currently evaluating the ASU to determine its impact on our disclosures; however, we do not expect there to be a material impact.
Note 3 —Goodwill and Other Intangibles, Net
Goodwill
The following table details the changes in goodwill (in thousands):
|
|
June 29, 2024 |
|
|
September 30, 2023 |
|
|
July 1, 2023 |
|
|||
Balance at beginning of the period |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Acquisitions, net of measurement period adjustments |
|
|
|
|
|
|
|
|
|
|||
Balance at the end of the period |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Other Intangible Assets
Other intangible assets consisted of the following as of June 29, 2024 (in thousands, except weighted average remaining useful life):
|
|
Weighted |
|
|
Gross |
|
|
Accumulated |
|
|
Net |
|
||||
Trade name and trademarks (finite life) |
|
|
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Trade name and trademarks (indefinite life) |
|
|
|
|
|
|
|
— |
|
|
|
|
||||
Non-compete agreements |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Consumer relationships |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Other intangibles |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Total |
|
|
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Other intangible assets consisted of the following as of September 30, 2023 (in thousands, except weighted average remaining useful life):
|
|
Weighted |
|
|
Gross |
|
|
Accumulated |
|
|
Net |
|
||||
Trade name and trademarks (finite life) |
|
|
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Trade name and trademarks (indefinite life) |
|
|
|
|
|
|
|
— |
|
|
|
|
||||
Non-compete agreements |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Consumer relationships |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Other intangibles |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Total |
|
|
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
7
Other intangible assets consisted of the following as of July 1, 2023 (in thousands, except weighted average remaining useful life):
|
|
Weighted |
|
|
Gross |
|
|
Accumulated |
|
|
Net |
|
||||
Trade name and trademarks (finite life) |
|
|
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Trade name and trademarks (indefinite life) |
|
|
|
|
|
|
|
— |
|
|
|
|
||||
Non-compete agreements |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Consumer relationships |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Other intangibles |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Total |
|
|
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Amortization expense was $
The following table summarizes the estimated future amortization expense related to finite-lived intangible assets on our condensed consolidated balance sheet as of June 29, 2024 (in thousands):
|
|
Amount |
|
|
Remainder of fiscal 2024 |
|
$ |
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
2028 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
|
Note 4—Accounts and Other Receivables, Net
Accounts and other receivables, net consisted of the following (in thousands):
|
|
June 29, 2024 |
|
|
September 30, 2023 |
|
|
July 1, 2023 |
|
|||
Vendor and other rebates receivable |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Customer receivables |
|
|
|
|
|
|
|
|
|
|||
Other receivables |
|
|
|
|
|
|
|
|
|
|||
Allowance for doubtful accounts |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Note 5—Inventories
Inventories consisted of the following (in thousands):
|
|
June 29, 2024 |
|
|
September 30, 2023 |
|
|
July 1, 2023 |
|
|||
Raw materials |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Finished goods |
|
|
|
|
|
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|||
8
Note 6—Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
|
|
June 29, 2024 |
|
|
September 30, 2023 |
|
|
July 1, 2023 |
|
|||
Prepaid insurance |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Prepaid occupancy costs |
|
|
|
|
|
|
|
|
|
|||
Prepaid sales tax |
|
|
|
|
|
|
|
|
|
|||
Prepaid maintenance |
|
|
|
|
|
|
|
|
|
|||
Prepaid other |
|
|
|
|
|
|
|
|
|
|||
Income taxes receivable |
|
|
|
|
|
|
|
|
|
|||
Other current assets |
|
|
|
|
|
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Note 7—Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
|
|
June 29, 2024 |
|
|
September 30, 2023 |
|
|
July 1, 2023 |
|
|||
Accrued payroll and employee benefits |
|
|
|
|
|
|
|
|
|
|||
Customer deposits |
|
|
|
|
|
|
|
|
|
|||
Interest |
|
|
|
|
|
|
|
|
|
|||
Inventory related accruals |
|
|
|
|
|
|
|
|
|
|||
Loyalty and deferred revenue |
|
|
|
|
|
|
|
|
|
|||
Sales tax |
|
|
|
|
|
|
|
|
|
|||
Self-insurance reserves |
|
|
|
|
|
|
|
|
|
|||
Other accrued liabilities |
|
|
|
|
|
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|||
As of June 29, 2024, September 30, 2023, and July 1, 2023, capital expenditures included in other accrued liabilities were $
Note 8—Long-Term Debt, Net
Our long-term debt, net consisted of the following (in thousands, except interest rates):
|
|
Effective |
|
|
June 29, 2024 |
|
|
September 30, 2023 |
|
|
July 1, 2023 |
|
||||
Term Loan |
|
|
% |
(2) |
$ |
|
|
$ |
|
|
$ |
|
||||
Revolving Credit Facility |
|
|
% |
(3) |
|
|
|
|
|
|
|
|
||||
Total long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Less: current portion of long-term debt |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Less: noncurrent Revolving Credit Facility |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|||
Less: unamortized discount |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Less: deferred financing charges |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Total long-term debt, net |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
9
Term Loan
In June 2023, we entered into Amendment No. 1 (“Term Loan Amendment”) to our Amended and Restated Term Loan Credit Agreement (“Term Loan”). The Term Loan Amendment (i) replaced the existing LIBOR-based interest rate benchmark with a Term SOFR-based benchmark and (ii) amended certain other related terms and provisions, including the addition of a SOFR adjustment of (a)
The Term Loan provides for an $
Revolving Credit Facility
In March 2023, we entered into Amendment No. 6 to our $
On April 3, 2024, we entered into Amendment No. 7 to our Revolving Credit Facility (the “2024 Amendment”). The 2024 Amendment (i) extended the maturity date to
As of June 29, 2024 and September 30, 2023,
Representations and Covenants
Substantially all of our assets are pledged as collateral to secure our indebtedness. The Term Loan does not require us to comply with any financial covenants. The Term Loan and the Revolving Credit Facility contain customary representations and warranties, covenants, and conditions to borrowing. No event of default occurred as of June 29, 2024, September 30, 2023, and July 1, 2023.
Future Debt Maturities
The following table summarizes the debt maturities and scheduled principal repayments of our indebtedness as of June 29, 2024 (in thousands):
|
|
Amount |
|
|
Remainder of fiscal 2024 |
|
$ |
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
2028 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
|
10
Note 9—Income Taxes
Our effective income tax rate was a benefit of
Note 10—Commitments & Contingencies
Contingencies
On September 8, 2023, a class action complaint for violation of federal securities laws was filed by West Palm Beach Police Pension Fund in the U.S. District Court for the District of Arizona against us, our Chief Executive Officer and our former Chief Financial Officer. On December 1, the court appointed lead plaintiff, and on February 20, 2024, the lead plaintiff filed an amended and consolidated complaint. The amended and consolidated complaint alleges that we violated federal securities laws by issuing materially false and misleading statements that failed to disclose adverse facts about our financial guidance, business operations and prospects, and seeks class certification, damages, interest, attorneys’ fees, and other relief. Due to the early stage of this proceeding, we cannot reasonably estimate the potential range of loss, if any. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in this matter.
On March 13, 2024 and March 14, 2024, derivative actions were separately filed in the U.S. District Court for the District of Arizona and Delaware by John Clemens and Sally Flynn, on behalf of the Company, against our officers and directors. Both complaints include substantially the same allegations as those in the securities class action, and allege that the defendant directors and officers harmed the Company by either making false or misleading statements, or allowing false or misleading statements to be made. The complaints seek the award of damages, costs and attorneys’ fees, and other declaratory relief. The parties in both the Arizona and Delaware derivative actions have filed stipulations to stay the actions pending resolution of the securities class action. Due to the early stage of these proceedings, we cannot reasonably estimate the potential range of loss, if any. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in these matters.
We are defendants in lawsuits or potential claims encountered in the normal course of business. When the potential liability from a matter can be estimated and the loss is considered probable, we record the estimated loss. Due to uncertainties related to the resolution of lawsuits, investigations and claims, the ultimate outcome may differ from the estimates. We do not expect that the resolutions of any of these matters will have a material effect on our condensed consolidated financial position or results of operations. We did not record any material loss contingencies as of June 29, 2024, September 30, 2023, and July 1, 2023.
Our workers’ compensation insurance program, general liability insurance program, and employee group medical plan have self-insurance retention features of up to $
Note 11—Related Party Transactions
On December 14, 2021, the Company entered into a share repurchase agreement with Bubbles Investor Aggregator, L.P. and Explorer Investment Pte. Ltd. (together, the “Selling Stockholders”), each a greater than
11
Note 12—Share Repurchase Program
On December 3, 2021, the board of directors authorized a share repurchase program for up to an aggregate of $
On December 16, 2021, the Company repurchased and retired
As of June 29, 2024, approximately $
The following table presents information about our repurchases of common stock under our share repurchase program (in thousands):
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
June 29, 2024 |
|
|
July 1, 2023 |
|
|
June 29, 2024 |
|
|
July 1, 2023 |
|
||||
Total number of shares repurchased |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total amount paid for shares repurchased |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Note 13—Equity-Based Compensation
Equity-Based Compensation
2020 Omnibus Incentive Plan
In October 2020, we adopted the Leslie’s, Inc. 2020 Omnibus Incentive Plan (the “Plan”). The Plan was most recently amended and restated in March 2024. The Plan provides for the grant of awards such as non-qualified stock options to purchase Leslie’s common stock (each, a “Stock Option”), restricted stock units (“RSUs”) and performance stock units (“PSUs”) which may settle in Leslie’s, Inc. common stock to our directors, executives, and eligible employees of the Company. The vesting of the Company’s outstanding and unvested Stock Options, RSUs, and PSUs is contingent upon each holder’s continued service through the date of each applicable vesting event. On March 15, 2024 the Company’s shareholders approved an amendment to the Plan increasing the shares of common stock available for future grants by
As of June 29, 2024, the aggregate unamortized value of all outstanding equity-based compensation awards was approximately $
Stock Options
Stock Options granted under the Plan generally expire
|
|
Number of Options |
|
|
Weighted Average |
|
||
Outstanding, Beginning as of October 1, 2023 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
|
|
||
Exercised |
|
|
|
|
|
|
||
Forfeited/Expired |
|
|
( |
) |
|
|
|
|
Balance, Ending as of June 29, 2024 |
|
|
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Vested and exercisable as of June 29, 2024 |
|
|
|
|
$ |
|
||
12
|
|
As of June 29, 2024 |
|
|
Aggregate intrinsic value of options outstanding |
|
$ |
|
|
Unamortized value of unvested stock options |
|
$ |
|
|
Weighted average years that expense is expected to be recognized |
|
|
|
|
Weighted average remaining contractual years outstanding |
|
|
|
|
Restricted Stock Units and Performance Units
RSUs represent grants that vest ratably upon the satisfaction of time-based requirements. PSUs represent grants potentially issuable in the future based upon the Company’s achievement of certain performance conditions. The fair value of our RSUs and PSUs are calculated based on the Company’s stock price on the date of the grant.
The following table summarizes our RSU and PSU activity under the Plan during the nine months ended June 29, 2024 (in thousands, except per share amounts):
|
|
Number of RSUs/PSUs |
|
|
Weighted Average |
|
||
Outstanding, Beginning as of October 1, 2023 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
|
|
||
Vested |
|
|
( |
) |
|
|
|
|
Forfeited |
|
|
( |
) |
|
|
|
|
Balance, Ending June 29, 2024 |
|
|
|
|
$ |
|
||
During the nine months ended June 29, 2024,
In December 2022, the Company granted
|
|
As of June 29, 2024 |
|
|
Unamortized value of unvested RSUs/PSUs |
|
$ |
|
|
Weighted average period (years) expense is expected to be recognized |
|
|
|
|
During the three months ended June 29, 2024 and July 1, 2023, equity-based compensation expense was $
13
Note 14—Earnings Per Share
The following is a reconciliation of basic weighted average common shares outstanding to diluted weighted average common shares outstanding (in thousands, except per share amounts):
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
June 29, 2024 |
|
|
July 1, 2023 |
|
|
June 29, 2024 |
|
|
July 1, 2023 |
|
||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income (loss) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average shares outstanding - basic |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Stock Options |
|
|
|
|
|
|
|
|
|
|
|
|
||||
RSUs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average shares outstanding - diluted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic earnings per share |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Diluted earnings per share |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
The following number of weighted-average potentially dilutive shares were excluded from the calculation of diluted earnings per share because the effect of including such shares would have been antidilutive (in thousands):
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
|
June 29, 2024 |
|
|
July 1, 2023 |
|
|
June 29, 2024 |
|
|
July 1, 2023 |
|
||||
Stock Options |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
RSUs |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
14
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes, which are included elsewhere in this Quarterly Report on Form 10-Q. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Actual results or outcomes may differ materially from those anticipated in these forward-looking statements, which are subject to risks, uncertainties, and other factors, including those described in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023 and in our other filings with the SEC.
We operate on a fiscal calendar that results in a fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to September 30th. In a 52-week fiscal year, each quarter contains 13 weeks of operations; in a 53-week fiscal year, each of the first, second and third quarters includes 13 weeks of operations and the fourth quarter includes 14 weeks of operations. References to the three months ended June 29, 2024 and July 1, 2023 refer to the 13 weeks ended June 29, 2024 and July 1, 2023, respectively. References to the nine months ended June 29, 2024 and July 1, 2023 refer to the 39 weeks ended June 29, 2024 and July 1, 2023, respectively.
Our Company
We are the largest and most trusted direct-to-consumer brand in the $15 billion United States pool and spa care industry, serving residential and professional consumers. Founded in 1963, we are the only direct-to-consumer pool and spa care brand with national scale, operating an integrated marketing and distribution ecosystem powered by a physical network of over 1,000 branded locations and a robust digital platform. We offer an extensive assortment of professional-grade products, the majority of which are exclusive to Leslie’s, as well as certified installation and repair services, all of which are essential to the ongoing maintenance of pools and spas. Our dedicated team of associates, pool and spa care experts, and experienced service technicians are passionate about empowering our consumers with the knowledge, products, and solutions necessary to confidently maintain and enjoy their pools and spas. The considerable scale of our integrated marketing and distribution ecosystem, which is powered by our direct-to-consumer network, uniquely enables us to efficiently reach and service every pool and spa in the continental United States.
We operate primarily in the pool and spa aftermarket industry, which is one of the most fundamentally attractive consumer categories given its scale, predictability, and growth outlook. More than 80% of our assortment is comprised of non-discretionary products essential to the care of residential and commercial pools and spas. Our assortment includes chemicals, equipment and parts, cleaning and maintenance equipment, and safety, recreational, and fitness-related products. We also offer important essential services, such as equipment installation and repair for residential consumers and professional pool operators. Consumers receive the benefit of extended vendor warranties on purchased products from our locations and on installations or repairs from our certified in-field technicians. We offer complimentary, commercial-grade in-store water testing and analysis via our proprietary AccuBlue® system, which increases consumer engagement, conversion, basket size, and loyalty, resulting in higher lifetime value. Our water treatment expertise is powered by data and intelligence accumulated from the millions of water tests we have performed over the years, positioning us as the most trusted water treatment service provider in the industry. Due to the non-discretionary nature of our products and services, our business has historically delivered strong growth and profitability in challenging market environments, including through the Great Recession and the COVID-19 pandemic.
We have a legacy of leadership and disruptive innovation. Since our founding in 1963, we have been the leading innovator in our category and have provided our consumers with the most advanced pool and spa care available. As we have scaled, we have leveraged our competitive advantages to strategically reinvest in our business and intellectual property to develop new value-added capabilities. We pioneered complimentary in-store water testing, offered complimentary in-store equipment repair services, introduced the industry’s first loyalty program, and developed an expansive platform of owned and exclusive brands. These differentiated capabilities allow us to meet the needs of any pool and spa owner, whether they care for their pool or spa themselves or rely on a professional, whenever, wherever, and however they choose to engage with us.
Key Factors and Measures We Use to Evaluate Our Business
We consider a variety of financial and operating measures in assessing the performance of our business. The key measures we use under United States generally accepted accounting principles (“GAAP”) are sales, gross profit and gross margin, selling, general and administrative expenses (“SG&A”), and operating income (loss). The key non-GAAP measures and other operating measures we use are comparable sales, comparable sales growth, Adjusted EBITDA, Adjusted net income (loss), and Adjusted diluted earnings per share.
15
Sales
We offer a broad range of products that consists of regularly purchased, non-discretionary pool and spa maintenance items such as chemicals, equipment, cleaning accessories and parts, as well as installation and repair services for pool and spa equipment. Our offering of proprietary, owned, and third-party brands across diverse product categories drives sales growth by attracting new consumers and encouraging repeat visits from our existing consumers. Revenue from merchandise sales at retail locations is recognized at the point of sale, revenue from services is recognized when the services are rendered, and revenue from e-commerce merchandise sales is generally recognized upon shipment of the merchandise. Revenue is recorded net of related discounts and sales tax. Payment from retail customers is generally at the point of sale and payment terms for professional pool operator customers are based on our credit requirements and generally have terms of less than 60 days. When we receive payment from a consumer before the consumer has taken possession of the merchandise or the service has been performed, the amount received is recorded as deferred revenue or as a customer deposit until the sale or service is complete. Sales are impacted by weather, seasonality, product mix and availability, promotional and competitive activities, the spending habits of our consumers, as well as inflation and interest rates. Growth of our sales is primarily driven by comparable sales growth and expansion of our locations in existing and new markets.
Comparable Sales and Comparable Sales Growth
We measure comparable sales growth as the increase or decrease in sales recorded by the comparable base in any reporting period, compared to sales recorded by the comparable base in the prior reporting period. The comparable base includes sales through our locations and through our e-commerce websites and third-party marketplaces. Comparable sales growth is a key measure used by management and our board of directors to assess our financial performance.
We consider a new or acquired location comparable in the first full month after it has completed one year of sales. Closed locations become non-comparable during their last partial month of operation. Locations that are relocated are considered comparable at the time the relocation is complete. Comparable sales is not calculated in the same manner by all companies, and accordingly, is not necessarily comparable to similarly titled measures of other companies and may not be an appropriate measure for performance relative to other companies.
The number of new locations reflects the number of locations opened during a particular reporting period. New locations require an initial capital investment in location buildouts, fixtures, and equipment, which we amortize over time as well as cash required for inventory.
As of June 29, 2024, we operated over 1,000 locations in 39 states across the United States. We owned 27 locations and leased the remainder of our locations. Our initial lease terms are typically five years with options to renew for multiple successive five-year periods. We evaluate new opportunities in new and existing markets based on the number of pools and spas in the market, competition, our existing locations, availability and cost of real estate, and distribution and operating costs of our locations. We review the performance of our locations on a regular basis and evaluate opportunities to strategically close locations to improve our profitability. Our limited investment costs in individual locations and our ability to transfer sales to our extensive network of remaining locations and e-commerce websites allows us to improve profitability as a result of any strategic closures.
Gross Profit and Gross Margin
Gross profit is equal to our sales less our cost of merchandise and services sold. Cost of merchandise and services sold reflects the direct cost of purchased merchandise, costs to package certain chemical products, including direct materials and labor, costs to provide services, including labor and materials, as well as distribution and occupancy costs. The direct cost of purchased merchandise includes vendor rebates. We recognize vendor rebates based on historical data. Distribution costs include warehousing and transportation expenses, including costs associated with third-party fulfillment centers used to ship merchandise to our e-commerce consumers. Occupancy costs include the rent, common area maintenance, real estate taxes, and depreciation and amortization costs of all retail locations. These costs are significant and are expected to continue to increase proportionate to our growth.
Gross margin is gross profit as a percentage of our sales. Gross margin is impacted by merchandise costs, pricing and promotions, product mix and availability, inflation, and service costs, which can vary. Our proprietary brands, custom-formulated products, and vertical integration provide us with cost savings, as well as greater control over product availability and quality as compared to other companies in the industry. Gross margin is also impacted by the costs of distribution and occupancy costs, which can vary.
Our gross profit is variable in nature and generally follows changes in sales. The components of our cost of merchandise and services sold may not be comparable to the components of cost of sales or similar measures of other companies. As a result, our gross profit and gross margin may not be comparable to similar data made available by other companies.
16
Selling, General and Administrative Expenses
Our SG&A includes selling and operating expenses across our retail locations and digital platform, and our corporate-level general and administrative expenses. Selling and operating expenses at retail locations include payroll, bonus and benefit costs for personnel, supplies, and credit and debit card processing costs. Corporate expenses include payroll, bonus, and benefit costs for our corporate and field support functions, equity-based compensation, marketing and advertising, insurance, utilities, occupancy costs related to our corporate office facilities, professional services, and depreciation and amortization for all assets, except those related to our retail locations and distribution operations, which are included in cost of merchandise and services sold. Selling and operating expenses generally vary proportionately with sales and the change in the number of locations. In contrast, general and administrative expenses are generally not directly proportional to sales and the change in the number of locations and may increase over time to support our growth and public company obligations. The components of our SG&A may not be comparable to the components of similar measures of other companies.
Operating Income (Loss)
Operating income (loss) is gross profit less SG&A. Operating income (loss) excludes interest expense, loss on debt extinguishment, income tax expense (benefit), and other (income) expenses, net. We use operating income (loss) as an indicator of the productivity of our business and our ability to manage expenses.
Adjusted EBITDA
Adjusted EBITDA is defined as earnings before interest (including amortization of debt issuance costs), taxes, depreciation and amortization, management fees, equity-based compensation expense, loss (gain) on debt extinguishment, loss (gain) on asset and contract dispositions, executive transition costs, severance, costs related to equity offerings, strategic project costs, merger and acquisition costs, and other non-recurring, non-cash or discrete items. Adjusted EBITDA is a key measure used by management and our board of directors to assess our financial performance. Adjusted EBITDA is also frequently used by analysts, investors, and other interested parties to evaluate companies in our industry, when considered alongside other GAAP measures. We use Adjusted EBITDA to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, and to compare our performance against that of other companies using similar measures.
Adjusted EBITDA is not a recognized measure of financial performance under GAAP but is used by some investors to determine a company’s ability to service or incur indebtedness. Adjusted EBITDA is not calculated in the same manner by all companies, and accordingly, is not necessarily comparable to similarly titled measures of other companies and may not be an appropriate measure for performance relative to other companies. Adjusted EBITDA should not be construed as an indicator of a company’s operating performance in isolation from, or as a substitute for, net income (loss), cash flows from operations or cash flow data, all of which are prepared in accordance with GAAP. We have presented Adjusted EBITDA solely as supplemental disclosure because we believe it allows for a more complete analysis of results of operations. Adjusted EBITDA is not intended to represent, and should not be considered more meaningful than, or as an alternative to, measures of operating performance as determined in accordance with GAAP. In the future, we may incur expenses or charges such as those added back to calculate Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these items.
Adjusted Net Income (Loss) and Adjusted Diluted Earnings per Share
Adjusted net income (loss) and Adjusted diluted earnings per share are additional key measures used by management and our board of directors to assess our financial performance. Adjusted net income (loss) and Adjusted diluted earnings per share are also frequently used by analysts, investors, and other interested parties to evaluate companies in our industry, when considered alongside other GAAP measures.
Adjusted net income (loss) is defined as net income (loss) adjusted to exclude management fees, equity-based compensation expense, loss (gain) on debt extinguishment, loss (gain) on asset and contract dispositions, executive transition costs, severance, costs related to equity offerings, strategic project costs, merger and acquisition costs, and other non-recurring, non-cash, or discrete items. Adjusted diluted earnings per share is defined as Adjusted net income (loss) divided by the diluted weighted average number of common shares outstanding.
17
Factors Affecting the Comparability of our Results of Operations
Our reported results have been affected by, among other events, the following events, which must be understood in order to assess the comparability of our period-to-period financial performance and condition.
Impact of Macroeconomic Events and Uncertainties
Our financial performance and condition may be impacted to varying extents from period to period by macroeconomic and geopolitical developments, including public health crises, escalating global conflicts, supply chain disruptions, labor market constraints, rising rates of inflation, rising interest rates, general economic slowdown, and potential failures among financial institutions. The direct and indirect impact COVID-19 has had on our financial and operating performance since 2020 has made period-to-period analysis and accurate forecasting difficult. Due to the non-discretionary nature of our products and services, our business delivered strong growth and profitability throughout the pandemic, in spite of restrictions on the operation of our locations and distribution facilities. Significant disruption to our supply chain for products we sell, as a result of COVID-19, geopolitical conflict or otherwise, can also have a material impact on our sales and earnings and cause unpredictable changes in results. In addition, we believe adverse macroeconomic trends and uncertainties including persistent inflation and high interest rates also increase consumers’ sensitivity to price and result in cost-conscious behavior inclusive of high ticket items, which can result in corresponding declines in sales and/or gross profit.
An additional uncertainty that can impact our results of operations is consumer purchasing patterns. Due to the highly unstable supply of granular chlorine compounds over the last three years, we believe some customers stockpiled chemicals, resulting in unexpected changes in demand. As a result of such behavior, our revenue may be higher than normal during the periods of stockpiling and may be lower than normal during the periods after stockpiling has occurred.
18
Results of Operations
We derived our condensed consolidated statements of operations for the three and nine months ended June 29, 2024 and July 1, 2023 from our condensed consolidated financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future. The following table summarizes key components of our results of operations for the periods indicated, both in dollars and as a percentage of our sales (in thousands, except per share amounts):
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
Statements of Operations Data: |
|
June 29, 2024 |
|
|
July 1, 2023 |
|
|
June 29, 2024 |
|
|
July 1, 2023 |
|
||||
Sales |
|
$ |
569,638 |
|
|
$ |
610,891 |
|
|
$ |
932,262 |
|
|
$ |
1,018,839 |
|
Cost of merchandise and services sold |
|
|
340,798 |
|
|
|
359,295 |
|
|
|
598,686 |
|
|
|
630,777 |
|
Gross profit |
|
|
228,840 |
|
|
|
251,596 |
|
|
|
333,576 |
|
|
|
388,062 |
|
Selling, general and administrative expenses |
|
|
131,145 |
|
|
|
135,789 |
|
|
|
302,879 |
|
|
|
324,427 |
|
Operating income |
|
|
97,695 |
|
|
|
115,807 |
|
|
|
30,697 |
|
|
|
63,635 |
|
Other expense: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense |
|
|
18,156 |
|
|
|
17,675 |
|
|
|
53,380 |
|
|
|
48,282 |
|
Total other expense |
|
|
18,156 |
|
|
|
17,675 |
|
|
|
53,380 |
|
|
|
48,282 |
|
Income (loss) before taxes |
|
|
79,539 |
|
|
|
98,132 |
|
|
|
(22,683 |
) |
|
|
15,353 |
|
Income tax expense (benefit) |
|
|
18,889 |
|
|
|
25,585 |
|
|
|
(9,227 |
) |
|
|
4,592 |
|
Net income (loss) |
|
$ |
60,650 |
|
|
$ |
72,547 |
|
|
$ |
(13,456 |
) |
|
$ |
10,761 |
|
Earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
$ |
0.33 |
|
|
$ |
0.39 |
|
|
$ |
(0.07 |
) |
|
$ |
0.06 |
|
Diluted |
|
$ |
0.33 |
|
|
$ |
0.39 |
|
|
$ |
(0.07 |
) |
|
$ |
0.06 |
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
|
184,834 |
|
|
|
183,932 |
|
|
|
184,614 |
|
|
|
183,725 |
|
Diluted |
|
|
184,861 |
|
|
|
184,760 |
|
|
|
184,614 |
|
|
|
184,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Percentage of Sales(1) |
|
(%) |
|
|
(%) |
|
|
(%) |
|
|
(%) |
|
||||
Sales |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
Cost of merchandise and services sold |
|
|
59.8 |
|
|
|
58.8 |
|
|
|
64.2 |
|
|
|
61.9 |
|
Gross margin |
|
|
40.2 |
|
|
|
41.2 |
|
|
|
35.8 |
|
|
|
38.1 |
|
Selling, general and administrative expenses |
|
|
23.0 |
|
|
|
22.2 |
|
|
|
32.5 |
|
|
|
31.8 |
|
Operating income |
|
|
17.2 |
|
|
|
19.0 |
|
|
|
3.3 |
|
|
|
6.2 |
|
Other expense: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense |
|
|
3.2 |
|
|
|
2.9 |
|
|
|
5.7 |
|
|
|
4.7 |
|
Total other expense |
|
|
3.2 |
|
|
|
2.9 |
|
|
|
5.7 |
|
|
|
4.7 |
|
Income (loss) before taxes |
|
|
14.0 |
|
|
|
16.1 |
|
|
|
(2.4 |
) |
|
|
1.5 |
|
Income tax expense (benefit) |
|
|
3.3 |
|
|
|
4.2 |
|
|
|
(1.0 |
) |
|
|
0.5 |
|
Net income (loss) |
|
|
10.6 |
|
|
|
11.9 |
|
|
|
(1.4 |
) |
|
|
1.1 |
|
Other Financial and Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Number of new and acquired locations, net |
|
|
10 |
|
|
|
12 |
|
|
|
13 |
|
|
|
19 |
|
Number of locations open at end of period |
|
|
1,020 |
|
|
|
1,009 |
|
|
|
1,020 |
|
|
|
1,009 |
|
Comparable sales growth(2) |
|
|
(4.0 |
)% |
|
|
(11.8 |
)% |
|
|
(4.1 |
)% |
|
|
(10.9 |
)% |
Adjusted EBITDA(3) |
|
$ |
109,469 |
|
|
$ |
129,038 |
|
|
$ |
65,771 |
|
|
$ |
108,683 |
|
Adjusted EBITDA as a percentage of sales(3) |
|
|
19.2 |
% |
|
|
21.1 |
% |
|
|
7.1 |
% |
|
|
10.7 |
% |
Adjusted net income (loss)(3) |
|
$ |
63,297 |
|
|
$ |
76,362 |
|
|
$ |
(5,465 |
) |
|
$ |
25,370 |
|
Adjusted diluted earnings per share |
|
$ |
0.34 |
|
|
$ |
0.41 |
|
|
$ |
(0.03 |
) |
|
$ |
0.14 |
|
19
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
June 29, 2024 |
|
|
July 1, 2023 |
|
|
June 29, 2024 |
|
|
July 1, 2023 |
|
||||
Net income (loss) |
|
$ |
60,650 |
|
|
$ |
72,547 |
|
|
$ |
(13,456 |
) |
|
$ |
10,761 |
|
Interest expense |
|
|
18,156 |
|
|
|
17,675 |
|
|
|
53,380 |
|
|
|
48,282 |
|
Income tax expense (benefit) |
|
|
18,889 |
|
|
|
25,585 |
|
|
|
(9,227 |
) |
|
|
4,592 |
|
Depreciation and amortization expense(1) |
|
|
8,246 |
|
|
|
8,144 |
|
|
|
24,419 |
|
|
|
25,569 |
|
Equity-based compensation expense(2) |
|
|
2,246 |
|
|
|
2,754 |
|
|
|
7,683 |
|
|
|
9,460 |
|
Strategic project costs(3) |
|
|
395 |
|
|
|
749 |
|
|
|
1,058 |
|
|
|
2,763 |
|
Executive transition costs and other(4) |
|
|
887 |
|
|
|
1,584 |
|
|
|
1,914 |
|
|
|
7,256 |
|
Adjusted EBITDA |
|
$ |
109,469 |
|
|
$ |
129,038 |
|
|
$ |
65,771 |
|
|
$ |
108,683 |
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
June 29, 2024 |
|
|
July 1, 2023 |
|
|
June 29, 2024 |
|
|
July 1, 2023 |
|
||||
Net income (loss) |
|
$ |
60,650 |
|
|
$ |
72,547 |
|
|
$ |
(13,456 |
) |
|
$ |
10,761 |
|
Equity-based compensation expense(2) |
|
|
2,246 |
|
|
|
2,754 |
|
|
|
7,683 |
|
|
|
9,460 |
|
Strategic project costs(3) |
|
|
395 |
|
|
|
749 |
|
|
|
1,058 |
|
|
|
2,763 |
|
Executive transition costs and other(4) |
|
|
887 |
|
|
|
1,584 |
|
|
|
1,914 |
|
|
|
7,256 |
|
Tax effects of these adjustments(5) |
|
|
(881 |
) |
|
|
(1,272 |
) |
|
|
(2,664 |
) |
|
|
(4,870 |
) |
Adjusted net income (loss) |
|
$ |
63,297 |
|
|
$ |
76,362 |
|
|
$ |
(5,465 |
) |
|
$ |
25,370 |
|
Selected Financial Information
Sales
Sales decreased to $569.6 million for the three months ended June 29, 2024, from $610.9 million in the prior year period, a decrease of $41.3 million, or 6.8%. The decrease was primarily driven by a reduction in average order value of approximately 5.0% due to chemical pricing actions and a decrease in transaction volume of 1.7%. Comparable sales decreased $21.6 million relative to the prior year period. Non-comparable sales, including acquisitions and new stores, contributed $2.6 million in the period.
During the three months ended June 29, 2024, our sales were adversely impacted by cold and wet weather in April and May which reduced the number of pool days in non-seasonal markets and delayed the start of pool season in seasonal markets. Sales improved in June with warm and dry weather, but it was not enough to offset the lost pool days in April and May. Additionally, sales were negatively impacted by weakness in large ticket categories due the cumulative effect of high inflation and interest rates, which contributed to the reduction in average order value. In addition, this year we experienced a calendar shift in which we lost two high volume selling days during the core pool season, and gained two lower volume selling days at the end of March and early April.
Sales decreased to $932.3 million for the nine months ended June 29, 2024, from $1,018.8 million in the prior year period, a decrease of $86.6 million, or 9.3%. The decrease was primarily driven by a reduction in average order value of approximately 5.7% due to chemical pricing actions and a decrease in transaction volume of 2.7%. Comparable sales decreased $36.5 million relative to the prior year period. Non-comparable sales, including acquisitions and new stores, contributed $6.4 million in the period.
Gross Profit and Gross Margin
20
Gross profit decreased to $228.8 for the three months ended June 29, 2024 from $251.6 million in the prior year period, a decrease of $22.8 million, or 9.9%. Gross margin decreased to 40.2% compared to 41.2% in the prior year period, which represents a decrease of 100 basis points. The decrease in gross margin was primarily driven by negative impacts of 112 basis points from the June 2023 chemical pricing actions, 85 basis points from the expensing of previously capitalized distribution center costs due to significant reductions in inventory during the period and 46 basis points from deleverage on occupancy costs. These impacts were partially offset by a 90 basis point reduction in inventory adjustments and distribution costs. Gross profit decreased to $333.6 million for the nine months ended June 29, 2024 from $388.1 million in the prior year period, a decrease of $54.5 million, or 16.3%. Gross margin decreased to 35.8% compared to 38.1% in the prior year period, which represents a decrease of approximately 230 basis points. The decrease in gross margin was primarily driven by negative impacts of 121 basis points from the June 2023 chemical pricing actions, 102 basis points from deleverage on occupancy costs, and 83 basis points from the expensing of previously capitalized distribution center costs due to significant reductions in inventory during the period. These impacts were partially offset by an 82 basis point reduction in inventory adjustments and distribution costs.
Selling, General and Administrative Expenses
SG&A decreased to $131.1 million during the three months ended June 29, 2024 from $135.8 million in the prior year period, a decrease of $4.6 million, or 3.5%. The decrease in SG&A was primarily related to a decrease in merchant fees of $2.4 million associated with lower sales, and lower payroll costs of $2.3 million as we continue to make solid progress on our cost management initiatives.
SG&A decreased to $302.9 million during the nine months ended June 29, 2024 from $324.4 million in the prior year period, a decrease of $21.5 million, or 6.6%. The decrease in SG&A was primarily related to lower payroll costs of $6.5 million, a decrease in merchant fees of $4.7 million associated with lower sales, lower executive transition costs of $2.2 million and a decrease in equity compensation expense of $1.8 million.
Interest Expense
Interest expense increased to $18.2 million for the three months ended June 29, 2024 from $17.7 million in the prior year period, an increase of $0.5 million. Interest expense increased to $54.4 million for the nine months ended June 29, 2024 from $48.3 million in the prior year period, an increase of $6.1 million.
These increase for the three and nine months ended was due to higher interest rates on our Term Loan.
Income Taxes
Income tax expense decreased to $18.9 million for the three months ended June 29, 2024 compared to $25.6 million in the prior year period, a decrease of $6.7 million. Income tax benefit was $9.2 million for the nine months ended June 29, 2024 compared to $4.6 million of income tax expense in the prior year period, a change of $13.8 million. These changes in both the three and nine months ended June 29, 2024 compared to the prior year period were primarily attributable to a pretax loss for the nine months ended June 29, 2024, compared to pretax income in the prior year period.
The effective income tax rate was 23.8% and a benefit of 40.7% for the three and nine months ended June 29, 2024, respectively. The effective income tax rate was 26.1% and 29.9% for the three and nine months ended July 1, 2023, respectively. The differences in effective tax rates during the periods are primarily attributable to the pretax income or loss during those periods.
Net Income (Loss) and Diluted Earnings per Share
Net income decreased to $60.7 million for the three months ended June 29, 2024 compared to $72.5 million in the prior year period, an decrease of $11.9 million. Net loss was $13.5 million for the nine months ended June 29, 2024 compared to net income of $10.8 million in the prior year period, a change of $24.3 million. These changes in net income (loss) were primarily due to decreases in gross profit, partially offset by a reduction in selling, general and administrative expense. Diluted earnings per share was $0.33 for the three months ended June 29, 2024 compared to $0.39 in the prior year period. Diluted earnings per share was $(0.07) for the nine months ended June 29, 2024 compared to diluted earnings per share of $0.06 in the prior year period.
Adjusted net income decreased to $63.3 million for the three months ended June 29, 2024 compared to $76.4 million in the prior year period, a decrease of $13.1 million. Adjusted net loss was $5.5 million for the nine months ended June 29, 2024 compared to adjusted net income of $25.4 million in the prior year period, a change of $30.9 million. Adjusted diluted earnings per share was $0.34 for the three months ended June 29, 2024 compared to $0.41 in the prior year period. Adjusted diluted earnings per share was $(0.03) for the nine months ended June 29, 2024 compared to adjusted diluted earnings per share of $0.14 in the prior year period.
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Adjusted EBITDA
Adjusted EBITDA decreased to $109.5 million for the three months ended June 29, 2024 compared to $129.0 million in the prior year period, a decrease of $19.5 million. Adjusted EBITDA decreased to $65.8 million for the nine months ended June 29, 2024 compared to $108.7 million in the prior year period, a decrease of $42.9 million. These decreases were primarily due to decreases in gross profit.
Seasonality and Quarterly Fluctuations
Our business is highly seasonal. Sales and earnings are highest during the third and fourth fiscal quarters, which include April through September, and represent the peak months of swimming pool use. Sales are substantially lower during our first and second fiscal quarters. We have a long track record of investing in our business throughout the year, including in operating expenses, working capital, and capital expenditures related to new locations and other growth initiatives. While these investments drive performance during the primary selling season in our third and fourth fiscal quarters, they have a negative impact on our earnings and cash flow during our first and second fiscal quarters.
We typically experience a build-up of inventory and accounts payable during the first and second fiscal quarters in anticipation of the peak swimming pool supply selling season. We negotiate extended payment terms with certain of our primary suppliers as we receive merchandise in December through March, and we pay for merchandise in April through July.
The principal external factor affecting our business is weather. Hot weather can increase purchases of chemicals and other non-discretionary products as well as purchases of discretionary products and can drive increased purchases of installation and repair services. Unseasonably cool weather or significant amounts of rainfall during the peak pool sales season can reduce chemical consumption in pools and spas and decrease consumer purchases of our products and services. In addition, unseasonably early or late warming trends can increase or decrease the length of the pool season and impact time around pool openings and closings, and therefore, our total sales and timing of our sales.
We generally open new locations before our peak selling season begins and we generally close locations after our peak selling season ends. We expect that our quarterly results of operations will fluctuate depending on the timing and amount of sales contributed by new locations.
Liquidity and Capital Resources
Overview
Our primary sources of liquidity are net cash provided by operating activities and borrowing availability under our Revolving Credit Facility. Historically, we have funded working capital requirements, capital expenditures, payments related to acquisitions, debt service requirements and repurchases of shares of our common stock with internally generated cash on hand and through our Revolving Credit Facility.
Cash and cash equivalents consist primarily of cash on deposit with banks. Cash and cash equivalents totaled $74.4 million and $55.4 million as of June 29, 2024 and September 30, 2023, respectively. We had no amounts outstanding on our Revolving Credit Facility as of June 29, 2024 and September 30, 2023.
Our primary working capital requirements are for the purchase of inventory, payroll, rent, other facility costs, distribution costs, and general and administrative costs. Our working capital requirements fluctuate during the year, driven primarily by seasonality and the timing of inventory purchases.
Our capital expenditures are primarily related to infrastructure-related investments, including investments related to upgrading and maintaining our information technology systems, ongoing location improvements, expenditures related to our distribution centers, and new location openings. We expect to fund capital expenditures from net cash provided by operating activities.
Based on our growth plans, we believe our cash and cash equivalents position, net cash provided by operating activities and borrowing availability under our Revolving Credit Facility will be adequate to finance our working capital requirements, planned capital expenditures, strategic acquisitions, share repurchases, and debt service over the next 12 months and thereafter. If cash provided by operating activities and borrowings under our Revolving Credit Facility are not sufficient or available to meet our capital requirements, then we may need to obtain additional equity or debt financing. There can be no assurance that equity or debt financing will be available to us if we need it or, if available, whether the terms will be satisfactory to us.
As of June 29, 2024, outstanding standby letters of credit totaled $10.9 million and, after considering borrowing base restrictions, we had $239.1 million of available borrowing capacity under the terms of the Revolving Credit Facility. As of June 29, 2024, we were in compliance with the covenants under the Revolving Credit Facility and our Term Loan agreements.
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Summary of Cash Flows
A summary of our cash flows from operating, investing, and financing activities is presented in the following table (in thousands):
|
|
Nine Months Ended |
|
|||||
|
|
June 29, 2024 |
|
|
July 1, 2023 |
|
||
Net cash provided by (used in) operating activities |
|
$ |
60,410 |
|
|
$ |
(74,813 |
) |
Net cash used in investing activities |
|
|
(34,247 |
) |
|
|
(40,898 |
) |
Net cash (used in) provided by financing activities |
|
|
(7,145 |
) |
|
|
22,848 |
|
Net increase (decrease) in cash and cash equivalents |
|
$ |
19,018 |
|
|
$ |
(92,863 |
) |
Cash Provided by (Used in) Operating Activities
Net cash provided by operating activities was $60.4 million for the nine months ended June 29, 2024 compared to net cash used in operating activities of $74.8 million in the prior year period, an increase of $135.2 million. The increase was primarily driven by changes in working capital related to reductions in accounts payable of $50.4 million and product inventories of $9.6 million.
Cash Used in Investing Activities
Net cash used in investing activities was $34.2 million for the nine months ended June 29, 2024 compared to $40.9 million in the prior year period, a decrease of $6.7 million. This decrease was primarily driven by a decrease in investments for business acquisitions of $15.5 million, partially offset by an increase in purchases of property and equipment of $7.6 million.
Cash (Used in) Provided by Financing Activities
Net cash used in financing activities for the nine months ended June 29, 2024 was $7.1 million compared to net cash provided by financing activities of $22.8 million in the prior year period, a decrease of $29.9 million. This decrease was primarily driven by lower borrowings on our Revolving Credit Facility during the period.
Share Repurchase Program
On December 3, 2021, the board of directors authorized a share repurchase program for up to an aggregate of $300 million of the Company’s outstanding shares of common stock over a period of three years, expiring December 31, 2024. As of June 29, 2024, approximately $147.7 million remained available for future purchases under our share repurchase program (see Note 12—Share Repurchase Program to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q).
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Contractual Obligations and Other Commitments
There have been no material changes to our contractual obligations and other commitments during the three months and nine ended June 29, 2024 from those disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023.
Critical Accounting Estimates
The preparation of our condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of sales and expenses during the reported periods. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of a company’s financial condition and results of operations, and which require a company to make its most difficult and subjective judgments. Based on this definition, we have identified the critical accounting policies and judgments, which are disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023. We base these estimates on historical results and various other assumptions we believe to be reasonable, all of which form the basis for making estimates concerning the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates.
There have been no material changes to our critical accounting estimates during the three and nine months ended June 29, 2024 from those disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, see Note 2—Summary of Significant Accounting Policies to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
There have been no material changes in our primary risk exposures or management of market risks from those disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023.
Impact of Inflation and Deflation
There have been no material changes in our exposure to inflation or deflation from those disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023.
Item 4. Controls and Procedures.
Management’s Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) are designed to ensure that information required to be disclosed by us in reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the appropriate time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely discussions regarding required disclosure. We, under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures as of June 29, 2024. Based on that evaluation, our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer) have concluded that the design and operation of our disclosure controls and procedures were ineffective as the material weaknesses in internal control over financial reporting disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023 were not yet remediated as of June 29, 2024.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended June 29, 2024 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except as described below.
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Ongoing Remediation Efforts
As previously disclosed in Part II, Item 9A, “Controls and Procedures” of our Annual Report on Form 10-K for the fiscal year ended September 30, 2023, we are in the process of implementing a plan to address the material weaknesses in internal control over financial reporting that were disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023. We are enhancing the design and implementation of existing controls and creating new controls as needed with respect to inventory control as follows:
We are enhancing the design and implementation of existing controls and creating new controls as needed with respect to vendor rebates as follows:
The actions we are taking are subject to continued senior management review as well as Audit Committee oversight. The material weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We are committed to continuing to improve our internal control processes, and, as we continue to evaluate and work to improve our internal control over financial reporting, we may take additional measures to address control deficiencies, or we may modify certain of our remediation measures as described above or as described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
We are subject to other litigation, claims, and other proceedings that arise from time-to-time in the ordinary course of business. We believe these actions are routine and incidental to the business. As of June 29, 2024, we had established reserves for claims that are probable and estimable and such reserves were not significant. While we cannot feasibly predict the outcome of these matters with certainty, we believe, based on examination of these matters, experience to date and discussions with counsel, that the ultimate liability, individually or in the aggregate, will not have a material adverse effect on our business, financial position, results of operations, or cash flows.
Except as set forth in Note 10 - Commitments & Contingencies to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, there have been no material changes to the legal proceedings described in Part I Item 3 “Legal Proceedings” of our Annual Report on Form 10-K for the fiscal year ended September 30, 2023.
Item 1A. Risk Factors.
There have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the year ended September 30, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
None.
Sales of Unregistered Securities
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
(a) Information Required to be Disclosed on Form 8-K
None.
(b) Changes to Procedures for Recommending Director Nominees
Not applicable.
(c) Trading Plans
During the quarter ended June 29, 2024, no director or Section 16 officer
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Item 6. Exhibits.
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|
|
|
Incorporated by Reference |
||||
Exhibit Number |
|
Exhibit Description |
|
Form |
|
Exhibit |
|
Filing Date/ Period End Date |
10.1 |
|
|
10-Q |
|
10.2 |
|
03/30/2024 |
|
10.2 |
|
|
8-K |
|
10.1 |
|
04/09/2024 |
|
31.1* |
|
|
|
|
|
|
|
|
31.2* |
|
|
|
|
|
|
|
|
32.1+ |
|
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 |
|
|
|
|
|
|
32.2+ |
|
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 |
|
|
|
|
|
|
101.INS* |
|
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
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|
|
|
|
|
101.SCH* |
|
Inline XBRL Taxonomy Schema Document With Embedded Linkbase Documents |
|
|
|
|
|
|
104* |
|
Cover Page Interactive Data File (embedded within the Inline XBRL document). |
|
|
|
|
|
|
* Filed herewith.
+ Furnished herewith and not deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
LESLIE’S, INC. |
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|
|
|
|
Date: August 7, 2024 |
|
By: |
/s/ Scott Bowman |
|
|
|
Scott Bowman |
|
|
|
Chief Financial Officer |
|
|
|
(Principal Financial Officer and Principal Accounting Officer) |
28