Leslie's, Inc. (LESL) - Q3 2024 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 29, 2024 (Fiscal Q3 2024) and the nine months ended June 29, 2024. Leslie's, Inc. is the leading direct-to-consumer pool and spa care brand in the United States, operating over 1,000 locations in 39 states. The company operates on a 52-week fiscal year ending the Saturday closest to September 30.
Key Financial Metrics
| Metric | Q3 2024 (3 Months) | Q3 2023 (3 Months) | YTD 2024 (9 Months) | YTD 2023 (9 Months) |
|---|---|---|---|---|
| Sales | $569.6 million | $610.9 million | $932.3 million | $1,018.8 million |
| Gross Profit | $228.8 million | $251.6 million | $333.6 million | $388.1 million |
| Gross Margin | 40.2% | 41.2% | 35.8% | 38.1% |
| Operating Income | $97.7 million | $115.8 million | $30.7 million | $63.6 million |
| Net Income (Loss) | $60.7 million | $72.5 million | $(13.5) million | $10.8 million |
| Diluted EPS | $0.33 | $0.39 | $(0.07) | $0.06 |
| Adjusted EBITDA | $109.5 million | $129.0 million | $65.8 million | $108.7 million |
| Cash & Equivalents | $74.4 million | $19.4 million (Q3 2023) | $74.4 million | $19.4 million (Q3 2023) |
| Long-Term Debt (Net) | $768.6 million | $774.9 million | $768.6 million | $774.9 million |
Liquidity: As of June 29, 2024, the company had $74.4 million in cash and cash equivalents. The Revolving Credit Facility had no outstanding borrowings, with approximately $239.1 million in available borrowing capacity after accounting for letters of credit.
Material Changes vs. Prior Period
- Sales Decline: Sales decreased 6.8% in Q3 and 9.3% YTD compared to the prior year. This was driven by a reduction in average order value (approx. 5.0% in Q3) due to chemical pricing actions and a decrease in transaction volume. Comparable sales declined 4.0% in Q3 and 4.1% YTD.
- Margin Compression: Gross margin decreased 100 basis points in Q3 and 230 basis points YTD. Key drivers included negative impacts from June 2023 chemical pricing actions, deleverage on occupancy costs, and the expensing of previously capitalized distribution center costs due to inventory reductions.
- Profitability: While Q3 remained profitable with $60.7 million in net income, the company reported a net loss of $13.5 million for the nine-month period, compared to net income of $10.8 million in the prior year. This shift was primarily due to lower gross profit partially offset by reduced SG&A expenses.
- Interest Expense: Interest expense increased to $18.2 million in Q3 (from $17.7 million) and $53.4 million YTD (from $48.3 million) due to higher interest rates on the Term Loan.
- Weather Impact: Q3 sales were adversely impacted by cold and wet weather in April and May, which reduced pool days and delayed the start of the season in seasonal markets.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects quarterly results to fluctuate based on weather and the timing of new location openings. The company anticipates funding working capital, capital expenditures, and debt service through operating cash flows and the Revolving Credit Facility.
- Share Repurchases: The company has a $300 million share repurchase program authorized through December 31, 2024. Approximately $147.7 million remains available. No shares were repurchased in the current quarter or YTD.
- Legal Proceedings: A securities class action lawsuit was filed in September 2023, alleging false and misleading statements regarding financial guidance and operations. Derivative actions were also filed in March 2024. The company disputes the allegations and cannot estimate potential losses at this early stage.
- Internal Controls: Management concluded that disclosure controls and procedures were ineffective as of June 29, 2024, due to unremediated material weaknesses in internal control over financial reporting related to inventory control and vendor rebates. Remediation efforts are ongoing.
- Seasonality: The business is highly seasonal, with the majority of sales and earnings occurring in the third and fourth fiscal quarters (April through September).
Investor Verification Checklist
- Inventory Management: Verify the progress of remediation efforts regarding inventory control and the accuracy of inventory reserves, given the material weakness disclosure.
- Weather Sensitivity: Monitor weather patterns in key markets for the remainder of the peak season (Q4) to assess potential sales recovery.
- Legal Exposure: Track developments in the securities class action and derivative lawsuits for potential financial impact or settlement costs.
- Debt Servicing: Review the impact of rising interest rates on future interest expense and cash flow, given the $783.7 million Term Loan balance.
- Comparable Sales Trend: Assess whether the decline in comparable sales (down 4.1% YTD) stabilizes or worsens in the upcoming peak quarter.