Leslie’s, Inc. Form 10-K Summary
Business context and reporting period
Leslie’s is a direct-to-consumer pool and spa care retailer serving residential, professional and commercial customers through 936 locations in 37 states, e-commerce channels, distribution centers and service technicians. The company sells chemicals, equipment, parts, maintenance products and installation and repair services. Fiscal 2020 ended October 3, 2020, included 53 weeks, compared with 52 weeks in fiscal 2019.
The company completed its initial public offering on November 2, 2020, after the reporting period. Its common stock began regular-way trading on Nasdaq on October 29, 2020 under the symbol LESL.
Financial performance and key metrics
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Sales | $1,112.2 million | $928.2 million | Up 19.8% |
| Gross profit | $460.7 million | $379.7 million | Up 21.3% |
| Gross margin | 41.4% | 40.9% | Up 51 bps |
| SG&A | $314.3 million | $258.2 million | Up 21.8% |
| Operating income | $146.4 million | $121.6 million | Up 20.4% |
| Net income | $58.6 million | $0.7 million | Up $57.9 million |
| Adjusted EBITDA | $182.8 million | $160.0 million | Up 14.2% |
| Adjusted EBITDA margin | 16.4% | 17.2% | Down 81 bps |
| Net cash from operations | $103.4 million | $57.8 million | Up 78.8% |
Comparable sales increased 18.0%, following growth of 0.4% in fiscal 2019. Management attributed the increase to higher consumer demand and pool and spa usage, with COVID-19 accelerating favorable consumer behavior. The additional fiscal week contributed approximately $18.0 million of sales, $1.5 million of net income and $3.0 million of adjusted EBITDA.
SG&A included approximately $8.6 million of COVID-19-related costs, including temporary wage increases and personal protective equipment, as well as $3.5 million of strategic location consolidation costs and $2.9 million of one-time bonus accruals. Adjusted net income was $65.0 million, or $0.42 per share, compared with $12.8 million, or $0.08 per share, in fiscal 2019.
Cash flow, liquidity and debt
- Cash and cash equivalents were $157.1 million at October 3, 2020, compared with $90.9 million a year earlier.
- Operating cash flow was $103.4 million; investing cash outflow was $26.8 million, including $20.6 million of capital expenditures and $6.2 million for acquisitions; financing cash outflow was $10.4 million.
- The ABL Credit Facility was amended in August 2020 to increase capacity to $200.0 million and extend maturity to August 2025. No borrowings were outstanding at year-end, and availability after borrowing-base restrictions was $125.5 million, including $11.6 million of standby letters of credit.
- Gross long-term debt was $1.201 billion at year-end, consisting primarily of an $811.2 million Term Loan due in 2023 and $390.0 million of Senior Unsecured Notes due in 2024. Net long-term debt was $1.180 billion after discounts and deferred financing costs.
- All debt carried variable interest rates. A 1% change in the effective interest rate was estimated to affect annual interest cost by approximately $8.1 million. Interest rate caps with a $750 million notional amount capped LIBOR at 3.00% through March 2021.
- The company stated that cash, operating cash flow and ABL availability were adequate for planned working capital, capital expenditures and debt service for the next 12 months. Substantially all assets were pledged as collateral.
After year-end, the company used $390.0 million of IPO proceeds to repay the Senior Unsecured Notes. The IPO generated $510.0 million of gross proceeds and $458.7 million of net proceeds to the company; remaining proceeds were designated for working capital and general corporate purposes.
Material changes versus the prior comparable period
- Sales growth accelerated from 4.0% in fiscal 2019 to 19.8% in fiscal 2020, while comparable sales growth increased from 0.4% to 18.0%.
- Gross margin improved from 40.9% to 41.4%, supported by product mix, proprietary brands and vertical integration.
- Operating margin improved modestly from 13.1% to 13.2%, but adjusted EBITDA margin declined from 17.2% to 16.4% because expenses grew faster than adjusted EBITDA.
- Net income increased sharply from $0.7 million to $58.6 million, aided by higher operating income, lower interest expense and lower income tax expense. Fiscal 2019 had been affected by interest expense limitations and a larger valuation allowance.
- Interest expense declined by $14.5 million to $84.1 million, primarily due to lower rates on floating-rate debt.
- The company opened or acquired 10 locations and closed 26 locations, ending with 936 locations versus 952 at the prior year-end.
- Operating lease right-of-use assets and lease liabilities were recognized upon adoption of the new lease accounting standard, adding approximately $177.7 million of right-of-use assets and $184.7 million of lease liabilities.
Outlook, management commentary, risks and unusual items
Management plans to grow the consumer file, increase share of wallet, expand loyalty and retention marketing, broaden products and services, increase the professional-location footprint, pursue strategic acquisitions, address underserved markets and continue investing in digital and connected pool-care capabilities. No formal quantitative fiscal 2021 guidance was provided in the filing.
Management characterized the business as highly seasonal, with 77% of fiscal 2020 sales and 109% of adjusted EBITDA generated in the third and fourth quarters. Weather, pool usage, supply availability and the duration or severity of COVID-19 can materially affect results. The company reported that all locations were open at October 3, 2020, although some had experienced temporary closures, reduced hours or curbside-only service.
- COVID-19 may cause renewed operating restrictions, supply-chain disruption, increased costs and changes in consumer behavior. Fiscal 2020 growth may not be sustainable.
- Substantial leverage, variable interest rates, debt covenants, collateral requirements and the transition away from LIBOR create refinancing, liquidity and interest-rate risks.
- Competition includes local retailers, home-improvement chains, mass merchants, online marketplaces and wholesale distributors.
- Operations are exposed to weather, seasonality, economic conditions, housing activity, raw-material prices, chemical handling, product liability, recalls and regulatory requirements.
- Cybersecurity, privacy, e-commerce platform dependence and third-party marketplace restrictions could affect sales and profitability.
- Legal proceedings were described as routine, with no material reserves or expected material adverse impact as of October 3, 2020.
- The company is a controlled company under Nasdaq rules and intends to rely on exemptions from certain independent-board and committee requirements. Affiliates of L Catterton and GIC collectively controlled approximately 75% of common stock as of November 30, 2020.
- The company does not expect to pay dividends in the foreseeable future.
Most important facts for investors to verify
- Confirm the post-IPO capital structure, including repayment of the $390.0 million Senior Unsecured Notes and the remaining Term Loan balance and maturities.
- Assess whether the 18.0% comparable-sales growth and COVID-19-related demand benefits persist after normalization.
- Monitor adjusted EBITDA margin, which declined despite strong sales and gross-margin growth.
- Review seasonal cash needs, inventory and supplier-payment timing, ABL availability and covenant compliance.
- Evaluate weather, supply-chain, chemical-regulatory, cybersecurity and COVID-19 risks in the context of the highly seasonal business.
- Consider potential dilution and selling pressure from IPO-related restricted stock units, options, registration rights and lock-up expirations.
- Review related-party arrangements, including the $4.9 million fiscal 2020 management fee and $1.9 million headquarters lease expense; the management services agreement terminated upon the IPO.