Leslie’s, Inc. — Q2 2022 Form 10-Q
Reporting period: 13 weeks ended April 2, 2022; year-to-date figures cover 26 weeks. Amounts below are in millions of dollars unless stated otherwise. Leslie’s sells pool and spa products and services through 965 company-operated locations in 38 states and online. Its business is highly seasonal, with sales and earnings generally concentrated in fiscal Q3 and Q4.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Sales | $228.1 | $192.4 | $412.9 | $337.4 |
| Gross profit / margin | $85.6 / 37.5% | $71.7 / 37.2% | $152.9 / 37.0% | $123.4 / 36.6% |
| SG&A | $89.6 | $70.4 | $169.4 | $147.9 |
| Operating income (loss) | $(4.0) | $1.3 | $(16.5) | $(24.5) |
| Net income (loss) | $(7.4) | $(6.5) | $(21.9) | $(36.7) |
| Adjusted EBITDA | $8.7 | $9.5 | $9.8 | $9.3 |
| Comparable sales growth | 13.3% | 51.3% | 16.4% | 33.7% |
Q2 sales rose 18.5%, driven by comparable sales growth and acquisitions/new locations. Gross margin improved 30 basis points, which management attributed mainly to product margin improvement and occupancy leverage, partly offset by business mix. SG&A grew 27.3%, outpacing sales, reflecting higher activity and investments, strategic project costs, and equity compensation; the company consequently moved from Q2 operating income to an operating loss. Q2 diluted loss per share was $0.04 versus $0.03. Six-month diluted loss per share improved to $0.12 from $0.20.
Cash flow, liquidity and debt
- Six-month operating cash outflow was $136.8, compared with $111.8 a year earlier, primarily due to inventory investment. Investing cash outflow was $43.9, including $30.0 for acquisitions and $14.3 for capital expenditures.
- Financing cash outflow was $110.9, including $152.1 used for share repurchases, partly offset by $45.0 of revolver borrowing. Cash fell to $52.0 at April 2, 2022 from $343.5 at October 2, 2021.
- Debt principal totaled $846.9: an $801.9 term loan and $45.0 drawn on the revolving facility. The term loan matures in 2028; the revolver matures in 2025. The company reported $145.0 of available revolver capacity after borrowing-base restrictions and letters of credit. It repaid the $45.0 revolver balance after quarter-end.
- Management said cash, operating cash generation and borrowing availability were expected to cover working capital, planned capital expenditures, share repurchases and debt service for the next 12 months. The filing reports compliance with debt covenants and no defaults.
Material changes, outlook and risks
- Comparable sales growth slowed from the unusually high prior-year comparisons, while the company continued to expand through acquisitions: two fiscal 2022 acquisitions added 14 locations for an aggregate $30.0 purchase price. The company had 965 locations at period-end, versus 940 a year earlier.
- In December 2021, Leslie’s repurchased and retired 7.5 million shares for $152.1 including offering costs. The $300 million, three-year authorization had $148.1 remaining at April 2, 2022.
- No specific financial guidance was provided. Management said COVID-19 had favorably affected sales and expected changed consumer behavior to continue for the foreseeable future, while noting uncertainty around the pandemic’s effects.
- Management emphasized seasonal working-capital needs, including inventory purchases ahead of peak pool season. Weather can shift pool openings and demand; supply-chain disruption and inflation may raise costs, and competitive conditions may limit passing cost increases to customers. Other cited risks include competition, supplier relationships, execution of growth and technology initiatives, and access to capital.
- The company reported no material change in risk factors, no material loss contingencies, and no material expected effect from ordinary-course legal matters. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether comparable-sales trends and margins hold up as the company enters its peak selling quarters, particularly against elevated prior-year comparisons.
- Inventory levels, seasonal operating cash use, supplier payment timing, and the ability to convert seasonal sales into cash.
- Debt and liquidity after the post-quarter revolver repayment, including borrowing availability and interest-rate exposure.
- Returns on acquisition spending, strategic projects, capital expenditures and remaining share-repurchase authorization.
- How inflation, supply availability and weather affect product costs, pricing, demand and reported margins.