Leslie’s, Inc. — Q1 FY2022 Form 10-Q
Business context and reporting period. The company sells pool and spa supplies and services through 959 company-operated locations in 38 states and online. The quarter covers 13 weeks ended January 1, 2022; comparisons are to the 13 weeks ended January 2, 2021. The business is highly seasonal: sales and earnings are typically concentrated in fiscal Q3 and Q4.
Key financial results
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Sales | $184.8 million | $145.0 million |
| Comparable sales growth | 20.5% | 15.7% |
| Gross profit / gross margin | $67.3 million / 36.4% | $51.7 million / 35.7% |
| SG&A | $79.8 million | $77.5 million |
| Operating loss | $12.5 million | $25.8 million |
| Net loss / diluted EPS | $14.5 million / $(0.08) | $30.3 million / $(0.17) |
| Adjusted EBITDA (non-GAAP) | $1.1 million | $(0.2) million |
| Cash used in operating activities | $125.6 million | $119.3 million |
Gross margin improved 70 basis points. Adjusted net loss was $10.9 million versus $10.6 million; adjusted diluted EPS was $(0.06) in both periods. Non-GAAP measures are company-defined and should be considered alongside GAAP results.
Financial position and liquidity
- Cash and cash equivalents were $53.3 million at January 1, 2022, down from $343.5 million at October 2, 2021. The quarter’s $290.2 million net cash decrease included the share repurchase and seasonal working-capital outflows.
- Inventory was $244.6 million, up from $198.8 million at fiscal year-end, reflecting planned stocking ahead of peak season. Operating cash use also reflected inventory and other working-capital changes.
- Term Loan principal was $803.9 million, variable-rate and due March 2028; balance-sheet debt, net of discount and financing costs, was $792.6 million including the current portion. No ABL borrowings were outstanding; reported available capacity was $191.0 million after letters of credit and borrowing-base restrictions.
- The company reported no financial covenants under its Term Loan or ABL facility and was in compliance with applicable covenants. A 1 percentage-point change in the Term Loan’s effective rate would change annual interest cost by approximately $8.0 million, based on the outstanding balance.
Material changes and notable items
- Sales rose 27.5%, attributed primarily to 20.5% comparable-sales growth, higher consumer demand and retail price inflation in core sanitizer and equipment categories; acquisitions and newer locations also contributed.
- Gross profit increased 30.2%, with margin gains attributed to product margin improvements and occupancy leverage, partly offset by business mix. SG&A increased only 3.0%; lower equity compensation and IPO-related costs offset higher sales-related expenses, acquisition costs and strategic initiative spending.
- Interest expense declined to $6.9 million from $11.5 million, partly reflecting repayment of senior unsecured notes in the prior year. The prior-year quarter also included a $7.3 million debt-extinguishment loss.
- The company repurchased and retired 7.5 million shares for $151.9 million, or $152.1 million including offering costs, at $20.25 per share. The repurchase was from two greater-than-5% stockholders in connection with a secondary offering. Of the authorized $300 million program, $148.1 million remained available at quarter-end.
- The company acquired seven Phoenix-area pool-supply locations in October 2021 for approximately $5.1 million net of cash acquired. No goodwill or intangible-asset impairment was recorded.
Outlook, risks, and contingencies
No formal financial guidance or quantified forecast is provided in this filing. Management stated that cash, operating cash generation and available ABL capacity were expected to be adequate for working capital, planned capital expenditures, repurchases and debt service over the next 12 months, while noting that additional financing could be needed if those sources prove insufficient. Management attributed sales strength partly to pandemic-related consumer trends but said their duration and effects are uncertain.
Key risks discussed include seasonality and weather, product availability and supply disruption, inflation and the ability to pass through higher costs, competition, variable interest rates and LIBOR transition, COVID-19 impacts, cyber and security threats, and access to capital. Management said ordinary-course litigation was not expected to have a material effect and no material loss contingencies were recorded. Disclosure controls were assessed as effective; no material changes in internal control were reported.
Important facts for investors to verify
- Whether elevated demand, pricing and comparable-sales growth persist through the peak pool season, and how weather affects results.
- Inventory levels, supplier availability, working-capital cash use and the timing of cash recovery in the seasonal selling period.
- Cash and ABL availability after the substantial repurchase, and the company’s future repurchase pace and capital-allocation priorities.
- Exposure to variable rates on approximately $803.9 million of Term Loan principal and the eventual replacement of LIBOR.
- The durability of margin improvements and the distinction between GAAP losses and company-defined adjusted measures.