Leslie’s, Inc. — Q3 2021 Form 10-Q
Business and period: Leslie’s sells pool and spa products and services through 946 company-operated locations in 38 states and online. The quarter ended July 3, 2021, comprised 13 weeks; year-to-date (YTD) covers 39 weeks. The business is highly seasonal, with peak sales generally in the third and fourth fiscal quarters.
Financial performance
| Metric | 13 weeks ended July 3, 2021 | Year over year | 39 weeks ended July 3, 2021 | Year over year |
|---|---|---|---|---|
| Sales | $596.5 million | +24.3% | $934.0 million | +28.1% |
| Comparable sales growth | 23.9% | vs. 19.4% | 27.2% | vs. 15.5% |
| Gross profit / margin | $283.7 million / 47.6% | 43.9% margin prior year | $407.1 million / 43.6% | 40.0% margin prior year |
| Operating income / margin | $166.4 million / 27.9% | $111.6 million / 23.3% | $142.0 million / 15.2% | $76.8 million / 10.5% |
| Net income | $118.8 million | +$46.9 million | $82.1 million | +$66.2 million |
| Diluted EPS | $0.61 | vs. $0.46 | $0.43 | vs. $0.10 |
| Adjusted EBITDA (non-GAAP) | $179.3 million; 30.1% of sales | vs. $119.8 million | $188.6 million; 20.2% of sales | vs. $102.7 million |
Margins and drivers: Management attributed higher gross margin primarily to product margin improvements and occupancy leverage, partly offset by business mix. Sales growth reflected stronger consumer demand and, in the quarter, elevated retail price inflation in sanitizer and equipment categories. SG&A rose to $117.3 million for the quarter and $265.1 million YTD, but declined as a share of sales to 19.7% and 28.4%, respectively. Higher costs included growth investment and equity-based compensation; YTD costs also included IPO-related amounts.
Cash, debt, and liquidity
- YTD operating cash flow was $118.4 million, compared with $85.9 million; investing cash outflow was $22.2 million, compared with $21.7 million.
- Cash and equivalents were $309.1 million at July 3, 2021, up from $157.1 million at October 3, 2020. Inventory was $224.5 million, versus $149.0 million at fiscal year-end; management cited seasonal inventory build and heightened demand.
- Term Loan principal was $808.0 million, with $787.7 million reported as long-term debt net of current portion, discount, and financing costs. The Term Loan matures in 2028. No ABL borrowings were outstanding; reported available borrowing capacity was $190.8 million, after borrowing-base restrictions and $9.2 million of standby letters of credit.
- The November 2020 IPO generated $458.6 million net proceeds for Leslie’s; proceeds were used to repay $390.0 million of Senior Unsecured Notes, with the balance for working capital and general purposes. February and June 2021 follow-on offerings were sales by existing stockholders, and proceeds went to those sellers, not the company.
- YTD financing cash flow was $55.8 million, reflecting IPO proceeds largely offset by debt repayments and financing costs. The company said cash, operating cash flow, and ABL availability should cover working capital, planned capital expenditures, and debt service for the next 12 months.
Material changes, outlook, and risks
- Interest expense fell to $7.4 million for the quarter and $27.0 million YTD, versus $19.5 million and $64.6 million. Debt repayment and lower rates contributed; YTD results included a $9.2 million loss on debt extinguishment.
- The Term Loan was amended in March 2021, reducing pricing by 75 basis points and extending maturity to March 2028. The $200 million ABL facility was amended to lower margins and fees. Both facilities had no financial covenant requirements; the filing reported no defaults and covenant compliance.
- No formal earnings guidance or quantified forward outlook is provided. Management said COVID-19 had favorably affected sales and expected changed consumer behavior to continue for the foreseeable future, while emphasizing uncertainty around the pandemic and its effects.
- Key risks include weather and season length, shifts in consumer demand, COVID-19 and possible operating or supply-chain disruptions, supplier availability, inflation, competition, interest-rate exposure, and execution of growth and technology initiatives. The interest-rate caps expired in March 2021; management estimated a 1% rate move would change interest cost by about $8.1 million over the next 12 months based on the outstanding Term Loan.
- Other notable items: equity-based compensation was $20.6 million YTD, including vesting associated with the IPO; the company reported no material loss contingencies and no off-balance-sheet arrangements. Future sales by existing shareholders after lockups expire may pressure the stock price.
Important facts for investors to verify
- Whether elevated demand, comparable-sales growth, and favorable product margins are sustainable beyond the unusually strong seasonal period.
- How inventory levels, supplier commitments, and seasonal working-capital needs affect cash generation and ABL usage.
- Term Loan rate exposure and the impact of the expired interest-rate caps; distinguish principal debt from its net balance-sheet carrying amount.
- Impact of equity compensation, share-count dilution, and future sales by existing stockholders as lockup restrictions lapse.
- Underlying performance after separately considering non-GAAP adjustments, including equity compensation, offering costs, and debt-extinguishment charges.