Leslie’s, Inc. — Q2 FY2021 Form 10-Q
Reporting period: 13 weeks ended April 3, 2021; six-month comparison is for the 26 weeks ended April 3, 2021, versus March 28, 2020. Leslie’s sells pool and spa products and services through 940 stores in 38 states and online. The business is highly seasonal, with sales and earnings generally concentrated in fiscal Q3 and Q4.
Financial results
| Metric | Three months ended Apr. 3, 2021 | Three months ended Mar. 28, 2020 | Six months ended Apr. 3, 2021 | Six months ended Mar. 28, 2020 |
|---|---|---|---|---|
| Sales | $192.4 million | $126.4 million | $337.4 million | $249.4 million |
| Comparable sales growth | 51.3% | 13.7% | 33.7% | 8.4% |
| Gross profit / margin | $71.7 million / 37.2% | $39.9 million / 31.6% | $123.4 million / 36.6% | $81.0 million / 32.5% |
| Operating income (loss) | $1.3 million | $(16.1) million | $(24.5) million | $(34.8) million |
| Net loss | $(6.5) million | $(29.8) million | $(36.7) million | $(56.0) million |
| Adjusted EBITDA | $9.5 million | $(8.1) million | $9.3 million | $(17.1) million |
| Operating cash flow | Not separately presented for the quarter | $(111.5) million | $(106.1) million |
Quarterly diluted loss per share was $0.03, versus $0.19; six-month diluted loss per share was $0.20, versus $0.36. SG&A was $70.4 million for the quarter and $147.9 million for six months. SG&A as a share of sales fell to 36.6% from 44.4% for the quarter and to 43.8% from 46.4% for six months. Adjusted EBITDA and adjusted net loss are non-GAAP measures.
Liquidity, debt and capital
- Cash was $90.3 million at April 3, 2021, down from $157.1 million at October 3, 2020. The six-month cash decrease was $66.7 million.
- Gross term-loan principal was $810.0 million; reported long-term debt, net of current portion, discounts and financing costs, was $789.3 million. The term loan matures in March 2028, bears variable interest, and is secured by substantially all assets. The company reported no term-loan financial covenants.
- No borrowings were outstanding under the $200 million ABL facility; $190.8 million was available after borrowing-base restrictions and $9.2 million of letters of credit. An April 12 amendment reduced certain ABL margins and the commitment fee and removed the LIBOR floor.
- Six-month operating cash use reflected seasonal inventory build: inventory increased to $277.9 million from $149.0 million at fiscal year-end. Financing cash flow included $458.6 million of net IPO proceeds and $392.1 million of long-term debt repayments.
Changes, outlook and risks
- Sales rose 52.3% for the quarter and 35.3% for six months, driven mainly by comparable-sales growth and higher consumer demand across product categories. Management attributed demand partly to increased residential pool and spa use and said COVID-19 had favorably accelerated consumer trends.
- Gross margin expanded 567 basis points for the quarter and 409 basis points for six months. Management said profit improvement reflected higher comparable sales and margin; lower interest expense also contributed to reduced net losses.
- The company completed its IPO in November 2020, receiving $458.7 million net, and used proceeds to repay $390 million of senior unsecured notes. A February 2021 follow-on offering was conducted by existing stockholders; its $731.4 million net proceeds went to the selling holders, not the company. The term loan was amended in March, extending maturity and reducing pricing; related debt-extinguishment losses were $1.9 million for the quarter and $9.2 million for six months.
- No quantitative earnings guidance was provided in the filing. Management said cash, operating cash flow and ABL availability should cover working capital, planned capital expenditures and debt service for the next 12 months, while noting future financing may be needed if those sources are insufficient.
- Key risks include weather and seasonality, COVID-19 effects on demand and supply chains, supplier availability, competition, inflation, variable-rate debt exposure, and access to future financing. The company estimated that a 1% rate change would affect interest costs by about $8.1 million over the next 12 months; interest-rate caps expired in March 2021.
- Management reported no material litigation loss contingencies and no material expected impact from ordinary-course claims. Purchase commitments totaled $374.6 million; future minimum lease payments totaled $221.1 million. Management stated disclosure controls were effective as of April 3, 2021.
- The filing highlights potential share-price pressure from resales as lock-up restrictions expire, including the February offering-related lock-up ending May 11, 2021. Management also cautioned that actual results may differ from forward-looking statements.
Important facts for investors to verify
- Whether exceptionally strong comparable sales and gross margins persist through the peak selling season, and how much demand reflects pandemic-related behavior.
- Seasonal working-capital needs, inventory conversion and cash generation; first-half operating cash use was $111.5 million.
- Debt service and exposure to variable rates following expiration of the interest-rate caps, including the effect of future rate changes.
- Potential dilution or stock-price effects from equity compensation and sales by existing shareholders as lock-ups expire.
- The assumptions and exclusions used in non-GAAP Adjusted EBITDA and adjusted net loss, including equity compensation, offering costs and debt-extinguishment charges.