Leslie’s, Inc. — Q3 FY2023 Form 10-Q
Business context and period: Leslie’s sells pool and spa products and services through retail locations and digital channels. The third quarter covered the 13 weeks ended July 1, 2023; year-to-date (YTD) covered 39 weeks. Results are seasonal, with sales and earnings typically highest in the third and fourth fiscal quarters. The company operated 1,009 locations in 39 states.
Key financial results
| Metric | Q3 FY2023 | Q3 FY2022 | YTD FY2023 | YTD FY2022 |
|---|---|---|---|---|
| Sales | $610.9 million | $673.6 million | $1,018.8 million | $1,086.5 million |
| Comparable sales growth | (11.8%) | 7.4% | (10.9%) | 10.7% |
| Gross profit | $251.6 million | $303.6 million | $388.1 million | $456.6 million |
| Gross margin | 41.2% | 45.1% | 38.1% | 42.0% |
| Operating income | $115.8 million | $172.1 million | $63.6 million | $155.7 million |
| Net income | $72.5 million | $123.0 million | $10.8 million | $101.1 million |
| Diluted EPS | $0.39 | $0.67 | $0.06 | $0.54 |
| Adjusted EBITDA | $129.0 million | $182.9 million | $108.7 million | $192.7 million |
- Cash flow: YTD operating cash flow was negative $74.8 million, versus positive $72.7 million a year earlier. Investing cash outflow was $40.9 million, including $26.7 million in capital expenditures and $15.5 million for acquisitions. Financing provided $22.8 million, primarily from net revolver borrowings.
- Liquidity and debt: Cash was $19.4 million at July 1, down from $112.3 million at October 1, 2022. Debt principal totaled $822.8 million: $791.8 million under the term loan and $31.0 million drawn on the revolving facility. The company reported $207.6 million of available revolver capacity after letters of credit and borrowing-base restrictions. Effective interest rates were 7.97% on the term loan and 6.83% on revolver borrowings.
- Balance sheet: Inventory was $436.6 million, up from $361.7 million at fiscal year-end; stockholders’ deficit was $179.8 million.
Material changes and management commentary
- Q3 sales fell 9.3%; YTD sales fell 6.2%. Comparable sales declined primarily because of lower customer traffic. New and acquired locations partly offset the declines.
- Gross margin declined 390 basis points in both the quarter and YTD period. Management cited product cost increases that could not be passed through to consumers, distribution costs associated with the peak-season inventory build, and occupancy deleverage.
- YTD SG&A increased 7.8%, including costs from acquisitions and new stores and severance associated with eliminating non-customer-facing positions. Interest expense increased $27.6 million YTD, primarily due to higher rates and revolver borrowings.
- Management said cash, operating cash flow, and revolver availability were expected to be adequate for working capital, planned capital expenditures, acquisitions, repurchases, and debt service over the next 12 months; additional financing could be needed if those sources prove insufficient.
- The company acquired five businesses for $15.5 million net of cash, adding 12 locations; purchase accounting was not complete. It reported no material impairment of goodwill or intangible assets and no material loss contingencies.
Outlook, risks, and controls
- No numerical revenue or earnings guidance is provided in the supplied filing text. Management emphasizes the seasonal nature of the business and sensitivity to weather, particularly cool or rainy conditions during peak pool-use months.
- Other disclosed risks include weaker consumer demand and economic conditions, inflation and interest rates, supply disruptions, competition, distribution-center disruptions, cybersecurity events, and the ability to obtain financing.
- Disclosure controls and procedures were deemed ineffective because a previously disclosed material weakness in internal control over financial reporting had not been remediated as of July 1, 2023. Management anticipated remediation during fiscal 2023, subject to controls operating effectively and testing.
- On August 1, 2023, the board adopted amended bylaws, including revised stockholder proposal and director-nomination procedures.
Important facts for investors to verify
- Whether traffic and comparable-sales declines continue, and how weather affects the remaining peak selling season.
- Whether product cost pressure, distribution expenses, and occupancy deleverage ease and support margin recovery.
- Cash generation after seasonal inventory investment, revolver usage, interest costs, and remaining borrowing capacity.
- Progress and testing supporting remediation of the internal-control material weakness.
- Completion of acquisition purchase accounting and the expected contribution of acquired locations.