Leslie’s, Inc. — Fiscal 2023 First Quarter 10-Q
Reporting period: 13 weeks ended December 31, 2022; comparable period ended January 1, 2022. Amounts below are in U.S. dollars. The business is highly seasonal: sales and earnings are typically concentrated in fiscal Q3 and Q4, so this quarter is not representative of peak-season performance.
Financial results and liquidity
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Sales | $195.1 million | $184.8 million |
| Comparable sales growth | (4.0)% | 20.5% |
| Gross profit / margin | $65.3 million / 33.5% | $67.3 million / 36.4% |
| SG&A | $92.3 million | $79.8 million |
| Operating loss | $(27.0) million | $(12.5) million |
| Net loss / diluted EPS | $(30.3) million / $(0.16) | $(14.5) million / $(0.08) |
| Adjusted EBITDA | $(11.9) million | $1.1 million |
| Net cash used in operating activities | $(184.4) million | $(125.6) million |
Gross margin fell 290 basis points. Management attributed the decline primarily to business mix and occupancy deleverage. SG&A rose 15.7%, reflecting higher sales-related costs, inflation in payroll and digital marketing, acquisition-related costs, and executive transition and other costs; lower depreciation and strategic-project costs partly offset the increase. Interest expense nearly doubled to $13.4 million, primarily due to higher LIBOR rates on floating-rate debt.
Operating cash use reflected seasonal working-capital investment, including a $64.8 million inventory cash outflow and an $80.8 million outflow from accounts payable and accrued expenses. Inventory was $429.5 million at quarter-end, versus $244.6 million a year earlier. Investing activities used $13.7 million, including $8.5 million for an acquisition and $5.7 million for property and equipment.
Cash was $2.7 million at December 31, 2022, down from $112.3 million at October 1, 2022. The company had $91.0 million drawn on its revolving credit facility and reported $99.0 million of available borrowing capacity after borrowing-base restrictions and $10.0 million of letters of credit. Gross debt was $886.8 million, consisting of a $795.8 million term loan and $91.0 million revolver borrowings. The term loan matures in March 2028; the revolver matures in August 2025. Substantially all assets secure the debt. No event of default was reported, and the facilities have no financial covenants.
Changes and business developments
- Sales increased 5.6%, but comparable sales declined 4.0%, which management attributed primarily to adverse weather versus the prior-year quarter. Acquisitions and new-store growth contributed $17.7 million in non-comparable sales.
- Gross profit decreased 3.0% despite higher reported sales, while net loss widened by $15.8 million.
- The company acquired a business for $8.5 million, adding five locations in Florida and Louisiana; purchase accounting was not complete. Leslie’s operated 992 locations in 39 states at quarter-end.
- Cash generated from financing included $91.0 million of revolver borrowings. The prior-year period included $152.1 million of share repurchases. Approximately $147.7 million remained available under the repurchase authorization at December 31, 2022.
Outlook, risks, and unusual items
The filing provides no specific revenue, earnings, or comparable-sales guidance. Management stated that cash, operating cash flow, and revolver availability should be adequate for working capital, planned capital expenditures, strategic acquisitions, repurchases, and debt service over the next 12 months, while noting that additional financing might be needed if those sources are insufficient or unavailable.
Management emphasized seasonality and weather sensitivity: unseasonably cool or rainy conditions can reduce pool chemical use and customer purchases, while timing of warm weather affects the pool season. Other cited risks include inflation, rising interest rates, economic uncertainty, supply-chain disruption, competition, and execution of growth and technology initiatives. The company reported no material change in its risk factors from its prior annual report.
Disclosure controls and procedures were ineffective at quarter-end because a previously disclosed material weakness in internal control over financial reporting had not been remediated. Management anticipated completing remediation during fiscal 2023, subject to controls operating effectively and sufficient testing. The filing reported no material loss contingencies and no material expected effect from ordinary-course litigation. The company did not expect the Inflation Reduction Act or reference-rate reform guidance to have a material financial-statement impact based on its initial evaluation.
Important facts for investors to verify
- Whether seasonal inventory converts to sales and cash during the peak selling quarters, and whether operating cash use moderates.
- Whether comparable sales, gross margin, and Adjusted EBITDA recover after the weather-affected quarter.
- Floating-rate debt costs, revolver utilization, borrowing availability, and liquidity as seasonal working-capital needs evolve.
- Progress and testing evidence for remediation of the material weakness in internal control over financial reporting.
- Acquisition integration, purchase-accounting adjustments, and the returns from the new locations.