Leslie’s, Inc. — Q1 Fiscal 2024 Form 10-Q
Reporting period: 13 weeks ended December 30, 2023, compared with the 13 weeks ended December 31, 2022. Leslie’s sells pool and spa products and services through more than 1,000 locations and online. The business is highly seasonal, with sales and earnings typically strongest in the third and fourth fiscal quarters.
Financial performance
| Metric | Q1 FY2024 | Prior-year quarter |
|---|---|---|
| Sales | $174.0 million | $195.1 million |
| Gross profit / margin | $50.4 million / 29.0% | $65.3 million / 33.5% |
| SG&A | $86.9 million | $92.3 million |
| Operating loss | $36.5 million | $27.0 million |
| Net loss / diluted EPS | $39.6 million / $0.21 loss | $30.3 million / $0.16 loss |
| Adjusted EBITDA | $24.4 million loss | $11.9 million loss |
| Operating cash flow | $71.9 million used | $184.4 million used |
Comparable sales declined 11.7%, versus 4.0% growth a year earlier. Gross margin fell 450 basis points. Management attributed the decline primarily to rebate-recognition timing (235 basis points), previously capitalized distribution costs expensed in the quarter (105 basis points), and distribution and occupancy deleverage from lower comparable sales (220 basis points), partly offset by favorable inventory adjustments (110 basis points). Interest expense rose to $17.1 million from $13.4 million, primarily due to higher rates on the term loan and revolver.
Adjusted net loss was $36.8 million, versus $25.3 million, and adjusted diluted EPS was a loss of $0.20, versus $0.14. These are non-GAAP measures and should be considered alongside GAAP results.
Cash, debt and liquidity
Cash was $8.4 million at December 30, 2023, down from $55.4 million at September 30, 2023. The company used $10.7 million in investing activities, including $10.7 million of capital expenditures, and generated $35.5 million from financing activities. The quarter’s cash decline was $47.0 million.
Debt consisted of $787.7 million of term-loan principal and $38.0 million outstanding on the revolving facility; reported long-term debt, net, was $771.7 million, excluding the separately presented $8.1 million current portion. The revolver commitment is $250 million, and reported available borrowing capacity, after borrowing-base restrictions and letters of credit, was $201.4 million. No debt defaults were reported. The term loan matures in March 2028; the revolver matures in August 2025.
Management stated that cash, operating cash flow and revolver availability should be adequate for working capital, planned capital expenditures, strategic acquisitions, share repurchases and debt service over the next 12 months. It cautioned that additional financing might be needed if these sources prove insufficient, and financing may not be available on satisfactory terms.
Changes, outlook and risks
- Sales declined 10.8% year over year; comparable sales weakness was partly offset by $2.6 million in non-comparable sales.
- SG&A fell 5.9%, reflecting lower merchant fees, headcount and executive-transition and acquisition costs; the decrease did not offset lower gross profit.
- Operating cash use improved year over year, primarily due to working-capital changes, including lower inventory-related cash needs. The company nevertheless reported substantial seasonal cash use.
- The filing provides no quantitative company sales or earnings guidance. Management highlighted weather, consumer purchasing patterns, supply-chain disruption, inflation and interest rates as factors that can affect results.
- A federal securities class action filed in September 2023 alleges materially misleading statements about financial guidance, operations and prospects. The company disputes the allegations and intends to defend itself; potential loss cannot currently be estimated.
- Disclosure controls and procedures were deemed ineffective because previously disclosed material weaknesses in internal control over financial reporting had not been remediated as of December 30, 2023. Management anticipated remediation during fiscal 2024.
Important facts for investors to verify
- Whether comparable-sales trends and gross-margin pressures improve during the peak swimming season, and whether rebate timing and distribution-cost effects reverse.
- Seasonal cash generation, inventory and working-capital needs, and the company’s ability to maintain adequate liquidity while servicing debt.
- Interest-rate exposure and compliance with borrowing terms, including revolver availability and upcoming maturities.
- Progress and testing supporting remediation of the disclosed internal-control material weaknesses.
- Developments in the securities class action and any change in the company’s assessment of potential exposure.