Leslie’s, Inc. — Q2 FY2023 Form 10-Q
Reporting period: The 13 weeks and 26 weeks ended April 1, 2023, compared with the periods ended April 2, 2022. Amounts below are in millions unless otherwise noted. Leslie’s sells pool and spa products and services through 997 company-operated locations in 39 states and e-commerce. Results are highly seasonal, with sales and earnings typically strongest in fiscal Q3 and Q4.
Financial performance
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Sales | $212.8 | $228.1 | $407.9 | $412.9 |
| Gross profit | $71.2 | $85.6 | $136.5 | $152.9 |
| Gross margin | 33.4% | 37.5% | 33.5% | 37.0% |
| SG&A | $96.4 | $89.6 | $188.6 | $169.4 |
| Operating loss | $(25.2) | $(4.0) | $(52.2) | $(16.5) |
| Net loss | $(31.5) | $(7.4) | $(61.8) | $(21.9) |
| Diluted loss per share | $(0.17) | $(0.04) | $(0.34) | $(0.12) |
| Adjusted EBITDA (non-GAAP) | $(8.4) | $8.7 | $(20.4) | $9.8 |
Comparable sales declined 13.5% in Q2 and 9.4% for the six-month period. Management attributed the declines primarily to normalization of seasonal purchasing patterns compared with pandemic-era periods and adverse weather. Acquisitions and new stores contributed $15.7 million of non-comparable sales in Q2 and $33.9 million over six months.
Gross margin fell 410 basis points in Q2 and 360 basis points year to date; management cited deleverage in occupancy and distribution costs. SG&A increased 7.5% in Q2 and 11.4% year to date, reflecting acquisition-related costs, increased associate investment, executive transition and severance costs, and higher depreciation and equity compensation; lower strategic-project costs partly offset these increases. Interest expense rose to $17.2 million in Q2 and $30.6 million for six months, mainly due to higher rates and increased revolver borrowings.
Cash flow, debt and liquidity
- For the six months, operating cash outflow was $246.0 million, versus $136.8 million in the prior-year period. The filing attributes the increase to higher net loss and working-capital movements, including inventory investment.
- Investing cash outflow was $23.6 million, including $14.8 million of capital expenditures and $9.9 million for acquisitions. Financing provided $166.0 million, primarily from net revolving-credit borrowings.
- Cash was $8.7 million at April 1, 2023, down from $112.3 million at October 1, 2022. Inventory was $492.3 million, compared with $361.7 million at fiscal year-end.
- Debt principal totaled $965.8 million: $793.8 million under the term loan and $172.0 million drawn on the revolver. The term loan matures in March 2028; the revolver matures in August 2025. The filing reports effective rates of 7.34% on the term loan and 6.61% on the revolver.
- The revolver commitment was increased to $250 million in March 2023. After borrowing-base restrictions and $11.4 million of standby letters of credit, available borrowing capacity was $66.6 million. The company reported compliance with debt covenants and no event of default; its facilities do not require financial covenants.
- Management stated cash, operating cash generation and revolver availability should be adequate for working capital, planned capital expenditures, strategic acquisitions, share repurchases and debt service over the next 12 months, while noting additional financing might be needed if those sources prove insufficient.
Outlook, risks and notable items
- The filing provides no numerical sales, earnings or cash-flow guidance. Management emphasized seasonality: the first and second fiscal quarters typically have lower sales, while inventory and other investments ahead of peak season pressure interim cash flow and earnings. Weather can materially affect demand and the timing of pool openings and closings.
- Management identified inflation, rising interest rates, economic slowdown, supply-chain disruption, competition, distribution-center disruption, and execution of growth and technology initiatives among risks. The company added risks related to financial-institution liquidity events and potential loss of or delayed access to cash held above FDIC insurance limits.
- Disclosure controls and procedures were ineffective as of April 1, 2023 because a previously reported 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 successful testing.
- The company acquired three businesses for $9.9 million during the six months, adding seven locations; purchase accounting was incomplete. It reported no material loss contingencies and did not expect ordinary-course litigation to have a material adverse effect.
- The company had approximately $147.7 million remaining under its $300 million share-repurchase authorization; no material repurchases occurred in the current-year six-month period.
Important facts for investors to verify
- Whether comparable-sales trends and margins improve during the peak season, and how much weather and seasonal timing affect results.
- Inventory levels, operating cash flow, revolver utilization and borrowing capacity as seasonal inventory is sold and supplier payments come due.
- The effect of floating-rate debt and any further rate changes on interest expense and liquidity.
- Progress and testing evidence for remediation of the material weakness in internal controls.
- Acquisition performance and final purchase-accounting valuations, alongside the company’s stated financing and liquidity assumptions.