10-Q: Leslie's Inc. Reports Disappointing Q2 2025 Results Amidst Macroeconomic Headwinds

Leslie's Inc. reports a net loss for Q2 2025, impacted by lower sales and increased expenses, while addressing ongoing efforts to remediate material weaknesses in internal controls.

Summary

• Leslie's Inc. reported a net loss of $51.3 million for the three months ended March 29, 2025, compared to a net loss of $34.6 million for the same period last year.
• Sales decreased by 6.1% to $177.1 million, primarily due to lower transaction volume and product mix.
• Comparable sales decreased by 6.7%.
• Gross profit decreased by 19.1% to $43.9 million, with a gross margin of 24.8% compared to 28.8% in the prior year period.
• Selling, general, and administrative expenses increased by 8.8% to $92.3 million.
• The company's effective income tax rate was 19.9% for the six months ended March 29, 2025, compared to 27.5% for the six months ended March 30, 2024.
• The company is working to remediate material weaknesses in internal control over financial reporting, with completion anticipated during fiscal year 2025.
• The company received a delisting notice from Nasdaq due to not meeting the minimum bid price requirement, and has until October 21, 2025, to regain compliance.
• The company's total borrowings under its credit facilities were $858.2 million as of March 29, 2025.
• The company's credit rating was recently downgraded by Standard and Poor's (S&P) Global Ratings and Moody's.

Sentiment

Score: 3

Explanation: The document presents a negative outlook due to decreased sales, increased losses, a Nasdaq delisting notice, and credit rating downgrades. While the company is taking steps to address internal control issues, the overall tone is concerning from an investment perspective.

Positives

• The company is actively working to remediate material weaknesses in internal control over financial reporting.
• The company has hired an experienced Director of Inventory to lead the remediation efforts for both inventory and vendor rebates.
• Naomi Cramer's promotion includes eligibility for annual equity grants equal to 65% of her base salary, subject to board approval.

Negatives

• The company experienced a significant increase in net loss, from $34.6 million to $51.3 million.
• Sales decreased by 6.1%, indicating weaker performance compared to the prior year.
• Gross margin declined from 28.8% to 24.8%, impacting profitability.
• The company received a Nasdaq delisting notice due to not meeting the minimum bid price requirement.
• The company's credit rating was recently downgraded by Standard and Poor's (S&P) Global Ratings and Moody's.

Risks

• Failure to regain and maintain compliance with Nasdaq listing standards could result in delisting of the company's common stock.
• Substantial indebtedness could adversely affect the company's financial condition and ability to operate its business.
• Product supply disruptions may have an adverse effect on the company's profitability and operating results.
• Disruptions from natural or man-made disasters or extreme weather, public health and safety issues, geopolitical events and security issues, labor or trade disputes, macroeconomic crises, and similar events could have a material adverse effect on the company's business.
• The company is subject to litigation, including a securities class action and derivative actions, which could result in significant costs and liabilities.

Future Outlook

The company believes its cash and cash equivalents position, net cash provided by operating activities, and borrowing availability under its Revolving Credit Facility will be adequate to finance its working capital requirements, planned capital expenditures, strategic acquisitions, and debt service over the next 12 months and thereafter.

Management Comments

• The Interim CFO role will report directly to Jason McDonell, Chief Executive Officer, and will also serve as Leslies Corporate Treasurer.
• We are enhancing the execution of existing inventory controls.
• We are enhancing the design and execution of existing controls and creating new controls as needed regarding vendor rebates.

Industry Context

The report indicates challenges within the pool and spa care industry, potentially influenced by macroeconomic factors and consumer spending habits. The company's performance is being compared against its own historical data, but there is no specific mention of direct competitors or broader industry benchmarks in this document.

Management Changes

Legal Proceedings

• A class action complaint for violation of federal securities laws was filed against the company, its former CEO, and former CFO.
• Three derivative actions were filed against the company's officers and directors.
• The company is also a defendant in lawsuits or potential claims encountered in the normal course of business.

Stakeholder Impact

• Shareholders may be concerned about the company's financial performance, the Nasdaq delisting notice, and the credit rating downgrades.
• Employees may be affected by the company's cost-cutting measures and restructuring activities.
• Customers may be impacted by potential supply chain disruptions and changes in product availability.
• Creditors may be concerned about the company's ability to meet its debt obligations.

Next Steps

• The company must regain compliance with Nasdaq's minimum bid price rule by October 21, 2025.
• The company intends to remediate material weaknesses in internal control over financial reporting during fiscal year 2025.
• The company will continue to defend itself vigorously in the securities class action and derivative actions.

Key Dates

Keywords

financial results, internal control, net loss, sales decline, Nasdaq delisting, credit rating, Leslie's Inc., Q2 2025