10-K: Leslies Inc. Reports Fiscal Year 2024 Results Amidst Market Challenges

Leslies Inc., the largest direct-to-consumer brand in the pool and spa care industry, reported a decrease in sales and profitability for fiscal year 2024, alongside ongoing efforts to address internal control weaknesses.

Summary

• Leslies Inc. reported a decrease in sales to $1.33 billion for fiscal year 2024, down from $1.45 billion in the previous year.
• Comparable sales decreased by 8.8% year-over-year, driven by declines in both traffic and average order value.
• The company's gross profit decreased to $476.8 million, with a gross margin of 35.8%, a decline of 200 basis points compared to the previous year.
• Selling, general, and administrative expenses decreased to $419.7 million, primarily due to lower merchant fees and payroll costs.
• The company experienced a net loss of $23.4 million, a significant decrease from the net income of $27.2 million in fiscal year 2023.
• Adjusted EBITDA decreased to $108.7 million, down from $168.1 million in the prior year, primarily due to lower sales volume and decreased product rate.
• The company identified material weaknesses in its internal control over financial reporting related to inventory and vendor rebates.
• Leslies is implementing remediation plans to address these weaknesses, with completion expected during fiscal year 2025.
• The company had $783.7 million in outstanding debt under its Term Loan and no outstanding borrowings under its Revolving Credit Facility as of November 26, 2024.

Sentiment

Score: 3

Explanation: The document presents a negative outlook due to decreased sales, profitability, and the identification of material weaknesses in internal controls. While the company is taking steps to address these issues, the overall tone is concerning from an investment perspective.

Positives

• Selling, general, and administrative expenses decreased by 5.9%, primarily due to lower merchant fees and payroll costs.
• The company is actively working to remediate the identified material weaknesses in internal control over financial reporting.
• The company has a strong employee relations and is committed to leadership excellence with 89% of employees indicating that their manager was a good leader.
• The company has a vertically integrated supply chain, packaging, and distribution model, which represents a significant competitive advantage.

Negatives

• Sales decreased by 8.3% to $1.33 billion in fiscal year 2024.
• Comparable sales declined by 8.8%, indicating a decrease in customer traffic and average order value.
• Gross margin decreased by 200 basis points to 35.8%, impacted by product rate, occupancy costs, and distribution expenses.
• Adjusted EBITDA decreased by $59.4 million to $108.7 million, primarily due to lower sales volume and decreased product rate.
• The company reported a net loss of $23.4 million, a significant downturn from the previous year's net income of $27.2 million.
• Material weaknesses in internal control over financial reporting were identified, specifically related to inventory and vendor rebates.
• The company's voluntary turnover rate over the past twelve months was 32%, with retail turnover at 36% and distribution center turnover at 16%.

Risks

• The company faces competition from various retailers, distributors, and service providers in the pool and spa care market.
• Demand for the company's products and services may be adversely affected by unfavorable economic conditions.
• The company is susceptible to adverse weather conditions, which can impact sales.
• Disruptions in the supply chain could have a material adverse effect on profitability and operating results.
• The company's substantial indebtedness could materially adversely affect its financial condition and ability to operate.
• The company has identified material weaknesses in its internal control over financial reporting, which could affect its ability to accurately report financial results.
• The company is subject to legal proceedings, including a class action complaint for violation of federal securities laws.

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, share repurchases, and debt service over the next 12 months and thereafter.

Management Comments

• The company's management is responsible for establishing and maintaining adequate internal control over financial reporting.
• Management has analyzed the material weaknesses and performed additional analysis and procedures in preparing our consolidated financial statements.
• Management has concluded that our consolidated financial statements fairly present, in all material respects, our financial condition, results of operations and cash flows at and for the periods presented.

Industry Context

The company operates in the aftermarket pool and spa care industry, which is characterized by its scale, predictability, and growth outlook. The industry is fragmented and competitive, with a wide range of manufacturers, retailers, distributors, and service providers. The company's business is seasonal, with sales and earnings highest during the third and fourth fiscal quarters.

Comparison to Industry Standards

• The document does not provide specific comparisons to industry standards or competitors' results.
• However, it notes that the company has a market-leading share of approximately 15% of residential aftermarket product spend as of 2023.
• The company's physical network is larger than the sum of its 20 largest competitors, and its digital sales are estimated to be greater than five times as large as that of its largest digital competitor.
• The company's gross margin of 35.8% is lower than the 43.1% reported in fiscal year 2022, indicating a potential decline in profitability compared to previous periods.
• The company's adjusted EBITDA of $108.7 million is significantly lower than the $292.3 million reported in fiscal year 2022, suggesting a substantial decrease in operational performance.

Legal Proceedings

• A class action complaint for violation of federal securities laws was filed against the company, its former CEO, and former CFO.
• Derivative actions were filed against the company's officers and directors in both Arizona and Delaware.
• The company is subject to other litigation, claims, and other proceedings that arise from time-to-time in the ordinary course of business.

Stakeholder Impact

• Shareholders are negatively impacted by the decrease in sales, profitability, and the identification of material weaknesses.
• Employees may be affected by the company's cost-cutting measures and restructuring activities.
• Customers may experience changes in product availability or service quality due to supply chain disruptions.
• Suppliers may be impacted by changes in the company's purchasing patterns or payment terms.
• Creditors may be concerned about the company's ability to service its debt obligations.

Next Steps

• The company plans to continue to implement a plan to address the material weaknesses in internal control over financial reporting.
• The company expects to complete its remediation activities during fiscal year 2025.
• The company will continue to evaluate new opportunities in new and existing markets based on the number of pools and spas in the market, competition, existing locations, availability and cost of real estate, and distribution and operating costs of locations.

Key Dates

Keywords

pool care, spa care, retail, e-commerce, financial results, internal control, debt, sales, profitability, gross margin, EBITDA, inventory, vendor rebates