10-Q: Leslies Inc. Reports Q1 2024 Results with Sales Decline and Increased Net Loss

Leslies Inc. experienced a decrease in sales and an increase in net loss for the first quarter of fiscal year 2024, compared to the same period last year.

Summary

• Leslies Inc. reported a net loss of $39.6 million for the quarter ended December 30, 2023, compared to a net loss of $30.3 million for the same period last year.
• Sales decreased by 10.8% to $174.0 million, with comparable sales declining by 11.7%.
• Gross profit decreased to $50.4 million, and gross margin declined to 29.0% from 33.5% year-over-year.
• The company's operating loss was $36.5 million, compared to $27.0 million in the prior year.
• Interest expense increased to $17.1 million due to higher interest rates on the company's debt.
• The company's effective income tax rate was a benefit of 26.1%.
• Adjusted EBITDA was a loss of $24.4 million, compared to a loss of $11.9 million in the prior year.
• Adjusted net loss was $36.8 million, compared to $25.3 million in the prior year.

Sentiment

Score: 3

Explanation: The document indicates a negative sentiment due to decreased sales, reduced gross margins, increased net loss, and the presence of material weaknesses in internal controls. The company's performance is significantly worse than the prior year, and there are concerns about its ability to manage debt and generate positive cash flow.

Positives

• Selling, general and administrative expenses decreased by $5.4 million, or 5.9%, primarily due to lower merchant fees, headcount, executive transition costs, and merger and acquisition costs.
• Net cash used in operating activities decreased by $112.5 million due to changes in working capital related to reductions in product inventories.
• Net cash used in investing activities decreased by $3.0 million primarily due to lower investments for business acquisitions.

Negatives

• Sales decreased by 10.8% year-over-year.
• Comparable sales declined by 11.7% year-over-year.
• Gross margin decreased by 450 basis points to 29.0%.
• Net loss increased by $9.3 million to $39.6 million.
• Adjusted EBITDA decreased by $12.5 million to a loss of $24.4 million.
• Interest expense increased by $3.7 million due to higher interest rates.
• The company's cash and cash equivalents decreased by $47.0 million during the quarter.

Risks

• The company's financial performance is subject to macroeconomic and geopolitical developments, including public health crises, supply chain disruptions, and inflation.
• Consumer purchasing patterns, particularly stockpiling of chemicals, can cause unpredictable changes in demand.
• The company's business is highly seasonal, with sales and earnings concentrated in the third and fourth fiscal quarters.
• Unseasonable weather can significantly impact sales.
• The company has identified material weaknesses in its internal control over financial reporting, which have not yet been remediated.
• The company is subject to a class action lawsuit alleging violations 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. However, there is no assurance that additional equity or debt financing will be available if needed.

Industry Context

The company operates in the pool and spa aftermarket industry, which is considered a fundamentally attractive consumer category due to its scale, predictability, and growth outlook. The company is the largest direct-to-consumer brand in this industry, with a market-leading share of approximately 15% of residential aftermarket product spend as of 2022. The company's performance is affected by seasonality and weather patterns, which are common factors in this industry.

Comparison to Industry Standards

• The company's comparable sales decline of 11.7% is a significant underperformance compared to the industry average, which has seen modest growth in recent periods.
• Competitors such as Pool Corporation (POOL) and Hayward Holdings (HAYW) have reported more stable sales figures, indicating that Leslies is facing company-specific challenges.
• The decrease in gross margin to 29.0% is also below industry benchmarks, where many competitors maintain margins above 30%.
• The company's increased net loss and negative Adjusted EBITDA are concerning when compared to the profitability of its peers.
• The company's reliance on debt financing and the increase in interest expense are also areas of concern compared to competitors with stronger balance sheets.

Legal Proceedings

• A class action complaint for violation of federal securities laws was filed against the company, its CEO, and former CFO on September 8, 2023.
• The complaint alleges materially false and misleading statements regarding financial guidance, business operations, and prospects.
• The company disputes the allegations and intends to defend itself vigorously.

Related Party Transactions

• On December 14, 2021, the company entered into a share repurchase agreement with Bubbles Investor Aggregator, L.P. and Explorer Investment Pte. Ltd., each a greater than 5% beneficial owner of the company's common stock.

Stakeholder Impact

• Shareholders are negatively impacted by the decreased sales, reduced gross margins, increased net loss, and the presence of material weaknesses in internal controls.
• Employees may be impacted by potential cost-cutting measures or restructuring efforts.
• Customers may be impacted by potential changes in product availability or pricing.
• Suppliers may be impacted by potential changes in payment terms or order volumes.
• Creditors may be impacted by the company's increased debt and reduced profitability.

Next Steps

• The company is in the process of implementing a plan to address the material weaknesses in internal control over financial reporting.
• The company anticipates that the remediation of these material weaknesses will be completed during fiscal year 2024.
• The company will continue to evaluate and work to improve its internal control over financial reporting.

Key Dates

Keywords

pool supplies, spa care, retail, e-commerce, financial results, quarterly report, sales, net loss, gross margin, EBITDA, debt, interest rates, seasonality, internal controls