10-Q: Leslies Inc. Reports Q2 2024 Results with Sales Decline and Increased Net Loss

Leslies Inc. experienced a decrease in sales and an increase in net loss for the second quarter of 2024, primarily due to lower transaction volumes and chemical pricing actions.

Summary

• Leslies Inc. reported a net loss of $34.6 million for the three months ended March 30, 2024, compared to a net loss of $31.5 million in the same period last year.
• Sales decreased by 11.4% to $188.7 million for the quarter, driven by a reduction in average order volume and transaction volume.
• The company's gross margin decreased to 28.8% from 33.4% in the prior year, primarily due to deleverage of occupancy costs and chemical pricing actions.
• Selling, general, and administrative expenses decreased by 11.9% to $84.9 million, mainly due to lower merchant fees, payroll costs, and executive transition costs.
• Interest expense increased to $18.2 million due to higher interest rates on the Term Loan and Revolving Credit Facility.
• For the six months ended March 30, 2024, the net loss was $74.1 million, compared to $61.8 million in the prior year period, with sales decreasing by 11.1% to $362.6 million.
• Comparable sales decreased by 11.7% for both the three and six month periods ended March 30, 2024.
• The company had $8.4 million in cash and cash equivalents and $97.0 million outstanding on its Revolving Credit Facility as of March 30, 2024.

Sentiment

Score: 3

Explanation: The document indicates a negative sentiment due to decreased sales, reduced gross margin, increased net loss, and ongoing internal control issues. The company is facing significant challenges and the outlook is uncertain.

Positives

• Selling, general, and administrative expenses decreased by 11.9% for the three months ended March 30, 2024.
• The company's income tax benefit increased due to a higher pretax loss.
• Net cash used in operating activities decreased by $130.9 million for the six months ended March 30, 2024, primarily due to changes in working capital related to reductions in product inventories.

Negatives

• Sales decreased by 11.4% for the three months ended March 30, 2024.
• Gross margin decreased by 460 basis points to 28.8% for the quarter.
• Net loss increased to $34.6 million for the quarter.
• Adjusted EBITDA decreased to $(19.3) million for the three months ended March 30, 2024.
• Interest expense increased due to higher interest rates on the Term Loan and Revolving Credit Facility.

Risks

• The company's financial performance is sensitive to weather conditions, which can impact sales of pool and spa products.
• Macroeconomic factors such as inflation, rising interest rates, and potential recession can affect consumer spending and the company's financial results.
• Supply chain disruptions can impact product availability and sales.
• The company faces competition from mass merchants and specialty retailers.
• The company is subject to legal proceedings, including a class action lawsuit and derivative actions.
• The company has identified material weaknesses in its internal control over financial reporting.

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.

Management Comments

• The company is committed to continuing to improve its internal control processes.
• The company disputes the allegations of wrongdoing in the legal proceedings and intends to defend itself vigorously.

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.

Comparison to Industry Standards

• The company's comparable sales decline of 11.7% is worse than the industry average, which has seen a slowdown in growth but not a decline of this magnitude.
• The company's gross margin of 28.8% is lower than the industry average, which typically ranges from 30% to 35% for specialty retailers.
• Competitors such as Pool Corporation (POOL) and Hayward Holdings (HAYW) have reported more stable sales and profitability in recent quarters, indicating that Leslies is facing unique challenges.
• The company's high debt levels and interest expenses are also a concern compared to industry peers with stronger balance sheets.
• The company's ongoing issues with internal controls are also a significant concern compared to industry standards.

Management Changes

Corporate Governance

Legal Proceedings

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

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.

Stakeholder Impact

• Shareholders are negatively impacted by the decreased sales, reduced gross margin, and increased net loss.
• Employees may be impacted by potential cost-cutting measures.
• Customers may be impacted by potential changes in product availability or pricing.
• Suppliers may be impacted by potential changes in purchasing patterns.

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 will continue to evaluate and work to improve its internal control over financial reporting.
• The company will continue to monitor the impact of macroeconomic factors on its business.

Key Dates

Keywords

pool supplies, spa care, retail, e-commerce, financial results, sales, gross margin, net loss, EBITDA, debt, legal proceedings, internal controls