10-Q: Leslies Reports Q2 Sales Increase Amid Store Closures

Leslies, Inc. reported a 4.3% increase in sales for the second quarter ended April 4, 2026, driven by retail strength and calendar shifts, despite ongoing store closures.

Summary

• Leslies, Inc. reported a 4.3% increase in sales for the second quarter ended April 4, 2026, reaching $184.7 million, compared to $177.1 million in the prior year period.
• Comparable sales for the quarter increased by 6.6%.
• However, for the six-month period ended April 4, 2026, sales decreased by 5.8% to $331.9 million, primarily due to sales lost from store closures and prior year headwinds.
• Gross margin improved significantly in the second quarter to 28.9% from 24.8% in the prior year, attributed to occupancy and distribution cost savings, and improved product mix.
• The company recognized impairment charges totaling $9.0 million for the six-month period related to store and distribution center closures.
• Net loss for the second quarter was $52.5 million, a slight increase from $51.3 million in the prior year, largely due to the absence of a prior year tax benefit.
• The company is addressing material weaknesses in internal controls related to inventory and asset impairments, with remediation expected in fiscal year 2026.
• Leslies received a credit rating downgrade from S&P to CCC from CCC+ in January 2026.

Sentiment

Score: 3

Explanation: StockSavvy.ai views this filing as negative due to the increased net loss, declining six-month sales, material weaknesses in internal controls, and the risk of Nasdaq delisting, despite a positive trend in second-quarter sales and gross margin.

Positives

• Second-quarter sales increased by 4.3% to $184.7 million.
• Comparable sales for the second quarter increased by 6.6%.
• Gross margin improved significantly in the second quarter to 28.9% from 24.8% in the prior year, driven by cost savings in occupancy and distribution, and better product mix.
• Selling, General, and Administrative (SG&A) expenses decreased slightly by 0.1% for the second quarter, and as a percentage of sales, improved by 220 basis points to 49.9%.

Negatives

• Net loss for the second quarter was $52.5 million, a slight increase from $51.3 million in the prior year.
• For the six-month period, sales decreased by 5.8% to $331.9 million.
• For the six-month period, gross margin decreased to 24.2% from 26.0% in the prior year, impacted by a $5.5 million inventory impairment charge.
• The company incurred $9.0 million in impairment charges for the six-month period related to store and distribution center closures.
• The company received a credit rating downgrade from S&P to CCC from CCC+ in January 2026.
• Disclosure controls and procedures were not effective as material weaknesses in internal control over financial reporting were not yet remediated.
• The company is at risk of delisting from The Nasdaq Global Select Market if it cannot regain compliance with the minimum market value of publicly held shares rule by August 10, 2026.

Risks

• Potential delisting from The Nasdaq Global Select Market if compliance with the minimum market value of publicly held shares rule is not regained by August 10, 2026.
• Continued supply disruptions or increased costs due to trade policies, geopolitical conflicts, and commodity price volatility.
• Sensitivity to weather conditions, economic changes (including high interest rates, recession fears, inflationary pressures), consumer purchasing patterns, and geopolitical events.
• Disruptions in the operations of manufacturing facilities and distribution centers.
• Inability to implement technology initiatives that deliver anticipated benefits without disrupting operations.
• Challenges in executing management transition plans and retaining qualified personnel.
• Regulatory changes affecting current and future products, including evolving standards for environmental and sustainability matters.
• Inability to timely service, pay off, or refinance existing debt and incur additional debt on acceptable terms.
• Need for additional capital to finance operations, with no assurance of availability or favorable terms.
• Impacts from epidemics, pandemics, or natural disasters.
• Cyber incidents and other security threats or disruptions.
• Inability to remediate material weaknesses or other deficiencies in internal control over financial reporting or maintain effective disclosure controls.
• The company's business is highly seasonal, with sales and earnings highest in the third and fourth fiscal quarters, leading to net losses and negative operating cash flow in the first and second quarters.

Future Outlook

The company expects to fund capital expenditures from net cash provided by operating activities. They believe their current cash position, operating cash flow, and revolving credit facility availability will be adequate to finance working capital, capital expenditures, strategic initiatives, acquisitions, and debt service over the next 12 months and thereafter. However, if these sources are insufficient, they may need to seek additional equity or debt financing, with no assurance of availability or favorable terms.

Management Comments

• Management is committed to improving operational efficiency through strategic store closures.
• The company believes its differentiated capabilities allow it to meet the needs of any pool and spa owner, whether they care for their pool or spa themselves or rely on a professional, whenever, wherever, and however they choose to engage.
• Management will continue to monitor the progress of store closures and evaluate the impact on the Company's financial results.
• Management believes the actions being taken will help remediate the material weaknesses and strengthen internal control over financial reporting, with completion anticipated during fiscal year 2026.

Industry Context

StockSavvy.ai notes that Leslies' performance in this quarter reflects the ongoing challenges and strategic adjustments within the pool and spa care retail sector. The increase in comparable sales in the current quarter, despite store closures, suggests some resilience in demand for essential pool maintenance products. However, the overall sales decline for the six-month period and the significant net loss highlight the impact of strategic restructuring and broader economic pressures on the industry.

Comparison to Industry Standards

• The company operates in the $15 billion U.S. pool and spa care industry, positioning itself as the largest direct-to-consumer brand in its segment.
• Leslies' physical network of approximately 950 retail locations is stated to be larger than the sum of its 20 largest competitors.
• The company's proprietary brands and vertical integration are highlighted as competitive advantages providing cost savings and control over product availability and quality, which is a common strategy for retailers seeking to differentiate and improve margins.
• The direct-to-consumer model and omnichannel strategy are aligned with broader retail trends focusing on customer engagement and accessibility across multiple channels.

Corporate Governance

Legal Proceedings

• A class action complaint for violation of federal securities laws was filed by West Palm Beach Police Pension Fund, alleging materially false and misleading statements. A motion to dismiss was granted, but the plaintiff was allowed to file a second amended complaint, which is currently pending a motion to dismiss.
• Three derivative actions were filed on behalf of the Company against its current and former officers and directors, alleging harm to the Company through false or misleading statements. These actions are stayed pending a decision in the securities class action.
• The company is subject to other routine litigation, claims, and proceedings in the ordinary course of business, for which reserves are not significant and are not expected to have a material adverse effect.

Stakeholder Impact

• Shareholders: Potential adverse effect on market liquidity and share price if delisted from Nasdaq. Stockholders may not be able to sell shares at prices equal to or greater than their purchase price.
• Creditors: The company's credit rating was downgraded to CCC, which may impact borrowing costs and access to credit.
• Employees: Management transition plans and retention of qualified personnel are identified as risks.
• Suppliers: The company has entered into a new supply agreement with annual minimum purchase commitments of approximately $45.0 million through December 31, 2027.

Next Steps

• Continue to monitor the progress of store closures and evaluate their impact on financial results.
• Implement and enhance controls, policies, and procedures to remediate material weaknesses in internal control over financial reporting.
• Regain compliance with Nasdaq's continued listing standards, specifically the minimum market value of publicly held shares rule, by August 10, 2026.
• Complete remediation of material weaknesses in internal control over financial reporting during fiscal year 2026.

Key Dates

Recommendation

While the Q2 sales and gross margin show some positive momentum, the significant increase in net loss for the six-month period, ongoing material weaknesses in internal controls, the risk of Nasdaq delisting, and the recent credit rating downgrade present substantial concerns. The company is in a restructuring phase with store closures, and it's too early to definitively assess the long-term impact of these changes. Therefore, a 'hold' recommendation is appropriate pending clearer signs of sustained operational improvement and resolution of control deficiencies.

Keywords

Leslies, Form 10-Q, Quarterly Report, Pool Supplies, Spa Care, Retail, Sales, Gross Margin, Net Loss, Impairment Charges, Store Closures, Financial Statements, SEC Filing