Leslie’s, Inc. (NASDAQ:LESL) Q1 2023 Earnings Call Transcript

Leslie’s, Inc. (NASDAQ:LESL) Q1 2023 Earnings Call Transcript February 3, 2023

Operator: Good afternoon, and welcome to the First Quarter of Fiscal 2023 Conference Call for Leslie’s, Inc. At this time, all participants are in a listen-only mode. As a reminder, this conference call is being recorded and will be available for replay later today on the company’s website. I will now turn the call over to Caitlin Churchill, Investor Relations. Thank you. You may begin.

Caitlin Churchill: Thank you, and good afternoon. I would like to remind everyone that comments made today may include forward-looking statements, which are subject to significant risks and uncertainties that could cause the company’s actual results to differ materially from management’s current expectations. These statements speak as of today and will not be updated in the future if circumstances change. Please review the cautionary statements and risk factors contained in the company’s earnings press release and recent filings with the SEC. During the call today, management will refer to certain non-GAAP financial measures. A reconciliation between the GAAP and non-GAAP financial measures can be found in the company’s earnings press release, which was furnished to the SEC today and posted to the Investor Relations section of Leslie’s website at ir.lesliespool.com.

On the call today from Leslie’s is Mike Egeck, Chief Executive Officer; and Steve Weddell, Chief Financial Officer. With that, I will turn the call over to Mike.

Mike Egeck: Thanks, Caitlin, and good afternoon everyone. Thank you for joining us. Please note that we have posted a short earnings deck to Leslie’s IR site and that we will be referring to certain pages in that deck during our call. I’d like to start by reminding everyone that the first quarter is our smallest quarter of the year, representing only about 12% of total year sales. However, it was an important quarter as we take the actions, incur the expenses, and make the appropriate investments to set ourselves up for the all-important second half of our fiscal year, which is pool season across the country. With that in mind, I am pleased that we delivered overall Q1 performance that was in-line with our expectations, despite some very challenging weather in the quarter.

Sales for the quarter grew 6% to a record $195 million. Average order value grew 7% and transactions were down 1%. Average revenue per customer grew 6% and our customer file was flat. Residential hot tub grew 35% in the quarter, and PRO pool grew 11%. Residential pool sales decreased 3% in the quarter. Comp sales decreased 4% for the quarter, which contributed to a two-year stack comp of plus 17%. Comp sales for the quarter were negatively impacted by wet and cold weather, particularly in Texas, California, and the Southwest. Sales in Florida benefited from the cleanup associated with Hurricane Ian. In total, a weather service provider calculated that weather was a 5% headwind to comp sales for the quarter. This is the first quarter since the positive impact of the Texas freeze in the second quarter of 2021, that weather has had a significant impact on our overall comp sales.

Gross profit for the quarter was 65 million and gross margin rate was down 290 basis points. Please refer to Page 6 of our supplemental deck to review our Q1 margin rate bridge. As you can see, the primary drivers of the change in margin rate are: number one, business mix, driven by acquisitions that disproportionately impacted margins in the quarter; two, incremental product costs in excess of retail price increases; three, incremental DC expense associated with the execution of our strategy to peak store and DC inventory earlier in preparation for pool season; and four, deleverage of occupancy costs driven by a decrease in comp sales. These factors are all reflected in our full-year guidance, and we expect these same factors to impact our Q2 margin rate.

To complete our summary of Q1 financial performance, adjusted EBITDA for the quarter was negative 12 million and adjusted diluted earnings per share were negative $0.14. Given the seasonality of our business, the loss in the quarter was anticipated and does not change our expectations for the full-year. Accordingly, we are reaffirming the full-year outlook we provided at our Investor Day in November. As we noted in November, we expected a tougher first half comps this year, and our first quarter results were in-line with our internal expectations. However, the makeup of those results did have some differences from our full-year outlook. As you can see illustrated in the table on Page 9 of the deck, total comp sales of minus 4% was less than our full-year guide of minus 2.5%.

Comp sales for nondiscretionary products, ex. Trichlor, were down 3% in the quarter and had a total comp sales contribution of minus 2.5% versus our full-year guide of plus 1.3%. Trichlor comp sales grew 8% in the quarter and had a total comp contribution of plus 1% versus our full-year guide of minus 1.1%. We saw no price deflation versus the prior year’s quarter or the fourth quarter of fiscal 2022. Discretionary product comp sales were down 11% in the quarter and had a total comp contribution of minus 2.5% versus a planned comp contribution of minus 2.7% for the year. Non-comp sales in the quarter were plus 9.6% versus our full-year guide of plus 5%. In summary, nondiscretionary sales, ex. Trichlor, were not as strong as we expected due to adverse weather.

Discretionary sales overall performed in-line with our expectations although hot tub sales were somewhat better than we expected. Trichlor outperformed as retail prices remained stable and non-comp sales outperformed, driven by acquisitions and new stores. As we look to the second quarter, weather is projected to be less of a headwind, but we do expect our hot tub business to decelerate such that we continue to anticipate first half comps to be as we described at our Investor Day. Moving to the industry backdrop. The pool and hot tub industry experienced reduced consumer demand in the quarter. As you can see on Page 10 of the deck, our specialty pool retail competitors, based on third-party aggregated credit card data, experienced a decline in sales of 7.2% in the quarter.

This softening demand has two primary components. First, as will be discussed concerning our own results, weather was a significant negative factor year-over-year for most markets. Second, consumers were less confident based on the challenging macroeconomic backdrop. For our business, we saw this decreased confidence, manifested in consumer behavior changes, including purchases of smaller sizes of our two key sanitizers, Trichlor and and reduced units per transaction. UPT for the quarter was down 2%. Against this backdrop of reduced demand, the competitive advantages derived from our integrated system of physical and digital assets and our associates’ strong execution of our diversified growth initiatives drove continued market share gains.

Turning now to the performance of our strategic growth initiatives. First, despite the macroeconomic and weather challenges in the quarter, our consumer file was flat versus the prior year’s quarter and improved 200 basis points from our fiscal Q4 2022. Next, we continue to deepen our relationship with our consumers. Average revenue per consumer grew 6% in the quarter, and the number of loyalty members increased 15% over the prior year’s quarter. With regard to our PRO initiative, we ended the quarter with 2,850 PRO contracts in place, and we are currently operating 80 PRO locations. Our plan to convert 15 PRO locations and build three new PRO locations in 2023 remains on track, and all 18 locations are scheduled to be operating by the start of the pool season.

PRO consumer group sales grew 11% in the quarter, with comp sales down 4%. Our PRO comps were affected by the same factors we discussed for our overall business, as well as some product availability challenges with one equipment vendor. M&A was the standout contributor to the quarter, accounting for more than 15 million in non-comp sales. Year-to-date, we have closed on two acquisitions that added six locations. And we have another five acquisitions under LOI that would add 13 locations. We expect to close the acquisitions under LOI prior to the start of pool season. The conditions in the pool and hot tub industry have created additional attractive acquisition opportunities, and we plan to continue accelerating this initiative. Regarding our residential white space initiative, in the quarter, we added five locations through acquisitions, opened one new store and closed two stores for a net increase of four locations.

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We currently operate more than 990 locations, and we’re on track to operate over 1,000 locations by the start of the pool season. For AccuBlue Home, we have finished consumer testing on the version 2.0 device and remain on track to launch this initiative for pool season 2023. With regard to corporate governance, we have published a proxy for our Annual Shareholding Meeting scheduled for March 16, 2023. In the proxy, we announced that Ms. Jodee Kozlak will not be seeking reelection to our Board, and then Mr. Marc Magliacano of L Catterton will be resigning from our Board, effective with the completion of our annual meeting. We thank Jodee and Marc for their service and many contributions to Leslie’s. In conjunction with these changes, we also announced that our Board will be revised from 10 to 8 members.

Now, I’ll turn it over to Steve to share more detail on our Q1 financial results.

Steve Weddell: Thank you, Mike, and good afternoon, everyone. As Mike mentioned, our first quarter results were in-line with our expectations, and we reported record sales for the quarter. We’re grateful for our team as they continue to execute against our initiatives and prepare for pool season in 2023. For the first quarter, we reported record sales of 195 million, an increase of 6% or 10 million when compared to the first quarter of fiscal 2022. Our comparable sales decreased 4% or 7 million. This decrease is on top of our comparable sales growth of 21% in the first quarter of fiscal 2022 and calendar adjusted comparable sales growth of 26% in the first quarter of fiscal 2021. Our comparable sales growth on a two-year stack basis was 17%, and on a three-year stack basis was 42%.

Our noncomparable sales totaled $17 million in the first quarter of fiscal 2023, which was driven by seven completed acquisitions that added 32 locations, as well as eight net new store openings since the end of fiscal 2021. Our comparable sales decreased by 4% for residential pool, 4% for PRO pool, and 2% for residential hot tub. On a two-year stack basis, we generated comparable sales growth of 14% for residential pool, 36% for PRO pool, and 4% for residential hot tub. Unfavorable weather had a 5% impact on sales growth during the first quarter with the Texas market experiencing the largest impact. Gross profit decreased 3% or 2 million when compared to the first quarter of fiscal 2022, and gross margin rate, which decreased in-line with expectations was down 290 basis points to 33.5% from 36.4% in the prior year.

On Page 6 of our supplemental deck, I’ll review our Q1 gross margin rate bridge in more detail. During the quarter, gross margins were impacted by the following: first, business mix lowered gross margins by 130 basis points, primarily related to M&A completed during the last 12 months. Second, lower product margins had a 40 basis point impact as a result of higher input costs. During the quarter, promotional activity was flat to slightly down and did not have a material impact on our gross margins. Third, occupancy costs deleveraged by 85 basis points due to rent increases and negative comparable sales growth. And finally, incremental distribution expenses lowered gross margin by 35 basis points. Distribution expenses were elevated as we executed on our plans to receive in and distribute more product to our store network earlier than last year in preparation for the coming pool season.

Now, I’ll turn to SG&A. SG&A increased 16% or 12 million when compared to the first quarter of fiscal 2022. We estimate inflation during the quarter increased SG&A by approximately 5 million, primarily related to payroll and digital marketing spend. The current year quarter also has an additional 4 million of noncomparable SG&A associated with acquired businesses. Adjusted EBITDA was negative 12 million for the first quarter of fiscal 2023, which was slightly ahead of internal expectations. Adjusted net loss was 25 million in the first quarter of fiscal 2023, compared to a loss of 11 million in the first quarter of fiscal 2022. Interest expense increased to 13 million during the quarter from 7 million in the first quarter of fiscal 2022. And our effective tax rate remained consistent at 25%.

Adjusted diluted earnings per share was negative $0.14 in the first quarter of fiscal 2023, compared to negative $0.06 in the prior year. And basic and diluted weighted average shares outstanding were 184 million in the first quarter of fiscal 2023, compared to 189 million shares in the first quarter of fiscal 2022. Moving to the balance sheet. We finished the first quarter of fiscal 2023 with cash of 3 million, and we had 91 million outstanding on our revolver compared to cash of 53 million and no borrowings on our revolver at the end of the first quarter of fiscal 2022. The reduction in net cash was primarily due to investments in inventory and higher M&A activity during the past 12 months. At the end of the first quarter of fiscal 2023, we had 99 million available on our revolver.

We ended the first quarter of fiscal 2023 with 430 million of inventory, an increase of 185 million or 76%, compared to 245 million at the end of the first quarter of fiscal 2022. The increase in inventory is primarily related to equipment, chemicals, and M&A activity. Both the equipment and chemical product categories are nondiscretionary in nature and are not subject to technology or fashion risk. And as previously stated, our first priority is to put the company in a position to meet consumer demand for the season. In furtherance of that objective, we continue to view our current elevated inventory position as appropriate and sensible given the uncertainty of supply. We also have the ability to use our balance sheet as a competitive advantage and invest in higher inventory levels in both our stores and our distribution centers.

When we believe we have sufficient inventory to meet consumer demand through season, and after we see supply chains across the industry become more predictable, then we will strategically manage inventory levels down. On debt, at the end of the first quarter of fiscal 2023, we had 796 million outstanding on our secured term loan facility, compared to 804 million at the end of the first quarter of fiscal 2022. The applicable rate on our term loan during the first quarter was LIBOR plus 250 basis points, and our effective interest rate was 6.1%, compared to an effective interest rate of 3% during the first quarter of fiscal 2022. Before I wrap up our first quarter performance, I’d like to share an update on our supply chain readiness. In November, we discussed specific actions we were taking to improve our supply chain across three key areas.

First, expand capacity by implementing the two-shift seven-day-a-week model during pool season for our distribution centers and by adding additional three PLs to our network; second, stock more inventory across our network; and third, diversify our supply base. I’m pleased to report that we have made significant progress against all three of these areas, and our team is focused on meeting consumer demand across our entire network during the upcoming pool season. Now, let me turn to our outlook for fiscal 2023. Our performance in the first quarter of fiscal 2023 was in-line with expectations. And today, we are reaffirming the outlook we issued at the end of November. As we discussed a couple of months ago, we’re expecting a more uncertain macroeconomic environment in fiscal 2023, up to and including a recession that will pressure industry sales, margins, and earnings growth.

Approximately 80% of our sales are nondiscretionary products and services, which will mitigate, but not eliminate a recessionary impact on our business. For fiscal 2023, we continue to expect sales of 1.56 billion to 1.64 billion, gross profit of 667 million to 708 million, adjusted EBITDA of 280 million to 310 million, net income of 131 million to 146 million, adjusted net income of 145 million to 160 million, and diluted adjusted earnings per share of $0.78 to $0.86, and diluted share count of 185 million shares to 187 million shares. Finally, on our outlook, I want to remind everyone of the natural seasonality within our business. Our primary selling season occurs during our fiscal third and fourth quarters, which span April through September.

We invest in our business throughout the year, including in operating expenses, working capital and capital expenditures related to our growth initiatives. While these investments drive performance during our primary selling season, they reduced our earnings and cash flow during the first half of our fiscal year. Consistent with our commentary in November in fiscal 2023, we expect negative comparable sales growth and significant gross margin declines in the first half of the fiscal year, given the strength of the comparable periods in fiscal 2022 and fixed cost deleverage. We also expect to generate all of our adjusted EBITDA and earnings in the second half of the fiscal year. In summary, during the first quarter of fiscal 2023, we generated record sales and performed in-line with our expectations.

We’re grateful for the contributions of our entire team as they continue to execute against our initiatives and prepare for the 2023 pool season. And we will continue our relentless focus on enhancing our customers’ experience and executing our initiatives to drive growth and market share gains. And with that, I will hand it back over to Mike. Thank you.

Mike Egeck: Thanks, Steve. The pool and spa industry has proven over time to be one of the most durable and advantaged consumer products categories, but it does have some sensitivity to macroeconomic conditions. In addition, during periods that are not prime pool season, consumers can take some shortcuts in maintenance with less danger of lost swimming days, safety concerns, and equipment damage from poor water care and maintenance. In the first quarter, we did see some indications of reduced confidence and demand from pool and spa owners, especially for discretionary products. This reduced confidence, combined with some very unfavorable weather, made for a challenging industry backdrop. Against that backdrop, we feel good about meeting our internal profit expectations and growing our top line 6%.

These results are a testament to our teams performing at a high level into the ability of our diversified strategic initiatives to drive growth in adverse macro conditions. And importantly, we feel very good about the progress we made against our plans to de-risk our supply chain and ensure that we are in a position to win big during the 2023 pool season. With that, I will hand it back to the operator for Q&A.

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Q&A Session

Operator: Thank you. Our first question is from Simeon Gutman with Morgan Stanley. Please proceed.

Simeon Gutman: Hey, good afternoon everyone. Hope you are good. I think you’ve talked about this in the past. I wanted to ask what recession could look like for you. And I think there’s a lot of puts and takes and who knows how the consumer will spend on travel and maybe it comes back into this category, but if there is a history lesson €“ and then just to clarify, minus 5% to flat, is that bracketing a potential recession or that is a non-recession scenario?

Mike Egeck: Yes. Thanks for the question, Simeon. The full-year guidance does include challenging macro conditions up to including a recession. So that does bracket it, to answer your question. And you’re right, there’s a lot of puts and takes in there, right. A recession could slow down spend on travel and could keep more people at home. You could also look for people to just try to skip some steps in pool maintenance, but they can only do that for a period of time, as you know. So, yes, we’re comfortable that our full-year guidance sufficiently brackets economic conditions up to and including a recession.

Simeon Gutman: Okay. And then a quick follow-up. How are €“ I don’t know if it’s deflation or disinflation or price tracking relative to expectations? And then demand for durables. You mentioned you’re starting to see some pockets or durables, but I guess, units per se. How are units tracking versus how you thought? And how is price tracking versus how you thought?

Mike Egeck: Yes, start with price. Inflation was a little higher than we anticipated in the quarter, but came down across all of our product categories. So, definitely heading in the direction we anticipate. It doesn’t change our outlook for 5% for the full-year. And in terms of durables, or if you would, big ticket items, we have seen some weakness in equipment. And at the same time, our equipment repair and parts businesses have picked up. So, there’s a little bit of a signal that some people are looking to repair versus replace or upgrade right now. But I think we’ve got to keep in mind that this is a very small quarter for us. And it’s not €“ we internally try very specifically not to take the trends we see in Q1 and apply them to the balance of the year. Such a small quarter that a little bit of changes in consumer behavior or in this case, a really challenging weather, have an outsized impact in the quarter that just don’t impact the full-year.

Simeon Gutman: Okay. Thanks Mike. Good luck.

Mike Egeck: Thank you.

Operator: Our next question is from Steven Forbes with Guggenheim Partners. Please proceed.

Rene Marin: This is Rene Marin on for Steven Forbes. I wanted to touch on the first side of the business. Can you discuss any incremental learnings from this customer? Additionally, can you discuss any notable trends with pricing in this segment? Thank you.

Mike Egeck: Rene, that was specific to the PRO consumer. Is that correct?

Rene Marin: Yes. Yes.