Mike Egeck: Yes. A few questions in there. I think what we’re – well, not I think. What’s going on with the file is we added a lot of, I’m going to call them, one-and-done customers during the height of the pandemic, ‘21 particularly, also into ‘22. And we identified this cohort of customers that came in and basically bought tabs, and that was it. And we threw a lot of retention and reactivation tactics at those customers, but not nearly the results we would typically see. And the file degradation that we’ve seen since midpoint of ‘22 is just those customers working their way out of the file. And with the file down 3%, quarter over quarter at the end of Q2, we feel we’re basically through with that cleansing, if you will, of one-and-done customers, which outside of that, the green shoot that we see is outside of those customers peeling off, adjusted, and yes, we’re seeing the file stabilize and starting to show some growth.
And we are not going to go into what growth we expect in the second half, but we expect the business to be positive in the second half, and we expect a positive customer file to support that.
Steven Forbes: Thanks Mike. And maybe just a follow-up, I think, Shaun’s question from before on sort of the chemical pricing, net of the offsets that occurred in the first quarter, because it does seem like there was a more challenging second quarter dynamic here. Any help in framing, like, what you sort of expect the product margin to be in the back half, right? I think in the reiterated gross margin guidance, are we still looking at stability to expansion in product margin, or is there something within the bridge that’s changing?
Mike Egeck: Scott, do you want to take that?
Scott Bowman: Yes, I can take that one. I think there is potential for gross margin expansion in the back half. And the main reason for that is when the June pricing actions, once we overlap that in June, then that basically eliminates the biggest headwind that we have on our product margins. And so I think that will be a big benefit for us. And also rebates should help us more in the back half. We are kind of getting past some timing differences that we had in the first half, but the back half, specifically the fourth quarter, should give us better margin lift from rebates in merch margin.
Steven Forbes: Thank you.
Mike Egeck: Steven, I will add one point to that. On the earnings deck on Page 9, we have got the gross margin bridge. I will give a little color on it. There is 91 basis points in their other product rate. More than half of that is some promotional dollars that we invested in the quarter trying to drive increased traffic, right. We just didn’t sit here and let weak traffic numbers impact the business without trying some different tactics. But I think what we discovered there is, very clearly, you can’t promote your way through tough weather. You can’t promote your way through a pool that’s not open yet. So, we learned a lot. We are going to implement those learnings in the second half. But that’s more than half of what you see there on the other product rate line.
Steven Forbes: Helpful. Thank you.
Operator: Next question, Ryan Merkel with William Blair. Please go ahead.
Ryan Merkel: Hey everyone. Thanks. And Mike, I wanted to ask on the non-discretionary sales down 11% in the quarter. Is that all weather and chemical price deflation? I just ask as a consumer, there is some weakness there, is that showing up at all?
Mike Egeck: Yes, we don’t think it’s consumer weakness per se, Ryan. The chemicals – volume overall in chemicals was down 4%. Trichlor and Cal-Hypol were down 1%. We had some softness in other chemicals. So, pricing was down 7%. And of that down 7%, 575 basis points of that, most of it is tied to the June ‘23 price actions. The balance, I would characterize as a combination of mix and a little bit more price pressure on the PRO side in chemicals.
Ryan Merkel: Got it. Okay, that’s helpful.
Mike Egeck: Yes. We are not seeing a weak consumer, per se. We are not seeing a consumer. With the weather we saw, it was a matter of footsteps through the doors and eyeballs on the sites.
Ryan Merkel: Got it. Okay. Yes, that makes sense. And then I had a question on gross margin too. You sort of answered it with the last one. But should we be expecting gross margins to be higher in the fourth quarter than in the third quarter? That’s what I had in my notes, just wanted to clarify that.
Mike Egeck: Yes, Scott, do you want to take that?
Scott Bowman: Yes, I have that one. So, yes, it’s a good question. And the answer is yes. And the main reason for that is we will have a full quarter’s worth of being beyond the June pricing actions. That will help. Rebates will help a little bit as well as those normalize. But also of note is the inventory adjustments in DC costs that were really heavy last year because of all the outside warehouses and all the movement of goods. We should show significant favorability against those two lines as well.
Ryan Merkel: Got it. Thanks a lot. Best of luck.
Mike Egeck: Thanks Ryan.
Operator: Next question, Simeon Gutman with Morgan Stanley. Please go ahead.
Simeon Gutman: Hi guys. Mike, I wanted to ask about pent-up demand and the history of this business when we have tough weather in the beginning. Are there parts of the season we don’t catch up? And this goes back to that order book that you mentioned because I would think you would be well ahead of where you should be tracking now given pent-up demand. And all the companies in our space that have had weather impacts are recovering normally. So, I think it’s very valid. But you do sell a higher-priced item or a lot of higher-priced items, maintenance and repair and even some of the discretionary. So, how do you think about that pent-up demand? How do you think about it in the context of where the consumer is? And then I am trying to get at, is there any way this is a head fake in your industry? How are you contemplating that, just trying to look at both sides?
Mike Egeck: Yes. In terms of pent-up demand for hot tubs specifically, where we have got a forward order book, yes, I would say definitively we have pent-up demand there, and we feel good about the reduction of that part of the business. In terms of equipment and – well, let me answer it this way, because it differs between seasonal and non-seasonal markets. In the seasonal markets, I have mentioned that pool openings were down 19%. Now, pool openings themselves generate volume, but what they really are is an indicator of the start to the season. And by our estimation, we are several weeks behind the start of the season. Now, historically, and as we have looked at weather this year, I think we are closer maybe to 2018. And originally, we had thought we were closer to 2022.
But as we look at weather, yes, when the pool is open in the Northeast, Long Island in particular where it’s a really significant ramp. However, you potentially have fewer pool days. It’s all going to depend now on how the pool season ends in the shoulder season. If it ends on its normal cadence, and we started late, yes, we will lose some days in the seasonal markets just from the pools not being open. In the non-seasonal markets, I think it is more about pent-up demand. People want to use their pools when the weather is correct, and they will tend to use the pool more when the weather encourages them to do so.
Simeon Gutman: Okay. And then can I ask a follow-up back on the share, which – market share. And I know you provided a lot of data here, which is not a lot of information, so you are going to get a lot of questions. When you lowered price, the chemical prices a year ago, remind us it was the industry had lowered it before you, meaning why shouldn’t that lowered price leading to be – lead to more share gain at this point? And are you seeing that share gain come back in chemicals?
Mike Egeck: Yes, it’s a good question. There were two things that spurred us on the chemical price adjustments in June. One was we had gotten outside of our historical price positioning, which is above mass and at or below specialty. We had gotten ourselves up and over specialty. The second thing, and just important to us was, our regular consumer insight work, we were starting to get feedback that we weren’t representing a good value, and it was showing up in our NPS scores. So, we adjusted our prices down to where we thought they should be. We – the third quarter of last year and in the fourth quarter of last year, we feel we did pull back some share versus leaving the prices where they were at. And the last two quarters, like we said, we were surprised by the credit card data, but we take it seriously, and we are working to make sure we make the most of the traffic that we are getting.
I don’t know what to make of the credit card data, actually. It’s a little concerning for sure. More importantly to us, it’s not really aligning with all of our other channel checks. So, not something we are ignoring, but it doesn’t change how we operate. We think we are very competitively priced right now. And this idea of value and our consumers seeing the value not only in our product, but our capabilities, like the AccuBlue water testing in the stores, we think all of that’s showing up through what was a really nice conversion lift. That’s one of the things we feel most positive about the business. When the traffic is there, we are converting at higher levels than we have in the past, and that’s a good sign for the pool season.
Simeon Gutman: Thank you. Good luck.
Mike Egeck: Thanks.
Operator: Next question, Garik Shmois with Loop Capital Markets. Please go ahead.
Garik Shmois: Hi. Thanks. And just a follow-up on that point, just go on to see if you could provide a little bit more context on how traffic was in the quarter in non-weather hit markets and if there was anything to read into trends in places where weather hasn’t been an issue.
Mike Egeck: Yes. That’s one of the challenges with this quarter. Typically, we have some regions where we have got normal weather that we can point to as a control group, if you would, and we just we didn’t have that. We didn’t have that anywhere. The seasonal markets, as I talked about and as evidenced by the pool openings, just vary, combination of cooler and wet. And when the weather got a little warmer, it was still very wet. And the number of consecutive days over 70 degrees, which we found is highly correlated with traffic in our business, in our major markets, Texas, Florida, Arizona, that was down anywhere from 18% to 64%. And in California, which was our best-performing market, there was zero consecutive days over 70, but there was also 69% more rainy days than a 10-year average. So, we actually couldn’t point to any of our major markets and say we had, based on data, a normal quarter.
Garik Shmois: Okay. That’s helpful. Just my follow-up question is on gross margins, just to put a bit of a finer point on the guide. I think coming into the year, you are expecting about 100 basis points in gross margin improvement this year. Correct me if I am wrong on that. And if that was the case, do you think that’s still reasonable given we are heading into the peak season now? Do you think there is enough opportunities in front of you to reach that prior guide?
