Yahoo Finance Leslie’s, Inc. (NASDAQ:LESL) Q2 2024 Earnings Call Transcript
Leslie's, Inc. (NASDAQ:LESL) Q2 2024 Earnings Call Transcript May 11, 2024
Leslie's, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon and welcome to the Second Quarter of Fiscal 2024 Conference Call for Leslie’s. [Operator Instructions] 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 Matt Skelly, Vice President of Investor Relations.
Matt Skelly: 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.
We have also posted our Q2 2024 earnings presentation to our IR website, and we’ll be making references to it in our prepared remarks. On the call today is Mike Egeck, Chief Executive Officer; and Scott Bowman, Chief Financial Officer. With that, I will turn the call over to Mike.
Mike Egeck: Thanks, Matt, and thank you all for joining us this afternoon. Our bottom line financial performance in the second quarter was largely in line with our expectations. Top line sales were impacted by cool and wet weather in our seasonal and non-seasonal markets, as well as a pool and spa consumer that continues to normalize their post-pandemic spending patterns. I am pleased with the team’s performance in the quarter, as we executed well against the factors within our control. We saw improved conversion from healthy in stock levels and competitive price positioning across our channels, and we delivered on our inventory goals while providing superior customer service and disciplined expense management. Since it’s been nearly 6 months since we provided our planning assumptions for the year, I want to remind everyone how we are thinking about our annual guidance.
At the midpoint, we plan the following for the year: discretionary product sales down 10%; equipment sales down 10%; nondiscretionary product sales up 1.5%; AOV down 4% driven by mix and the cycling of our June 2023 chemical price adjustments; and transactions up 3% driven by normal weather. You will hear from us today that the majority of these factors are performing in line with expectations, with the exception of weather and the associated impact on traffic and transactions. During the quarter, the weather was much cooler across key non-seasonal markets, including Texas, Southern California, Arizona, and Florida. This resulted in significantly fewer consecutive days above the critical 70-degree threshold versus the same period in the prior year and/or the 10-year averages for these markets.
Weather was also a factor in our seasonal markets, with pool openings down 19% year over year, driven by a cool and wet spring. Turning to our financial results for the quarter. Total second quarter sales were $189 million, down 11% year over year. This includes an approximately 440 basis point impact from our June 2023 chemical price actions and the Q2 calendar shift that Scott will detail later in the call. Residential pool was down 12%, PRO pool was down 9%, and residential hot tub was down 14%. Comp sales were down 12%. Given the weather I just discussed, traffic was down 10% in the quarter. Total transactions were down 6% year over year. Our focus on customer service, product availability, competitive pricing, compelling assortments, and value messaging drove increases in customer conversion that offset a significant portion of the traffic decline.
Average order value was down 5% year over year. Average order value continues to be affected by sales of high-ticket discretionary products, including hot tubs, above-ground pools, and heaters, as well as our June 2023 chemical price changes. Non-discretionary product sales were down 11% versus a year ago. Total chemical sales decreased 11%, inclusive of a negative 575 basis point impact from our June 2023 price adjustments. However, volume of cal hypo and trichlor was down only 1%, and we were encouraged by the sequential improvement in key chemical volumes each month during the quarter. Sales of equipment were down 10%, an improvement of 800 basis points from Q1, and consistent with our expectations at the midpoint of our full year guide.
Discretionary product sales were down 13%, an improvement of 600 basis points from Q1, and contributed about 24% of the quarter’s total sales decline. Of note, rain and/or snow across many of our seasonal markets prevented installation crews from delivering and installing hot tubs and swim spas. Cancellation rates remain very low, and our order book at the end of the quarter is supportive of the midpoint of our full year guide. As you can see on Page 11 of our earnings presentation, our regular analysis of select credit card data indicates that our sales underperformed the industry by approximately 850 basis points in the quarter, of which approximately 380 basis points is attributable to our June 2023 chemical price changes and the calendar shift.
However, our vendor discussions, district and store manager discussions, customer exit interviews, and data from SimilarWeb for our digital businesses all indicate our Q2 performance is broadly in line with the industry, ex the chemical price change. Looking across a longer time horizon, the credit card data indicates that specialty pool sales were down in 8 of the last 10 quarters. Over those 10 quarters, we have grown sales faster than the industry by an average of approximately 380 basis points. With respect to profitability, gross margin decreased 464 basis points, driven primarily by the impact of the chemical price reductions we implemented in June 2023 and occupancy deleverage. Gross margin was largely in line with our expectations, with the exception of the incremental occupancy deleverage associated with lower-than-expected sales.
Adjusted EBITDA for the quarter was negative $19 million and adjusted diluted earnings per share, was negative $0.17. As a reminder, our fiscal second quarter, like our first fiscal quarter, is historically a relatively small sales quarter during which we make investments and incur costs to position the company for the peak pool season in our fiscal second half. As such, we expect no profit contribution in these quarters and our performance this year was consistent with these expectations. With regard to the industry backdrop, certain categories and channels have seen some instances of deflation near to date, but overall industry retail pricing is largely stable, and we remain competitively priced across our omnichannel platform. Industry promotional activity continues to be consistent with historic seasonality, and we are using advanced analytics to be more surgical on when and where to promote most effectively.
Supply chains are operating normally, and inventory levels are seasonally appropriate. The slow start to this year’s pool season notwithstanding, we believe that the long-term pool industry fundamentals and secular tailwinds that drive industry demand remain intact, and we expect both of these factors to continue to underpin our long-term growth opportunity. Leslie’s remains the leading direct-to-consumer pool and spa retailer with unmatched scale, capabilities, and brand awareness. As we have positioned ourselves to win during pool season, we also remain focused on executing our strategic growth initiatives, which we expect to drive long-term sustainable top line growth and profitability, share gains, and operational efficiency. Turning to those initiatives.
First, our customer file improved from down 8% in fiscal Q1 to down 3% in fiscal Q2. We believe that our customer file continues to normalize from the pandemic spike, and we expect to return to growth in the second half of the year. Second, average revenue per customer was down 8% in the quarter, driven primarily by decreases in big-ticket items such as hot tubs, swim spas, above-ground pools, and automatic pool cleaners. Average revenue per customer for our loyalty customers outperformed at down 4% in the quarter. Third, with regard to our PRO initiative, we ended the quarter with 4,088 PRO contracts in place and 102 PRO locations. This compares to 3,300 PRO contracts and 98 PRO locations at the end of the second quarter of last year. PRO sales were down 9% for the quarter.
PRO Partner sales were down 7%, offset by non-partner PRO sales, which declined 26%, highlighting the importance and effectiveness of our partner program. Fourth, M&A and new store growth continue to be important initiatives for Leslie’s, and we are confident in our long-term store expansion opportunities. For fiscal 2024, we remain on track to open 15 new stores. Finally, our AccuBlue Home smart tech water testing device and membership program continues to gain momentum and is resonating strongly with customers. Our manufacturing partner is delivering product on time, and we are on track to meet our inventory targets for pool season. Our members continue to give us feedback that our proprietary software is a gamechanger and continue to respond with very positive online reviews.
As you will recall, our AccuBlue Home membership consists of a free device and a $50 per month membership subscription, which is offset by $50 per month of purchase credits that can be used online or in store. Our members have been spending at a rate of more than $1,000 per year. We remain focused on executing our strategic initiatives to capture the long-term opportunities and extend our industry leadership. In addition, we continue to take actions to improve the trajectory of the balance of the year. Number one, we are using our analytical tools and insights to drive efficiency in pricing and promotions with a focus on growing gross margin dollars. Number two, we achieved our goal of reducing our peak inventory by more than $100 million and remain on track to reduce year-end inventory by more than $50 million, while maintaining strong in-stock levels and service metrics and high NPS scores.
We will keep a laser focus on SG&A efficiency. Scott will address this later in the call, but SG&A in the second quarter was down 12% versus the same period a year ago. Number four, we continue investing in our people, fostering and promoting top talent within the organization, while adding outside talent with deep experience and fresh eyes to continuously improve how we operate. Number five, we are leveraging our omnichannel platform to connect with consumers more frequently, including through surveys, exit interviews, research, and other feedback to give us a detailed view into the specialty pool and spa consumer. And number six, we continue to invest in marketing to drive long-term brand awareness, customer file growth, Pool Perks members, and sales.
I will now hand it over to Scott to discuss our results and outlook in more detail. Scott?
Scott Bowman: Good afternoon, everyone, and thank you, Mike. Our results for the quarter were largely in line with our expectations, while unfavorable weather contributed to lower traffic and a late start to the pool season in our main markets. For the second quarter, we reported total sales of $189 million, a decrease of 11% compared to the second quarter of fiscal 2023. The second quarter this year ended on March 30th versus April 1st last year. Due to this calendar shift, we lost 2 early spring higher-volume selling days and gained 2 lower-volume winter selling days. The negative impact of this shift was approximately $4 million or 180 basis points in the quarter. Comparable sales decreased 12%, driven primarily by transaction count and spending on larger ticket items.
Comparable sales decreased 26% on a 2-year stack basis. Non-comparable sales contributed $1.5 million in the quarter, driven by acquisitions and new store growth. With respect to trends by consumer group, comparable sales for residential pool declined 12%, PRO pool declined 9%, and residential hot tub declined 14% compared to the prior year period. Sales declines are driven by unfavorable weather, softer sales in discretionary items, and the June 2023 price actions. In these shoulder seasons, weather and the timing of pool openings can cause significant sales variances due to the smaller sales base. Gross profit was $54 million compared to $71 million in the second quarter of fiscal 2023, and gross margin rate declined 464 basis points to 28.8%, which was slightly below expectations, mainly due to incremental occupancy deleverage from lower-than-expected sales.
We continue to expect meaningful back-half margin expansion versus the first half of the fiscal year, most notably in the fourth quarter, as we cycle the June 2023 chemical price decreases and higher inventory adjustments and distribution costs that pressured second half 2023 profitability. Page 9 of our earnings presentation illustrates our Q2 gross margin rate bridge in more detail. During the quarter, gross margin was affected mainly by lower selling prices and deleverage in occupancy costs due to lower sales. SG&A was $85 million, a reduction of 12%, or $11.5 million, compared to the second quarter of fiscal 2023. The reduction was primarily due to declines in merchant fees, lower payroll and executive transition costs, and lower store expenses.
Adjusted EBITDA was negative $19 million compared to negative $8 million in the second quarter of fiscal 2023, and adjusted net loss was $32 million compared to a loss of $26 million in the second quarter of fiscal 2023. Interest expense increased to $18 million during the quarter from $17 million in the same period last year due primarily to higher interest rates, and our effective tax rate increased to 29% compared to 25.7% in the second quarter of fiscal 2023. Adjusted diluted earnings per share was negative $0.17 compared to negative $0.14 in the second quarter of fiscal 2023. Diluted weighted average shares outstanding were $185 million. Moving to the balance sheet. We ended the quarter with $786 million outstanding on our secured term loan facility and $97 million on our revolving credit facility.
This compares to $794 million and $172 million, respectively, in the prior year quarter. Our debt levels were lower by $83 million versus a year ago, and our leverage ratio was 6.0 times. Availability on the revolver was $142 million at the end of the quarter. As a reminder, this is our peak debt quarter before we generate all of our profitability and free cash flow in the seasonally important second half of our fiscal year. The applicable rate on our term loan was SOFR plus 275 basis points in the second quarter, and our effective interest rate was 8.2% compared to 7.3% in the prior year quarter. Our total cost of debt for the quarter was 8.1% compared to 7.2% in the second quarter of last year. Additionally, last month, we successfully extended the maturity date of our revolving credit facility to April 2029.
Cash and cash equivalents were $8 million at the end of the quarter, compared to $9 million for the same period last year. Inventory ended the quarter at $379 million, a decrease of $113 million, or 23% compared to the prior year quarter, while our in-stock position, service metrics, and Net Promoter Scores remained very strong. Our stores are well-stocked with the full assortment for the pool owner and PRO as we gear up for the peak pool season. And now turning to our fiscal 2024 outlook. After a first quarter that was consistent with expectations, our second quarter was below our top line expectations, mainly due to unfavorable weather that resulted in a slower start to the pool season. We are now 5 weeks into our third quarter. During the first 3 weeks, weather continued to be a challenge.
However, over the last 2 weeks, we’ve seen improved trends with improved weather. Ultimately, our biggest volume weeks lie ahead, and with our consistent, seasonable weather, we believe we are on track to deliver a year within our outlook ranges. Moving to capital allocation, our first priority continues to be the paydown of debt, with the goal of achieving a leverage ratio of 3.5x to 3.7x in fiscal 2024, and a longer-term goal of reaching a leverage ratio of 3x or less. Regarding our footprint, we are planning 15 new store openings in fiscal 2024, with the majority of these stores expected to open prior to Memorial Day ahead of the peak pool season. We also plan to convert 6 residential stores to our PRO format this year. At this time, we are not including any sales or EBITDA contribution from M&A activity in our full year guidance.
And with that, I’ll hand it back over to Mike for closing remarks.
Mike Egeck: Thank you, Scott. To conclude, results this quarter continue the recent trend of softer sales for Leslie’s and the industry, from persistent unfavorable weather and normalizing pool and spa consumer behavior from a period of significant growth. In light of that, we continue to aggressively manage SG&A and inventory while focusing on customer service. We believe we are set up to win in pool season. Our employees are excited and engaged, our stores and DCs are well stocked and ready to go, our omni-channel presence has us positioned to service residential and PRO customers in the way that they choose, and our PRO Partner and Pool Perks loyalty program are leaders in the industry. We have an unmatched set of capabilities to serve our customers, and with AccuBlue Home, a clean, safe, and beautiful pool has never been easier to achieve.
With the majority of our sales and all of our profitability still to be achieved in the back half of the year, we are focused on superior execution, and we remain confident in our long-term prospects for growth and profitability. With that, I will hand it back to the operator for Q&A.
See also
15 States With the Highest Rates of SNAP Recipients in the US and
30 Highest Paid Jobs and Occupations in the US.
To continue reading the Q&A session, please click here.
