UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO |
Commission File Number:
(Exact Name of Registrant as Specified in its Charter)
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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The
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Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
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No
As of January 27, 2023, the Registrant
had
Ta ble of Contents
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PART I |
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Item 1. |
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5 |
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Notes to Unaudited Condensed Consolidated Financial Statements |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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PART II |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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26 |
i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations or financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” or “would” or the negative of these words or other similar terms or expressions. Our actual results or outcomes could differ materially from those indicated in these forward-looking statements for a variety of reasons, including, among others:
You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, and operating results. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended October 1, 2022. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. The results, events, and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results or outcomes could differ materially from those described in the forward-looking statements.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q, and, while we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.
The forward-looking statements made in this Quarterly Report on Form 10-Q are based on events or circumstances as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments.
1
PART I - FINANCIAL INFORMATION
Item 1 . Financial Statements .
LESLIE’S, INC.
CONDENSED Consolida ted Balance Sheets
(Amounts in Thousands, Except Share and Per Share Amounts)
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December 31, 2022 |
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October 1, 2022 |
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January 1, 2022 |
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(Unaudited) |
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(Audited) |
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(Unaudited) |
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Assets |
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Current assets |
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Cash and cash equivalents |
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$ |
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$ |
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$ |
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Accounts and other receivables, net |
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Inventories |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Operating lease right-of-use assets |
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Goodwill and other intangibles, net |
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Deferred tax assets |
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Other assets |
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Total assets |
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$ |
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$ |
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$ |
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Liabilities and stockholders’ deficit |
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Current liabilities |
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Accounts payable and accrued expenses |
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$ |
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$ |
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$ |
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Operating lease liabilities |
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Income taxes payable |
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Current portion of long-term debt |
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Total current liabilities |
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Deferred tax liabilities |
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Operating lease liabilities, noncurrent |
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Revolving Credit Facility |
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Long-term debt, net |
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Other long-term liabilities |
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Total liabilities |
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Stockholders’ deficit |
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Common stock, $
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Additional paid in capital |
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Retained deficit |
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(
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(
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(
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Total stockholders’ deficit |
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(
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(
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(
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Total liabilities and stockholders’ deficit |
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$ |
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$ |
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$ |
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See accompanying notes which are an integral part of these condensed consolidated financial statements.
2
LESLIE’S, INC.
CONDENSED Consolidated S tatements of Operations
(Amounts in Thousands, Except Per Share Amounts)
(Unaudited)
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Three Months Ended |
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December 31, 2022 |
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January 1, 2022 |
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Sales |
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$ |
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$ |
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Cost of merchandise and services sold |
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Gross profit |
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Selling, general and administrative expenses |
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Operating loss |
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(
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Other expense: |
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Interest expense |
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Other expenses, net |
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Total other expense |
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Loss before taxes |
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(
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(
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Income tax benefit |
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(
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(
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Net loss |
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$ |
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$ |
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Earnings per share: |
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Basic |
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$ |
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$ |
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Diluted |
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$ |
(
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$ |
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Weighted average shares outstanding: |
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Basic |
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Diluted |
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See accompanying notes which are an integral part of these condensed consolidated financial statements.
3
LESLIE’S, INC.
CONDENSED Consolidated Statements of Stockholders’ Deficit
(Amounts in Thousands)
(Unaudited)
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Common Stock |
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Additional
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Retained |
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Total
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Shares |
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Amount |
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(Deficit) |
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Deficit |
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Deficit |
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Balance, October 2, 2021 |
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$ |
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$ |
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$ |
(
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$ |
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Issuance of common stock under the Plan |
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— |
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— |
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Equity-based compensation |
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— |
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— |
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— |
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Repurchase and retirement of common stock |
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(
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(
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(
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(
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(
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Net loss |
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— |
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— |
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— |
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(
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(
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Balance, January 1, 2022 |
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$ |
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$ |
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$ |
(
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$ |
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Balance, October 1, 2022 |
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$ |
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$ |
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$ |
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$ |
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Issuance of common stock under the Plan |
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— |
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— |
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Equity-based compensation |
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— |
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— |
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— |
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Restricted stock units surrendered in lieu of withholding taxes |
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(
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— |
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(
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— |
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(
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Net loss |
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— |
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— |
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— |
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(
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(
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Balance, December 31, 2022 |
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$ |
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$ |
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$ |
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$ |
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See accompanying notes which are an integral part of these condensed consolidated financial statements.
4
LESLIE’S, INC.
CONDENSED Consolidated S tatements of Cash Flows
(Amounts in Thousands)
(Unaudited)
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Three Months Ended |
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December 31, 2022 |
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January 1, 2022 |
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Operating Activities |
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Net loss |
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$ |
(
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$ |
(
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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Equity-based compensation |
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Amortization of deferred financing costs and debt discounts |
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Provision for doubtful accounts |
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Deferred income taxes |
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Loss on disposition of assets |
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Changes in operating assets and liabilities: |
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Accounts and other receivables |
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(
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Inventories |
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(
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Prepaid expenses and other current assets |
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(
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(
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Other assets |
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(
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Accounts payable and accrued expenses |
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(
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(
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Income taxes payable |
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(
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(
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Operating lease assets and liabilities, net |
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(
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Net cash used in operating activities |
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(
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(
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Investing Activities |
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Purchases of property and equipment |
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(
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(
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Business acquisitions, net of cash acquired |
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(
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(
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Proceeds from disposition of fixed assets |
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Net cash used in investing activities |
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(
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Financing Activities |
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Borrowings on Revolving Credit Facility |
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Repayment of long-term debt |
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(
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(
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Proceeds from options exercised |
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Repurchase and retirement of common stock |
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(
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Payments of employee tax withholdings related to restricted stock vesting |
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(
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Net cash provided by (used in) financing activities |
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(
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Net decrease in cash and cash equivalents |
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(
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(
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Cash and cash equivalents, beginning of period |
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Cash and cash equivalents, end of period |
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$ |
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$ |
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Supplemental Information: |
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Interest |
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$ |
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$ |
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Income taxes, net of refunds received |
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(
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See accompanying notes which are an integral part of these condensed consolidated financial statements.
5
LESLIE’S, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1—Business and Operations
Leslie’s, Inc. (“Leslie’s,” “we,” “our,” “us,” “its,” or the “Company”) is the leading direct-to-consumer pool and spa care brand. We market and sell pool and spa supplies and related products and services, which primarily consist of maintenance items such as chemicals, equipment and parts, and cleaning accessories, as well as safety, recreational, and fitness-related products. We currently market our products through
Note 2—Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
We prepared the accompanying interim condensed consolidated financial statements following United States generally accepted accounting principles (“GAAP”). The financial statements include all normal and recurring adjustments that are necessary for a fair presentation of our financial position and operating results. The interim condensed consolidated financial statements include the accounts of Leslie’s, Inc. and our subsidiaries. All significant intercompany accounts and transactions have been eliminated. These interim condensed consolidated financial statements and the related notes should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended October 1, 2022.
Fiscal Periods
We operate on a fiscal calendar that results in a fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to September 30th. In a 52-week fiscal year, each quarter contains 13 weeks of operations; in a 53-week fiscal year, each of the first, second and third quarters includes 13 weeks of operations and the fourth quarter includes 14 weeks of operations. References to the three months ended December 31, 2022 and the three months ended January 1, 2022 refer to the 13 weeks ended December 31, 2022 and January 1, 2022, respectively.
Use of Estimates
Management is required to make certain estimates and assumptions during the preparation of the condensed consolidated financial statements in accordance with GAAP. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the condensed consolidated financial statements. They also impact the reported amount of net income (loss) during any period. Actual results could differ from those estimates.
Seasonality
Our business is highly seasonal. Sales and earnings are highest during our third and fourth fiscal quarters, being April through September, which represent the peak months of swimming pool use. Sales are substantially lower during our first and second fiscal quarters.
Summary of Other Significant Accounting Policies
There have been no updates to our Significant Accounting Policies since our Annual Report on Form 10-K for the year ended October 1, 2022. For more information regarding our Significant Accounting Policies and Estimates, see Note 2—Summary of Significant Accounting Policies included in our Annual Report on Form 10-K for the year ended October 1, 2022.
6
Recent Accounting Pronouncements
In March 2020, January 2021 and December 2022, the FASB issued ASU No. 2020-04, 2021-01 and 2022-06, respectively, regarding Reference Rate Reform (collectively “Topic 848”). This collective guidance is in response to accounting concerns regarding contract modifications and hedge accounting because of impending rate reform associated with structural risks of interbank offered rates, and particularly, the risk of cessation of the London Inter-Bank Offer Rate (“LIBOR”) related to regulators in several jurisdictions around the world having undertaken reference rate reform initiatives to identify alternative reference rates. The intended cessation date of the overnight 1-, 3-, 6-, and 12-month tenors of LIBOR is expected to be June 30, 2023. In addition, Topic 848 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The guidance is effective upon issuance and may be applied through December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. In anticipation of its adoption and based on management’s initial evaluation of the projected impact to our condensed consolidated financial statements, we do not estimate there to be a material impact.
Note 3—Business Combinations
Our condensed consolidated financial statements include the results of operations of these acquisitions from the date of acquisition. The total purchase consideration was allocated to the tangible and intangible assets acquired and the liabilities assumed at their estimated fair values as of each acquisition date, with the excess recorded to goodwill. The goodwill resulting from these acquisitions is expected to be deductible for income tax purposes. During the measurement periods, which will not exceed one year from each closing, we will continue to obtain information to assist us in finalizing the acquisition date fair values. Any qualifying changes to our preliminary estimates will be recorded as adjustments to the respective assets and liabilities, with any residual amounts allocated to goodwill.
Fiscal 2023 Acquisition
During the three months ended December 3
1, 2022, we acquired a business for a purchase price of $
Fiscal 2022 Acquisitions
In fiscal 2022, we acquired
|
|
|
Total |
|
|
|
Total purchase consideration, net of cash acquired |
|
$ |
|
|
|
Fair value of assets acquired and liabilities assumed: |
|
|
|
|
|
Inventories |
|
|
|
|
|
Finite-lived intangible assets |
|
|
|
|
|
Other assets and liabilities, net |
|
|
|
|
|
Total assets acquired, net of liabilities assumed |
|
|
|
|
|
Goodwill |
|
$ |
|
|
Note 4 —Goodwill and Other Intangibles, Net
Goodwill
The following table details the changes in goodwill (in thousands):
|
|
|
December 31, 2022 |
|
|
October 1, 2022 |
|
|
January 1, 2022 |
|
|||
|
Balance at beginning of the period |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Acquisitions, net of measurement period adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
7
Other Intangible Assets
Other intangible assets consisted of the following as of December 31, 2022 (in thousands, except weighted average remaining useful life):
|
|
|
Weighted
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
||||
|
Trade name and trademarks (finite life) |
|
|
|
|
|
$ |
|
|
|
$ |
(
|
) |
|
$ |
|
|
|
Trade name and trademarks (indefinite life) |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
Non-compete agreements |
|
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
Consumer relationships |
|
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
Other intangibles |
|
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
Total |
|
|
|
|
$ |
|
|
|
$ |
(
|
) |
|
$ |
|
|
|
Other intangible assets consisted of the following as of October 1, 2022 (in thousands, except weighted average remaining useful life):
|
|
|
Weighted
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
||||
|
Trade name and trademarks (finite life) |
|
|
|
|
|
$ |
|
|
|
$ |
(
|
) |
|
$ |
|
|
|
Trade name and trademarks (indefinite life) |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
Non-compete agreements |
|
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
Consumer relationships |
|
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
Other intangibles |
|
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
Total |
|
|
|
|
$ |
|
|
|
$ |
(
|
) |
|
$ |
|
|
|
Other intangible assets consisted of the following as of January 1, 2022 (in thousands, except weighted average remaining useful life):
|
|
|
Weighted
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
||||
|
Trade name and trademarks (finite life) |
|
|
|
|
|
$ |
|
|
|
$ |
(
|
) |
|
$ |
|
|
|
Trade name and trademarks (indefinite life) |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
Non-compete agreements |
|
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
Consumer relationships |
|
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
Other intangibles |
|
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
|
|
|
Total |
|
|
|
|
$ |
|
|
|
$ |
(
|
) |
|
$ |
|
|
|
Amortization expense
was $
The following table summarizes the estimated future amortization expense related to finite-lived intangible assets on our condensed consolidated balance sheet as of December 31, 2022 (in thousands):
|
|
|
Amount |
|
|
|
Remainder of fiscal 2023 |
|
$ |
|
|
|
2024 |
|
|
|
|
|
2025 |
|
|
|
|
|
2026 |
|
|
|
|
|
2027 |
|
|
|
|
|
Thereafter |
|
|
|
|
|
Total |
|
$ |
|
|
8
Note 5—Accounts and Other Receivables, Net
Accounts and other receivables, net consisted of the following (in thousands):
|
|
|
December 31, 2022 |
|
|
October 1, 2022 |
|
|
January 1, 2022 |
|
|||
|
Vendor and other rebates receivable |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Customer receivables |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other receivables |
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Note 6—Inventories
Inventories consisted of the following (in thousands):
|
|
|
December 31, 2022 |
|
|
October 1, 2022 |
|
|
January 1, 2022 |
|
|||
|
Raw materials |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Finished goods |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Note 7—Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
|
|
|
December 31, 2022 |
|
|
October 1, 2022 |
|
|
January 1, 2022 |
|
|||
|
Prepaid insurance |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Prepaid occupancy costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid sales tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid inventory |
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid other |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Note 8—Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following (in thousands):
|
|
|
December 31, 2022 |
|
|
October 1, 2022 |
|
|
January 1, 2022 |
|
|||
|
Accounts payable |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Accrued payroll and employee benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory related accruals |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loyalty and deferred revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-insurance reserves |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other accrued liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
As of December 31, 2022 and October 1, 2022, capital expenditures included in o
ther accrued liabilities of $
9
Note 9—Long-Term Debt, Net
Our long-term debt, net consisted of the following (in thousands, except interest rates):
|
|
|
Effective
|
|
|
December 31, 2022 |
|
|
October 1, 2022 |
|
|
January 1, 2022 |
|
||||
|
Term Loan—due on March 9, 2028 |
|
|
|
% |
(2) |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Revolving Credit Facility |
|
|
|
% |
(3) |
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: current portion of long-term debt |
|
|
|
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
|
Less: noncurrent Revolving Credit Facility |
|
|
|
|
|
(
|
) |
|
|
|
|
|
|
|
|
|
|
Less: unamortized discount |
|
|
|
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
|
Less: deferred financing charges |
|
|
|
|
|
(
|
) |
|
|
(
|
) |
|
|
(
|
) |
|
|
Total long-term debt, net |
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Term Loan
In March 2021, we entered into an amendment to our term loan credit agreement (“Term Loan”). The amended Term Loan provides for an $
Revolving Credit Facility
In April 2021, we entered into Amendment No. 5 to our $
We are also obligated to pay a commission on all outstanding letters of credit as well as customary administrative, issuance, fronting, amendment, payment, and negotiation fees. As of December 31, 2022, we had $
Representations and Covenants
Substantially all of our assets are pledged as collateral to secure our indebtedness. The Term Loan and the Revolving Credit Facility do not require us to comply with any financial covenants. The Term Loan and the Revolving Credit Facility contain customary representations and warranties, covenants, and conditions to borrowing. No event of default occurred as of December 31, 2022, October 1, 2022, or January 1, 2022.
10
Future Debt Maturities
The following table summarizes the debt maturities and scheduled principal repayments of our indebtedness as o f December 31, 2022 (in thousands):
|
|
|
Amount |
|
|
|
Remainder of fiscal 2023 |
|
$ |
|
|
|
2024 |
|
|
|
|
|
2025 |
|
|
|
|
|
2026 |
|
|
|
|
|
2027 |
|
|
|
|
|
Thereafter |
|
|
|
|
|
Total |
|
$ |
|
|
Note 10—Income Taxes
Our effective income tax rate was a benefit of
In August 2022, the Inflation Reduction Act of 2022 was signed into law and contains provisions effective January 1, 2023. The Company is currently evaluating its impact on future periods, and at this time the Company does not expect it to have a material impact on our condensed consolidated financial statements.
Note 11—Commitments & Contingencies
Contingencies
We are defendants in lawsuits or potential claims encountered in the normal course of business. When the potential liability from a matter can be estimated and the loss is considered probable, we record the estimated loss. Due to uncertainties related to the resolution of lawsuits, investigations and claims, the ultimate outcome may differ from the estimates. We do not expect that the resolutions of any of these matters will have a material effect to our condensed consolidated financial position or results of operations. We did not record any material loss contingencies as of December 31, 2022, October 1, 2022, and January 1, 2022, respectively.
Our workers’ compensation insurance program, general liability insurance pr
ogram, and employee group medical plan have self-insurance retention features of up to $
Note 12—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. (together, the “Selling Stockholders”), each a greater than
Note 13—Share Repurchase Program
On December 3, 2021, the board of directors authorized a share repurchase program for up to an aggregate of $
11
On December 16, 2021, the Company repurchased and retired
As of December 31, 2022, approximately $
The following table presents information about our repurchases of common stock under our share repurchase program (in thousands):
|
|
|
Three Months Ended |
|
|
|||||
|
|
|
December 31, 2022 |
|
|
January 1, 2022 |
|
|
||
|
Total number of shares repurchased |
|
|
|
|
|
|
|
|
|
|
Total amount paid for shares repurchased |
|
$ |
|
|
|
$ |
|
|
|
Note 14—Equity-Based Compensation
Equity-Based Compensation
2020 Omnibus Incentive Plan
In October 2020, we adopted the Leslie’s, Inc. 2020 Omnibus Incentive Plan (the “Plan”). The Plan provides for the grant of awards such as non-qualified stock options to purchase Leslie’s common stock (each, a “Stock Option”), restricted stock units (“RSUs”) and performance stock units (“PSUs”) which may settle in Leslie’s, Inc. common stock to our directors, executives, and eligible employees of the Company. The vesting of the Company’s outstanding and unvested Stock Options, RSUs and PSUs is contingent up
on the holder’s continued service through the date of each applicable vesting event. As of December 31, 2022, we had approximately
As of December 31, 2022, the aggregate unamortized value of all outstanding equity-based compensation awards was approximate
ly $
Stock Options
Stock Options granted under the Plan generally expire
|
|
|
December 31, 2022 |
|
|||||
|
|
|
Number of Options |
|
|
Weighted Average
|
|
||
|
Outstanding, Beginning |
|
|
|
|
|
$ |
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
Forfeited/Expired |
|
|
(
|
) |
|
|
|
|
|
Balance, Ending |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
||
|
Vested and exercisable as of December 31, 2022 |
|
|
|
|
|
$ |
|
|
|
|
|
As of December 31, 2022 |
|
|
|
Aggregate intrinsic value of options outstanding |
|
$ |
|
|
|
Unamortized value of unvested stock options |
|
$ |
|
|
|
Weighted average years that expense is expected to be recognized |
|
|
|
|
|
Weighted average remaining contractual years outstanding |
|
|
|
|
12
Restricted Stock Units and Performance Units
RSUs represent grants that vest ratably upon the satisfaction of time-based requirements. PSUs represent grants potentially issuable in the future based upon the Company’s achievement of certain performance conditions. The fair value of our RSUs and PSUs are calculated based on the Company’s stock price on the date of the grant.
The following table summarizes our RSU and PSU activity under the Plan during the three months ended December 31, 2022 (in thousands, except per share amounts):
|
|
|
December 31, 2022 |
|
|||||
|
|
|
Number of RSUs/PSUs |
|
|
Weighted Average
|
|
||
|
Outstanding, Beginning |
|
|
|
|
|
$ |
|
|
|
Granted (1) |
|
|
|
|
|
|
|
|
|
Vested |
|
|
(
|
) |
|
|
|
|
|
Forfeited |
|
|
(
|
) |
|
|
|
|
|
Balance, Ending |
|
|
|
|
|
$ |
|
|
|
|
|
As of December 31, 2022 |
|
|
|
Unamortized value of unvested RSUs/PSUs |
|
$ |
|
|
|
Weighted average period (years) expense is expected to be recognized |
|
|
|
|
During the three months ended December 31, 2022 and January 1, 2022, equity-based compensation expense
was $
Note 15—Earnings Per Share
The following is a reconciliation of basic weighted average common shares outstanding to diluted weighted average common shares outstanding ( in thousands, except per share amounts):
|
|
|
Three Months Ended |
|
|||||
|
|
|
December 31, 2022 |
|
|
January 1, 2022 |
|
||
|
Numerator: |
|
|
|
|
|
|
||
|
Net loss |
|
$ |
(
|
) |
|
$ |
(
|
) |
|
Denominator: |
|
|
|
|
|
|
||
|
Weighted average shares outstanding - basic |
|
$ |
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
||
|
Stock Options |
|
|
|
|
|
|
|
|
|
RSUs |
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Basic earnings per share |
|
$ |
(
|
) |
|
$ |
(
|
) |
|
Diluted earnings per share |
|
$ |
(
|
) |
|
$ |
(
|
) |
The following number of weighted-average potentially dilutive shares were excluded from the calculation of diluted earnings per share because the effect of including such shares would have been antidilutive (in thousands):
|
|
|
|
Three Months Ended |
|
|||||
|
|
|
|
December 31, 2022 |
|
|
January 1, 2022 |
|
||
|
Stock Options |
|
|
|
|
|
|
|
|
|
|
RSUs |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
13
Item 2 . Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes, which are included elsewhere in this Quarterly Report on Form 10-Q. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Actual results or outcomes may differ materially from those anticipated in these forward-looking statements, which are subject to risks, uncertainties, and other factors, including those described in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended October 1, 2022.
We operate on a fiscal calendar that results in a fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to September 30th. In a 52-week fiscal year, each quarter contains 13 weeks of operations; in a 53-week fiscal year, each of the first, second and third quarters includes 13 weeks of operations and the fourth quarter includes 14 weeks of operations. References to the three months ended December 31, 2022 and the three months ended January 1, 2022 refer to the 13 weeks ended December 31, 2022 and January 1, 2022, respectively.
Our Company
We are the largest and most trusted direct-to-consumer brand in the $15 billion United States pool and spa care industry, serving residential and professional consumers. Founded in 1963, we are the only direct-to-consumer pool and spa care brand with national scale, operating an integrated marketing and distribution ecosystem powered by a physical network of 992 branded locations and a robust digital platform. We offer an extensive assortment of professional-grade products, the majority of which are exclusive to Leslie’s, as well as certified installation and repair services, all of which are essential to the ongoing maintenance of pools and spas. Our dedicated team of associates, pool and spa care experts, and experienced service technicians are passionate about empowering our consumers with the knowledge, products, and solutions necessary to confidently maintain and enjoy their pools and spas. The considerable scale of our integrated marketing and distribution ecosystem, which is powered by our direct-to-consumer network, uniquely enables us to efficiently reach and service every pool and spa in the continental United States.
We operate primarily in the pool and spa aftermarket industry, which is one of the most fundamentally attractive consumer categories given its scale, predictability, and growth outlook. We have a highly predictable, recurring revenue model, as evidenced by our 59 consecutive years of sales growth. Approximately 80% of our assortment is comprised of non-discretionary products essential to the care of residential and commercial pools and spas. Our assortment includes chemicals, equipment and parts, cleaning and maintenance equipment, and safety, recreational, and fitness-related products. We also offer important essential services, such as equipment installation and repair for residential consumers and professional pool operators. Consumers receive the benefit of extended vendor warranties on purchased products from our locations and on installations or repairs from our certified in-field technicians. We offer complimentary, commercial-grade in-store water testing and analysis via our proprietary AccuBlue® system, which increases consumer engagement, conversion, basket size, and loyalty, resulting in higher lifetime value. Our water treatment expertise is powered by data and intelligence accumulated from the millions of water tests we have performed over the years, positioning us as the most trusted water treatment service provider in the industry. Due to the non-discretionary nature of our products and services, our business has historically delivered strong, uninterrupted growth and profitability in all market environments, including through the Great Recession and the ongoing COVID-19 pandemic.
We have a legacy of leadership and disruptive innovation. Since our founding in 1963, we have been the leading innovator in our category and have provided our consumers with the most advanced pool and spa care available. As we have scaled, we have leveraged our competitive advantages to strategically reinvest in our business and intellectual property to develop new value-added capabilities. Over the course of our history, we have pioneered complimentary in-store water testing, offered complimentary in-store equipment repair services, introduced the industry’s first loyalty program, and developed an expansive platform of owned and exclusive brands. These differentiated capabilities allow us 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 with us.
Key Factors and Measures We Use to Evaluate Our Business
We consider a variety of financial and operating measures in assessing the performance of our business. The key measures we use under GAAP are sales, gross profit and gross margin, SG&A, and operating income (loss). The key non-GAAP measures and other operating measures we use are comparable sales, comparable sales growth, Adjusted EBITDA, Adjusted net income (loss), and Adjusted earnings per share.
14
Sales
We offer a broad range of products that consists of regularly purchased, non-discretionary pool and spa maintenance items such as chemicals, equipment, cleaning accessories and parts, as well as installation and repair services for pool and spa equipment. Our offering of proprietary, owned, and third-party brands across diverse product categories drives sales growth by attracting new consumers and encouraging repeat visits from our existing consumers. Revenue from merchandise sales at retail locations is recognized at the point of sale, revenue from services is recognized when the services are rendered, and revenue from e-commerce merchandise sales is generally recognized upon shipment of the merchandise. Revenue is recorded net of related discounts and sales tax. Payment from retail customers is generally at the point of sale and payment terms for professional pool operator customers are based on our credit requirements and generally have terms of less than 60 days. When we receive payment from a consumer before the consumer has taken possession of the merchandise or the service has been performed, the amount received is recorded as deferred revenue or as a customer deposit until the sale or service is complete. Sales are impacted by product mix and availability, as well as promotional and competitive activities and the spending habits of our consumers. Growth of our sales is primarily driven by comparable sales growth and expansion of our locations in existing and new markets.
Comparable Sales and Comparable Sales Growth
We measure comparable sales growth as the increase or decrease in sales recorded by the comparable base in any reporting period, compared to sales recorded by the comparable base in the prior reporting period. The comparable base includes sales through our locations and through our e-commerce websites and third-party marketplaces. Comparable sales growth is a key measure used by management and our board of directors to assess our financial performance.
We consider a new or acquired location comparable in the first full month after it has completed one year of sales. Closed locations become non-comparable during their last partial month of operation. Locations that are relocated are considered comparable at the time the relocation is complete. Comparable sales is not calculated in the same manner by all companies, and accordingly, is not necessarily comparable to similarly titled measures of other companies and may not be an appropriate measure for performance relative to other companies.
The number of new locations reflects the number of locations opened during a particular reporting period. New locations require an initial capital investment in location build-outs, fixtures, and equipment, which we amortize over time as well as cash required for inventory.
As of December 31, 2022, we operated 992 locations in 39 states across the United States. We owned 27 locations and leased the remainder of our locations. Our initial lease terms are typically five years with options to renew for multiple successive five-year periods. We evaluate new opportunities in new and existing markets based on the number of pools and spas in the market, competition, our existing locations, availability and cost of real estate, and distribution and operating costs of our locations. We review performance of our locations on a regular basis and evaluate opportunities to strategically close locations to improve our profitability. Our limited investment costs in individual locations and our ability to transfer sales to our extensive network of remaining locations and e-commerce websites allows us to improve profitability as a result of any strategic closures.
Gross Profit and Gross Margin
Gross profit is equal to our sales less our cost of merchandise and services sold. Cost of merchandise and services sold reflects the direct cost of purchased merchandise, costs to package certain chemical products, including direct materials and labor, costs to provide services, including labor and materials, as well as distribution and occupancy costs. The direct cost of purchased merchandise includes vendor rebates, which are generally treated as a reduction of merchandise costs. We recognize such vendor rebates at the time the obligations to purchase products or perform services have been completed, and the related inventory has been sold. Distribution costs include warehousing and transportation expenses, including costs associated with third-party fulfillment centers used to ship merchandise to our e-commerce consumers. Occupancy costs include the rent, common area maintenance, real estate taxes, and depreciation and amortization costs of all retail locations. These costs are significant and are expected to continue to increase proportionate to our growth.
Gross margin is gross profit as a percentage of our sales. Gross margin is impacted by merchandise costs, pricing and promotions, product mix and availability, inflation, and service costs, which can vary. Our proprietary brands, custom-formulated products, and vertical integration provide us with cost savings, as well as greater control over product availability and quality as compared to other companies in the industry. Gross margin is also impacted by the costs of distribution and occupancy costs, which can vary.
Our gross profit is variable in nature and generally follows changes in sales. The components of our cost of merchandise and services sold may not be comparable to the components of cost of sales or similar measures of other companies. As a result, our gross profit and gross margin may not be comparable to similar data made available by other companies.
15
Selling, General and Administrative Expenses
Our SG&A includes selling and operating expenses across our retail locations and digital platform, and our corporate-level general and administrative expenses. Selling and operating expenses at retail locations include payroll, bonus and benefit costs for personnel, supplies, and credit and debit card processing costs. Corporate expenses include payroll, bonus, and benefit costs for our corporate and field support functions, equity-based compensation, marketing and advertising, insurance, utilities, occupancy costs related to our corporate office facilities, professional services, and depreciation and amortization for all assets, except those related to our retail locations and distribution operations, which are included in cost of merchandise and services sold. Selling and operating expenses generally vary proportionately with sales and the change in the number of locations. In contrast, general and administrative expenses are generally not directly proportional to sales and the change in the number of locations but are expected to increase over time to support our growth and public company obligations. The components of our SG&A may not be comparable to the components of similar measures of other companies.
Operating Income (Loss)
Operating income (loss) is gross profit less SG&A. Operating income (loss) excludes interest expense, loss on debt extinguishment, income tax expense (benefit), and other (income) expenses, net. We use operating income (loss) as an indicator of the productivity of our business and our ability to manage expenses.
Adjusted EBITDA
Adjusted EBITDA is defined as earnings before interest (including amortization of debt issuance costs), taxes, depreciation and amortization, management fees, equity-based compensation expense, loss on debt extinguishment, costs related to equity offerings, strategic project costs, executive transition costs, severance, losses (gains) on disposition of fixed assets, merger and acquisition costs, and other non-recurring, non-cash or discrete items. Adjusted EBITDA is a key measure used by management and our board of directors to assess our financial performance. Adjusted EBITDA is also frequently used by analysts, investors, and other interested parties to evaluate companies in our industry, when considered alongside other GAAP measures. We use Adjusted EBITDA to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, and to compare our performance against that of other companies using similar measures.
Adjusted EBITDA is not a recognized measure of financial performance under GAAP but is used by some investors to determine a company’s ability to service or incur indebtedness. Adjusted EBITDA is not calculated in the same manner by all companies, and accordingly, is not necessarily comparable to similarly titled measures of other companies and may not be an appropriate measure for performance relative to other companies. Adjusted EBITDA should not be construed as an indicator of a company’s operating performance in isolation from, or as a substitute for, net income (loss), cash flows from operations or cash flow data, all of which are prepared in accordance with GAAP. We have presented Adjusted EBITDA solely as supplemental disclosure because we believe it allows for a more complete analysis of results of operations. Adjusted EBITDA is not intended to represent, and should not be considered more meaningful than, or as an alternative to, measures of operating performance as determined in accordance with GAAP. In the future, we may incur expenses or charges such as those added back to calculate Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these items.
Adjusted Net Income (Loss) and Adjusted Earnings per Share
Adjusted net income (loss) and Adjusted earnings per share are additional key measures used by management and our board of directors to assess our financial performance. Adjusted net income (loss) and Adjusted earnings per share are also frequently used by analysts, investors, and other interested parties to evaluate companies in our industry, when considered alongside other GAAP measures.
Adjusted net income (loss) is defined as net income (loss) adjusted to exclude management fees, equity-based compensation expense, loss on debt extinguishment, costs related to equity offerings, strategic project costs, executive transition costs, severance, losses (gains) on disposition of fixed assets, merger and acquisition costs, and other non-recurring, non-cash or discrete items. Adjusted diluted earnings per share is defined as Adjusted net income (loss) divided by the diluted weighted average number of common shares outstanding.
16
Factors Affecting the Comparability of our Results of Operations
Our reported results have been affected by, among other events, the following events, which must be understood in order to assess the comparability of our period-to-period financial performance and condition.
Impact of Macroeconomic Events and Uncertainties
Our financial performance and condition may be impacted to varying extents from period to period by macroeconomic and geopolitical developments, including the ongoing COVID-19 pandemic, escalating global conflicts, supply chain disruptions, labor market constraints, rising rates of inflation, and rising interest rates. The extent of the impact of COVID-19 on our financial and operating performance depends significantly on the duration and severity of the pandemic, the actions taken to contain or mitigate its impact, and any changes in consumer behaviors. While it is not possible to predict the likelihood, timing, or severity of future direct and indirect impacts of COVID-19 on our business, due to the non-discretionary nature of our products and services, our business has delivered strong growth and profitability thus far throughout the pandemic, despite restrictions on the operation of our locations and distribution facilities. Significant disruption to our supply chain for products we sell, as a result of COVID-19, geopolitical conflict or otherwise, could have a material impact on our sales and earnings.
Business Acquisitions
See Note 3—Business Combinations to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for information regarding our business acquisitions.
17
Results of Operations
We derived our condensed consolidated statements of operations for the 13-weeks ended December 31, 2022 and January 1, 2022 from our condensed consolidated financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future. The following table summarizes key components of our results of operations for the periods indicated, both in dollars and as a percentage of our sales (in thousands, except per share amounts):
|
|
|
Three Months Ended |
|
|||||
|
Statements of Operations Data: |
|
December 31, 2022 |
|
|
January 1, 2022 |
|
||
|
Sales |
|
$ |
195,104 |
|
|
$ |
184,824 |
|
|
Cost of merchandise and services sold |
|
|
129,808 |
|
|
|
117,508 |
|
|
Gross profit |
|
|
65,296 |
|
|
|
67,316 |
|
|
Selling, general and administrative expenses |
|
|
92,281 |
|
|
|
79,785 |
|
|
Operating loss |
|
|
(26,985 |
) |
|
|
(12,469 |
) |
|
Other expense: |
|
|
|
|
|
|
||
|
Interest expense |
|
|
13,360 |
|
|
|
6,863 |
|
|
Other expenses, net |
|
|
— |
|
|
|
389 |
|
|
Total other expense |
|
|
13,360 |
|
|
|
7,252 |
|
|
Loss before taxes |
|
|
(40,345 |
) |
|
|
(19,721 |
) |
|
Income tax benefit |
|
|
(10,086 |
) |
|
|
(5,270 |
) |
|
Net loss |
|
$ |
(30,259 |
) |
|
$ |
(14,451 |
) |
|
Earnings per share |
|
|
|
|
|
|
||
|
Basic |
|
$ |
(0.16 |
) |
|
$ |
(0.08 |
) |
|
Diluted |
|
$ |
(0.16 |
) |
|
$ |
(0.08 |
) |
|
Weighted average shares outstanding |
|
|
|
|
|
|
||
|
Basic |
|
|
183,513 |
|
|
|
188,507 |
|
|
Diluted |
|
|
183,513 |
|
|
|
188,507 |
|
|
|
|
|
|
|
|
|
||
|
Percentage of Sales (1) |
|
(%) |
|
|
(%) |
|
||
|
Sales |
|
|
100.0 |
|
|
|
100.0 |
|
|
Cost of merchandise and services sold |
|
|
66.5 |
|
|
|
63.6 |
|
|
Gross margin |
|
|
33.5 |
|
|
|
36.4 |
|
|
Selling, general and administrative expenses |
|
|
47.3 |
|
|
|
43.2 |
|
|
Operating loss |
|
|
(13.8 |
) |
|
|
(6.7 |
) |
|
Other expense: |
|
|
|
|
|
|
||
|
Interest expense |
|
|
6.8 |
|
|
|
3.7 |
|
|
Other expenses, net |
|
|
— |
|
|
|
0.2 |
|
|
Total other expense |
|
|
6.8 |
|
|
|
3.9 |
|
|
Loss before taxes |
|
|
(20.7 |
) |
|
|
(10.7 |
) |
|
Income tax benefit |
|
|
(5.2 |
) |
|
|
(2.9 |
) |
|
Net loss |
|
|
(15.5 |
) |
|
|
(7.8 |
) |
|
Other Financial and Operations Data: |
|
|
|
|
|
|
||
|
Number of new and acquired locations, net |
|
|
2 |
|
|
|
7 |
|
|
Number of locations open at end of period |
|
|
992 |
|
|
|
959 |
|
|
Comparable sales growth (2) |
|
|
(4.0 |
)% |
|
|
20.5 |
% |
|
Adjusted EBITDA (3) |
|
$ |
(11,915 |
) |
|
$ |
1,096 |
|
|
Adjusted EBITDA as a percentage of sales (3) |
|
|
(6.1 |
)% |
|
|
0.6 |
% |
|
Adjusted net loss (3) |
|
$ |
(25,333 |
) |
|
$ |
(10,916 |
) |
|
Adjusted diluted earnings per share |
|
$ |
(0.14 |
) |
|
$ |
(0.06 |
) |
18
|
|
|
Three Months Ended |
|
|||||
|
|
|
December 31, 2022 |
|
|
January 1, 2022 |
|
||
|
Net loss |
|
$ |
(30,259 |
) |
|
$ |
(14,451 |
) |
|
Interest expense |
|
|
13,360 |
|
|
|
6,863 |
|
|
Income tax benefit |
|
|
(10,086 |
) |
|
|
(5,270 |
) |
|
Depreciation and amortization expense (1) |
|
|
8,503 |
|
|
|
9,241 |
|
|
Equity-based compensation expense (2) |
|
|
3,044 |
|
|
|
2,794 |
|
|
Costs related to equity offerings (3) |
|
|
— |
|
|
|
389 |
|
|
Strategic project costs (4) |
|
|
720 |
|
|
|
1,513 |
|
|
Executive transition costs and other (5) |
|
|
2,803 |
|
|
|
17 |
|
|
Adjusted EBITDA |
|
$ |
(11,915 |
) |
|
$ |
1,096 |
|
|
|
|
Three Months Ended |
|
|||||
|
|
|
December 31, 2022 |
|
|
January 1, 2022 |
|
||
|
Net loss |
|
$ |
(30,259 |
) |
|
$ |
(14,451 |
) |
|
Equity-based compensation expense (2) |
|
|
3,044 |
|
|
|
2,794 |
|
|
Costs related to equity offerings (3) |
|
|
— |
|
|
|
389 |
|
|
Strategic project costs (4) |
|
|
720 |
|
|
|
1,513 |
|
|
Executive transition costs and other (5) |
|
|
2,803 |
|
|
|
17 |
|
|
Tax effects of these adjustments (6) |
|
|
(1,641 |
) |
|
|
(1,178 |
) |
|
Adjusted net loss |
|
$ |
(25,333 |
) |
|
$ |
(10,916 |
) |
Selected Financial Information
Sales
Sales increased to $195.1 million for the three months ended December 31, 2022, from $184.8 million in the prior year period, an increase of $10.3 million, or 5.6%. The increase was primarily driven by higher non-comparable sales of $17.7 million from acquisitions and new store growth. For the three months ended December 31, 2022, comparable sales growth decreased $7.4 million, or 4.0%, primarily due to adverse weather conditions compared to the prior year period.
Gross Profit and Gross Margin
Gross profit decreased to $65.3 million for the three months ended December 31, 2022 from $67.3 million in the prior year period, a decrease of $2.0 million, or 3.0%. Gross margin decreased to 33.5% compared to 36.4% in the prior year period, a decrease of 290 basis points. The decrease in gross profit was primarily due to a reduction in comparable sales. The decrease in gross margin was primarily due to business mix and occupancy deleverage.
19
Selling, General and Administrative Expenses
SG&A increased to $92.3 million during the three months ended December 31, 2022 from $79.8 million during the three months ended January 1, 2022, an increase of $12.5 million or 15.7%. This increase in SG&A was primarily related to a $12.0 million increase associated with higher sales, inflationary costs associated with payroll and digital marketing expenses and non-comparable SG&A associated with our acquisitions; a $2.8 million increase in executive transition and other costs primarily related to severance payments associated with the elimination of non-customer facing positions and nonrecurring merger and acquisition costs; and a $0.3 million increase in non-cash equity based compensation expense. These increases were offset by lower depreciation and amortization expense of $1.7 million and lower strategic project costs incurred of $0.8 million compared to the prior year period.
Total Other Expense
Total other expenses increased to $13.4 million for the three months ended December 31, 2022 from $7.3 million in the prior year period, an increase of $6.1 million. The increase in other expenses was primarily related the increase in interest expense of $6.5 million due to the increase in LIBOR rates on our floating rate debt compared to the prior year period.
Income Taxes
Income tax benefit increased to $10.1 million for the three months ended December 31, 2022 compared to $5.3 million in the prior year period, an increase of $4.8 million. The increase was primarily attributable to a higher pretax loss.
The effective income tax rate was a benefit of 25.0% for the three months ended December 31, 2022 and includes net income tax expenses attributable to equity-based compensation awards. The effective income tax rate was a benefit of 26.7% in the prior year period and includes net income tax benefits attributable to equity-based compensation awards.
Net Loss and Earnings per Share
Net loss increased to $(30.3) million for the three months ended December 31, 2022 compared to $(14.5) million in the prior year period, an increase of $15.8 million. Diluted earnings per share was $(0.16) for the three months ended December 31, 2022 compared to $(0.08) in the prior year period.
Adjusted net loss increased to $(25.3) million for the three months ended December 31, 2022 compared to $(10.9) million in the prior year period, an increase of $14.4 million. Adjusted diluted earnings per share was $(0.14) for the three months ended December 31, 2022 compared to $(0.06) in the prior year period.
Adjusted EBITDA
Adjusted EBITDA decreased to $(11.9) million for the three months ended December 31, 2022 compared to $1.1 million in the prior year period, a decrease of $13.0 million. This decrease was due primarily to the decrease in gross profit and higher SG&A.
Seasonality and Quarterly Fluctuations
Our business is highly seasonal. Sales and earnings are highest during the third and fourth fiscal quarters, which include April through September, and represent the peak months of swimming pool use. In fiscal 2022, we generated approximately 75% of our sales and 95% of our Adjusted EBITDA in the third and fourth quarters of our fiscal year. Sales are substantially lower during our first and second fiscal quarters. We have a long track record of investing in our business throughout the year, including in operating expenses, working capital, and capital expenditures related to new locations and other growth initiatives. While these investments drive performance during the primary selling season in our third and fourth fiscal quarters, they have a negative impact during our first and second fiscal quarters.
We typically experience a build-up of inventory and accounts payable during the first and second fiscal quarters in anticipation of the peak swimming pool supply selling season. We negotiate extended payment terms with certain of our primary suppliers as we receive merchandise in December through March, and we pay for merchandise in April through July.
The principal external factor affecting our business is weather. Hot weather can increase purchases of chemicals and other non-discretionary products as well as purchases of discretionary products and can drive increased purchases of installation and repair services. Unseasonably cool weather or significant amounts of rainfall during the peak sales season can reduce chemical consumption in pools and spas and decrease consumer purchases of our products and services. In addition, unseasonably early or late warming trends can increase or decrease the length of the pool season and impact timing around pool openings and closings and, therefore, our total sales and timing of our sales.
20
We generally open new locations before our peak selling season begins and we close locations after our peak selling season ends. We expect that our quarterly results of operations will fluctuate depending on the timing and amount of sales contributed by new locations.
Liquidity and Capital Resources
Overview
Our primary sources of liquidity are net cash provided by operating activities and borrowing availability under our Revolving Credit Facility. Historically, we have funded working capital requirements, capital expenditures, payments related to acquisitions, debt service requirements and repurchases of shares of our common stock with internally generated cash on hand and through our Revolving Credit Facility.
Cash and cash equivalents consist primarily of cash on deposit with banks. Cash and cash equivalents totaled $2.7 million and $112.3 million as of December 31, 2022 and October 1, 2022, respectively. As of December 31, 2022, we had $91.0 million outstanding on our Revolving Credit Facility and we had no amounts outstanding as of October 1, 2022,
Our primary working capital requirements are for the purchase of inventory, payroll, rent, other facility costs, distribution costs, and general and administrative costs. Our working capital requirements fluctuate during the year, driven primarily by seasonality and the timing of inventory purchases.
Our capital expenditures are primarily related to infrastructure-related investments, including investments related to upgrading and maintaining our information technology systems, ongoing location improvements, expenditures related to our distribution centers, and new location openings. We expect to fund capital expenditures from net cash provided by operating activities.
Based on our growth plans, we believe our cash and cash equivalents position, net cash provided by operating activities, and borrowing availability under our Revolving Credit Facility will be adequate to finance our working capital requirements, planned capital expenditures, strategic acquisitions, share repurchases, and debt service over the next 12 months. If cash provided by operating activities and borrowings under our Revolving Credit Facility are not sufficient or available to meet our capital requirements, then we may need to obtain additional equity or debt financing. There can be no assurance that equity or debt financing will be available to us if we need it or, if available, whether the terms will be satisfactory to us.
As of December 31, 2022, outstanding standby letters of credit totaled $10.0 million and, after considering borrowing base restrictions, we had $99.0 million of available borrowing capacity under the terms of the Revolving Credit Facility. As of December 31, 2022, we were in compliance with the covenants under the Revolving Credit Facility and our Term Loan agreements.
Summary of Cash Flows
A summary of our cash flows from operating, investing, and financing activities is presented in the following table (in thousands):
|
|
|
Three Months Ended |
|
|||||
|
|
|
December 31, 2022 |
|
|
January 1, 2022 |
|
||
|
Net cash used in operating activities |
|
$ |
(184,409 |
) |
|
$ |
(125,559 |
) |
|
Net cash used in investing activities |
|
|
(13,749 |
) |
|
|
(10,527 |
) |
|
Net cash provided by (used in) financing activities |
|
|
88,556 |
|
|
|
(154,071 |
) |
|
Net decrease in cash and cash equivalents |
|
$ |
(109,602 |
) |
|
$ |
(290,157 |
) |
Cash Used in Operating Activities
Net cash used in operating activities increased to $184.4 million for the three months ended December 31, 2022 compared to $125.6 million in the prior year period, an increase of $58.8 million. This increase was primarily driven by changes in working capital related to strategic investment in product inventories to meet customer demand across product categories.
Cash Used in Investing Activities
Net cash used in investing activities increased to $13.7 million for the three months ended December 31, 2022 compared to $10.5 million in the prior year period, an increase of $3.2 million. This increase was primarily driven by higher investments for business acquisitions.
21
Cash Provided by (Used in) Financing Activities
Net cash provided by financing activities for the three months ended December 31, 2022 was $88.6 million, and was primarily related to the borrowings on our Revolving Credit Facility of $91.0 million. Net cash used in financing activities for the three months ended January 1, 2022 was $154.1 million, and was primarily related to the repurchase and retirement of common stock of $152.1 million.
Share Repurchase Program
On December 3, 2021, the board of directors authorized a share repurchase program for up to an aggregate of $300 million of the Company’s outstanding shares of common stock over a period of three years, expiring December 31, 2024. As of December 31, 2022, approximately $147.7 million remained available for future purchases under our share repurchase program (see Note 13—Share Repurchase Program to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q).
Contractual Obligations and Other Commitments
There were no material changes to our contractual obligations outside the ordinary course of our business during the three months ended December 31, 2022 from those disclosed in our Annual Report on Form 10-K for the fiscal year ended October 1, 2022.
Critical Accounting Estimates
The preparation of our condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of sales and expenses during the reported periods. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of a company’s financial condition and results of operations, and which require a company to make its most difficult and subjective judgements. Based on this definition, we have identified the critical accounting policies and judgements, which are disclosed in our Annual Report on Form 10-K for the fiscal year ended October 1, 2022. We base these estimates on historical results and various other assumptions we believe to be reasonable, all of which form the basis for making estimates concerning the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates.
There have been no material changes to our critical accounting estimates during the three months ended December 31, 2022 from those disclosed in our Annual Report on Form 10-K for the fiscal year ended October 1, 2022.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, see Note 2—Summary of Significant Accounting Policies to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Item 3 . Quantitative and Qualitati ve Disclosures About Market Risk.
Interest Rate Risk
There have been no material changes in our primary risk exposures or management of market risks from those disclosed in our Annual Report on Form 10-K for the fiscal year ended October 1, 2022.
Impact of Inflation and Deflation
There have been no material changes in our exposure to inflation or deflation from those disclosed in our Annual Report on Form 10-K for the fiscal year ended October 1, 2022.
22
Item 4. Controls and Procedures.
Management’s Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) are designed to ensure that information required to be disclosed by us in reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the appropriate time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely discussions regarding required disclosure. We, under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the design and operation of our disclosure controls and procedures were ineffective as the material weakness in internal control over financial reporting that was disclosed in our Annual Report on Form 10-K for the fiscal year ended October 1, 2022 was not yet remediated during the quarter ended December 31, 2022.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except as described below.
Remediation
As previously disclosed in Part II, Item 9A of our Annual Report on Form 10-K for the fiscal year ended October 1, 2022, we are in the process of implementing a plan to address the material weakness in internal control over financial reporting that was disclosed in our Annual Report on Form 10-K. The material weakness will not be considered remediated, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We anticipate that the remediation of this material weakness will be completed during fiscal year 2023. We are committed to continuing to improve our internal control processes, and, as we continue to evaluate and work to improve our internal control over financial reporting, we may take additional measures to address control deficiencies, or we may modify certain of our remediation measures.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
We are subject to various litigations, claims and other proceedings that arise from time to time in the ordinary course of business. We believe these actions are routine and incidental to the business. As of December 31, 2022, we had established reserves for claims that are probable and estimable and such reserves were not significant. While we cannot feasibly predict the outcome of these matters with certainty, we believe, based on examination of these matters, experience to date and discussions with counsel, that the ultimate liability, individually or in the aggregate, will not have a material adverse effect on our business, financial position, results of operations, or cash flows.
Item 1A . Risk Factors.
There have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the year ended October 1, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
The following table sets forth the repurchases of our common stock under our $300 million share repurchase program during the three months ended December 31, 2022:
|
Period |
|
Total Number of Shares Purchased |
|
|
Average Price Paid Per Share |
|
|
Total Number of Shares Purchased as Part of Publicly Announced Programs |
|
|
Dollar Value of Shares that May Yet Be Purchased Under the Program |
|
||||
|
October 2, 2022 - October 29, 2022 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
October 30, 2022 - November 26, 2022 (1) |
|
|
27,329 |
|
|
$ |
15.32 |
|
|
|
27,329 |
|
|
$ |
418,680 |
|
|
November 27, 2022 - December 31, 2022 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
Sales of Unregistered Securities
None.
Item 3. Defaults Upon Senior Securities .
None.
Item 4. Mine Safety Disclosures .
Not applicable.
Item 5 . Oth er Information.
None.
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Item 6. Exhibits .
|
|
|
|
|
Incorporated by Reference |
||||
|
Exhibit Number |
|
Exhibit Description |
|
Form |
|
Exhibit |
|
Filing Date/ Period End Date |
|
10.1* |
|
|
|
|
|
|
|
|
|
10.2* |
|
Form of Restricted Stock Unit Award Agreement pursuant to 2020 Omnibus Incentive Plan |
|
|
|
|
|
|
|
10.3* |
|
Form of Performance Unit Award Agreement pursuant to 2020 Omnibus Incentive Plan |
|
|
|
|
|
|
|
31.1* |
|
|
|
|
|
|
|
|
|
31.2* |
|
|
|
|
|
|
|
|
|
32.1+ |
|
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 |
|
|
|
|
|
|
|
32.2+ |
|
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 |
|
|
|
|
|
|
|
101.INS* |
|
Inline XBRL Instance Document |
|
|
|
|
|
|
|
101.SCH* |
|
Inline XBRL Schema Document |
|
|
|
|
|
|
|
101.CAL* |
|
Inline XBRL Calculation Linkbase Document |
|
|
|
|
|
|
|
101.LAB* |
|
Inline XBRL Label Linkbase Document |
|
|
|
|
|
|
|
101.PRE* |
|
Inline XBRL Presentation Linkbase Document |
|
|
|
|
|
|
|
101.DEF* |
|
Inline XBRL Definition Linkbase Document |
|
|
|
|
|
|
|
104* |
|
Cover Page Interactive Data File (embedded within the Inline XBRL document). |
|
|
|
|
|
|
* Filed herewith.
+ Furnished herewith and not deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
25
SIGNAT URES
Pursuant to the requirements of Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized .
|
|
|
LESLIE’S, INC. |
|
|
|
|
|
|
|
Date: February 3, 2023 |
|
By: |
/s/ Steven M. Weddell |
|
|
|
|
Steven M. Weddell |
|
|
|
|
Executive Vice President and Chief Financial Officer |
|
|
|
|
(Principal Financial Officer and Principal Accounting Officer) |
26