Leslie's, Inc. (LESL) is the largest and most trusted direct-to-consumer brand in the $15 billion U.S. pool and spa care industry, serving both residential customers and pool professionals nationwide. Founded in 1963, the company has established itself as the industry leader, operating an integrated marketing and distribution ecosystem powered by a physical network of over 1,000 branded locations and a robust digital and e-commerce platform.

Company History and Evolution

The company's journey has been marked by a relentless pursuit of innovation and strategic evolution. Since its inception as a single retail store in Phoenix, Arizona, Leslie's has positioned itself as the trailblazer in the pool and spa care space. Over the decades, the company expanded its footprint across the United States, establishing a national presence in 39 states. Leslie's has pioneered industry-first initiatives such as complimentary in-store water testing, offering complimentary in-store equipment repair services, introducing the industry's first loyalty program, and developing an expansive platform of owned and exclusive brands.

Market Leadership

Today, Leslie's boasts a market-leading share of approximately 15% of the residential aftermarket product spend, with its physical network being larger than the sum of its 20 largest competitors. The company's digital sales are estimated to be greater than five times as large as that of its largest digital competitor, underscoring its strong omnichannel capabilities. Leslie's offers an extensive assortment of professional-grade products, the majority of which are exclusive to the company, as well as certified installation and repair services.

Industry Overview

The pool and spa aftermarket industry, in which Leslie's primarily operates, is one of the most fundamentally attractive consumer categories, characterized by scale, predictability, and a favorable growth outlook. More than 80% of the company's assortment is comprised of non-discretionary products essential to the care of residential and commercial pools and spas, providing a stable and recurring revenue stream.

Challenges and Transformation

However, despite its industry-leading position, Leslie's has faced its share of challenges in recent years. The company's financial performance has been impacted by various macroeconomic factors, including public health crises, supply chain disruptions, labor market constraints, high rates of inflation, rising interest rates, and potential failures among financial institutions. Since its IPO in 2019, Leslie's has experienced declining revenue and profitability, grappling with negative shareholder equity and other operational issues.

To navigate these turbulent waters, Leslie's has recently undergone a strategic transformation, led by its new CEO, Jason McDonald, who joined the company in September 2024. Since his appointment, McDonald has embarked on a comprehensive "listening and learning" tour, engaging with customers, team members, suppliers, and industry stakeholders to develop a deep understanding of the company's strengths, weaknesses, and opportunities.

Strategic Initiatives

Guided by three key strategic themes – customer centricity, convenience, and asset utilization – Leslie's is now executing on a series of transformative initiatives aimed at driving sustainable revenue growth and margin expansion, while simultaneously strengthening its balance sheet through deleveraging and improved cash flow generation.

One of the company's first major initiatives is the establishment of local fulfillment centers (LFCs) in key markets. By consolidating additional quantities of critical SKUs in these hubs and leveraging the company's existing store network, Leslie's aims to better serve its DIY and pro customers, ensuring consistent in-stock positions and improved responsiveness to fluctuations in demand.

Another strategic focus area is the company's renewed emphasis on its pro customer segment. Recognizing the importance of serving both DIY and professional pool operators, Leslie's has shifted its mindset from a limited number of dedicated "pro stores" to leveraging its entire 1,000-store footprint to cater to the needs of its pro customers. This holistic approach includes customized assortments, expanded service offerings, and enhanced omnichannel capabilities.

To strengthen its connection with DIY customers, Leslie's has also invested in upgrading its mobile app, introducing new features such as improved search and shopping functionality, a recommendation engine, and better integration with the company's loyalty program. These enhancements aim to drive increased customer engagement and loyalty, ultimately translating into higher lifetime value.

Financials

Despite the challenges faced in the first quarter of fiscal 2025, where the company reported a net loss of $44.6 million and an adjusted EBITDA loss of $29.3 million, Leslie's management remains steadfast in its commitment to executing on its transformation strategy. The company's guidance for the second quarter and full-year fiscal 2025 suggests that the benefits of its initiatives are expected to become more visible during the peak second half of the fiscal year.

For the three months ended December 28, 2024, Leslie's reported sales of $175.23 million, up 0.7% from the prior year period. Comparable sales grew 0.4% year-over-year. Gross profit decreased 5.3% to $47.72 million, with gross margin declining 180 basis points to 27.2%. The reduction in gross margin was primarily due to increased inventory adjustments and deleverage on occupancy and distribution costs.

Selling, general and administrative (SG&A) expenses increased 0.6% to $87.42 million. The increase was driven by higher consulting and professional fees, partially offset by lower payroll-related expenses. Net loss for the quarter was $44.56 million, compared to a net loss of $39.55 million in the prior year period. Adjusted EBITDA, a non-GAAP metric, decreased 20.0% to $29.32 million.

The company's business is highly seasonal, with the third and fourth fiscal quarters representing the peak months of swimming pool use and generating the highest sales and earnings. The first and second fiscal quarters typically generate net losses and negative operating cash flow due to lower sales volumes.

For the most recent quarter, Leslie's reported operating cash flow of -$105,078,000 and free cash flow of -$109,756,000. The decline in net income, OCF, and FCF was primarily due to increases in inventory adjustments, occupancy costs, and transformational expenses.

Looking ahead, Leslie's has provided guidance for the second quarter and full-year fiscal 2025. For Q2, the company expects sales of $179 million to $189 million, implying flat to negative 5% versus the prior year. They expect gross profit of $44 million to $48 million and adjusted EBITDA of negative $38 million to negative $33 million.

For the full-year fiscal 2025, Leslie's expects sales of $1.3 billion to $1.37 billion, implying revenue in the range of a decline of 2% to growth of 3% year-over-year. This includes an estimated contribution of approximately 1.5% due to the fifty-third week in fiscal 2025. The company expects full-year fiscal 2025 gross profit of $473 million to $505 million and adjusted EBITDA of $96 million to $116 million. They also expect adjusted net income of negative $2 million to positive $13 million and adjusted diluted earnings per share of negative $0.01 to positive $0.07.

Liquidity

As of the most recent quarter, Leslie's had $796.65 million in total long-term debt and $40 million outstanding on its revolving credit facility, resulting in a high debt/equity ratio. The company had $11.62 million in cash and cash equivalents and $198.1 million of available borrowing capacity under its $250 million revolving credit facility. The current ratio stood at 1.76, while the quick ratio was 0.36.

Leslie's plans to continue its focus on reducing overall debt and inventory levels in fiscal 2025, with capital expenditures expected to be $35 million to $40 million. This strategic approach to financial management aligns with the company's broader transformation efforts and its commitment to strengthening its balance sheet.

As Leslie's continues to navigate the evolving industry landscape, the company's focus on customer centricity, convenience, and asset utilization may prove crucial in strengthening its competitive position and driving long-term sustainable growth. With a renewed emphasis on the fundamentals of retailing and a customer-centric approach, Leslie's is well-positioned to solidify its status as the premiere destination for customized pool and spa care solutions in the United States.