Executive Summary / Key Takeaways

• Leslie's (LESL) is undertaking a significant transformation, leveraging its unmatched physical footprint and pool expertise to enhance customer convenience and asset utilization, aiming to drive sustainable profitable growth and improve cash flow despite recent industry normalization and macroeconomic pressures.
• Recent financial performance reflects industry challenges, with Q2 fiscal 2025 sales down 6.1% and increased net losses, but also shows early signs of operational improvement, including higher conversion rates, improved in-stock levels on critical SKUs (>99%), and sequential strength in Pro and hot tub segments.
• Key strategic initiatives like establishing Local Fulfillment Centers (LFCs), optimizing the entire store network for Pro customers, enhancing the DIY omnichannel experience (including a tiered loyalty program and Uber same-day delivery), and implementing cost optimization measures are central to the turnaround plan.
• Debt reduction is the top capital allocation priority, supported by efforts to maximize free cash flow through inventory optimization (targeting at least $15M reduction in FY25), cost control, and disciplined CapEx ($30M-$35M target for FY25), a critical focus given substantial debt levels and recent credit rating downgrades.
• While macroeconomic sensitivity, weather variability, and competitive pressures from diverse players (wholesale, tech, mass retail, online) remain risks, successful execution of the transformation initiatives, particularly in leveraging technology and the physical network for enhanced service and efficiency, is key to realizing the long-term potential and improving financial health.

Setting the Scene: A Pool Care Leader in Transition

Leslie's, Inc. (LESL) stands as the undisputed leader in the fragmented U.S. pool and spa care industry, a substantial $15 billion market. Founded in 1963, the company built its legacy as a direct-to-consumer brand, cultivating deep expertise and trust among pool owners. Its business model is anchored by an expansive omnichannel network comprising over 1000 company-operated locations across 39 states, complemented by robust e-commerce platforms. This physical footprint is a significant competitive advantage, placing a Leslie's store within 20 miles of 80% of U.S. pools, and even closer in the Sunbelt region.

The company's history reveals distinct phases. For over five decades, Leslie's demonstrated consistent, predictable growth with mid-single-digit sales increases and healthy EBITDA margins in the mid-to-high teens. The pandemic era (fiscal 2021-2022) brought an unprecedented surge in demand, leading to outsized growth and record profitability as consumers invested heavily in their homes and backyards. However, this was followed by a challenging period of demand normalization throughout fiscal 2023 and 2024, exacerbated by macroeconomic headwinds like inflation, high interest rates, and variable weather. This correction impacted Leslie's sales and profitability, highlighting the sensitivity of certain product categories, particularly high-ticket discretionary items, to economic cycles.

In response to this evolving landscape and to position the company for future success, Leslie's embarked on a strategic transformation under new CEO Jason McDonald, who took the helm in September 2024. The core of this transformation is a sharpened focus on the fundamentals of retailing, putting the customer at the center, and leveraging the company's inherent competitive advantages. This strategic pivot is structured around three initial key themes: customer centricity, convenience, and asset utilization, with a fourth pillar, cost optimization, recently added.

Central to Leslie's differentiation and strategic execution is its technological foundation. The proprietary AccuBlue system for in-store water testing is a cornerstone, providing commercial-grade analysis that drives customer engagement, increases conversion rates and basket sizes, and builds loyalty by offering personalized, expert recommendations. This system is powered by data accumulated from millions of water tests, solidifying Leslie's position as a trusted water treatment authority. Extending this capability, the AccuBlue Home system brings accurate water testing and guidance directly to the customer's home, enhancing convenience and reinforcing loyalty and spend. Operationally, the company utilizes tools like Blue Yonder for inventory management, crucial for achieving "precision inventory" – ensuring the right products are in the right place at the right time, particularly for critical "Never Out" SKUs. These technologies are not just tools; they are integrated elements of Leslie's value proposition, contributing to its competitive moat by enhancing service quality, operational efficiency, and customer stickiness.

In the competitive arena, Leslie's faces a diverse set of rivals. While its physical network and specialized expertise differentiate it from mass merchants like Home Depot and online giants like Amazon , it competes with wholesale distributors like Pool Corporation (POOL) and equipment manufacturers like Pentair (PNR) and Hayward Holdings (HAYW). Compared to POOL, which dominates wholesale distribution with scale-driven cost efficiencies (TTM Gross Margin ~30% vs. LESL's ~35%), Leslie's strength lies in its direct customer relationship and retail presence. Against equipment specialists like PNR (TTM Gross Margin ~39%) and HAYW (TTM Gross Margin ~50%), Leslie's competes across a broader product and service offering, leveraging its convenience and expertise rather than solely on cutting-edge equipment technology. The strategic focus on enhancing the omnichannel experience and leveraging the store network for speed and convenience directly addresses competition from online retailers and aims to capture a larger share of the professional market, where speed and availability are paramount.

Performance Reflecting Transition and Market Dynamics

Leslie's recent financial performance illustrates the impact of the ongoing industry normalization and the early stages of its transformation. For the second quarter of fiscal 2025, sales were $177.1 million, a decrease of 6.1% compared to the prior year period. This decline was primarily attributed to softer transaction volume and product mix, with comparable sales lower by $12.4 million. Gross profit fell by 19.1% to $43.9 million, resulting in a gross margin of 24.8%, down from 28.8%. This margin contraction was mainly due to increased occupancy and distribution center costs (220 basis points impact) and unfavorable volume and mix (180 basis points impact). Selling, general, and administrative expenses increased by 8.8% to $92.3 million, driven by higher compensation, direct store expenses, and professional fees. The combined effect of lower gross profit and higher SGA resulted in an operating loss of $48.4 million and a net loss of $51.3 million for the quarter. Adjusted EBITDA for Q2 fiscal 2025 was a loss of $36.1 million, compared to a loss of $19.3 million in the prior year.

While the headline numbers reflect challenges, there are operational indicators suggesting early progress on strategic initiatives. In Q1 fiscal 2025, the company achieved sales growth (up 0.7%) for the first time in two years, with traffic improving to flat year-over-year. Conversion rates saw a notable increase of over 160 basis points in Q1 fiscal 2025, a trend management attributes to improved in-stock positions and team member expertise. This focus on inventory is yielding results; in Q2 fiscal 2025, Leslie's achieved over 99% in-stock levels on critical "Never Out" SKUs, a significant 620 basis point improvement since the start of the fiscal year. Despite improving in-stock rates, overall inventory was reduced by 12% year-over-year in Q2 fiscal 2025, contributing to an 8% improvement in inventory turns.

Segment performance also provides nuance. The Pro Pool segment continues to demonstrate relative resilience, with sales down only 2% in Q2 fiscal 2025, outpacing the total company decline and showing momentum from 9% growth in Q1 fiscal 2025. The Residential Hot Tub segment also showed sequential improvement, increasing 4% in Q2 fiscal 2025. The core Residential Pool segment, however, remains pressured, declining 9% in Q2 fiscal 2025, highlighting the ongoing work needed to drive traffic and demand in this key area.

Fiscal year 2024 provided the backdrop for the current transformation. Sales were down 8%, and Adjusted EBITDA was $109 million. Gross margin compression in FY 2024 was attributed to factors like the June 2023 chemical price actions, expensing of capitalized DC costs, and occupancy deleverage. SG&A saw a $26 million reduction in FY 2024, demonstrating cost control efforts. Interest expense increased due to higher rates, impacting the bottom line.

Strategic Execution and Forward Outlook

Leslie's transformation plan is actively underway, with several key initiatives launched or expanded to drive future performance. Under the convenience and asset utilization pillars, the company has operationalized 26 Local Fulfillment Centers (LFCs). These centers, utilizing existing store locations with minimal capital investment, act as mini-hubs to consolidate inventory, improve in-stock levels, and enhance speed-to-serve for both DIY and Pro customers. This initiative is expected to optimize the supply chain and potentially allow for further inventory reductions.

Winning in the Pro segment is a strategic priority, shifting from designated "Pro stores" to leveraging the entire 1000+ store network. This involves adjusting assortment, improving speed and reliability, and growing Pro partner contracts, building on the positive momentum seen in recent quarters. For the DIY customer, the focus is on building omnichannel loyalty through enhancements to the mobile app, improved service scheduling, and expanding the rollout of the AccuBlue Home system to stores nationwide.

New initiatives introduced in Q2 fiscal 2025 further support these pillars. Building the Leslie's brand through more efficient marketing (leveraging marketing mix modeling) and launching the "We Are Pool People" campaign aims to drive traffic. The enhanced Pool Perks loyalty program, with new tiers and personalization capabilities using customer data, is designed to increase engagement and spend among the core DIY base. A significant step towards enhancing convenience and asset utilization is the recently signed agreement with Uber for same-day delivery services this summer. This leverages the proximity of the store network for faster fulfillment and potential cost optimization by reducing reliance on cross-country shipping for online orders.

A critical fourth pillar, cost optimization, has been introduced to drive accelerated EBITDA growth. Initial efforts have identified approximately $5 million to $10 million in annualized cost savings, primarily within indirect procurement, with the bulk expected to materialize in fiscal 2026. This comprehensive review of the cost structure is ongoing, seeking efficiencies across the organization.

Management has reaffirmed its full-year fiscal 2025 guidance, reflecting a balanced view of current trends, macroeconomic factors, and the expected impact of these initiatives. For fiscal 2025, the company anticipates sales between $1.3 billion and $1.37 billion, representing a range from a 2% decline to a 3% increase year-over-year (including an estimated 1.5% contribution from the 53rd week). Adjusted EBITDA is projected to be between $96 million and $116 million, with Adjusted Net Income ranging from a loss of $2 million to a gain of $13 million, and Adjusted Diluted EPS between a loss of $0.01 and a gain of $0.07. Capital expenditures are targeted at $30 million to $35 million, a reduction from prior expectations, reflecting prioritized high-return projects and the minimal investment required for LFCs. Management expects the strategic initiatives to begin contributing more meaningfully in the higher-volume second half of the year, benefiting from better operating leverage and favorable comparisons as the company cycles prior-year impacts.

Liquidity and capital allocation are centered on strengthening the balance sheet. Debt reduction is the top priority, with a long-term goal of reaching a leverage ratio of 3x or less. The company ended Q2 fiscal 2025 with $17.3 million in cash and $101.5 million outstanding on its Revolving Credit Facility, which is expected to be repaid in full in Q3 fiscal 2025. The secured term loan balance was reduced by $27 million year-to-date fiscal 2025. Efforts to optimize inventory (targeting at least a $15 million reduction in FY25) are key to generating free cash flow for debt paydown. The focus on debt reduction has led to a pause in M&A activity and a moderated pace of new store openings (planning 3 in FY25).

Risks and Competitive Realities

Despite the strategic pivot and operational focus, Leslie's faces significant risks. Macroeconomic conditions, including inflation, high interest rates, and potential recession fears, continue to weigh on consumer spending, particularly impacting sales of higher-margin discretionary products and equipment. Weather remains a critical external factor, directly influencing pool usage and demand for chemicals and services, as evidenced by the impact of cold/wet weather in early Q3 2024 and Q2 2025. Supply chain disruptions, whether due to geopolitical events, trade policies (estimating $10-$12 million annualized tariff exposure), or natural disasters, could impact product availability and costs. Unpredictable consumer purchasing patterns, potentially influenced by past stockpiling behavior, add uncertainty to demand forecasting.

The company's substantial indebtedness ($858.2 million total as of March 29, 2025) is a key financial risk, diverting cash flow to debt service and limiting financial flexibility. The variable nature of this debt exposes the company to interest rate increases. Recent credit rating downgrades (S&P to B, Moody's (MCO) to Caa1) could increase borrowing costs and further constrain access to capital. Litigation, including securities class action and derivative lawsuits, adds legal and financial uncertainty, although the potential range of loss is currently not estimable. Furthermore, the company continues to work on remediating previously disclosed material weaknesses in internal control over financial reporting, targeting completion in fiscal 2025, which is crucial for financial reporting reliability and investor confidence. Nasdaq (NDAQ) listing compliance, specifically the minimum bid price rule, presents a potential delisting risk if the share price does not recover.

In the competitive landscape, Leslie's must effectively leverage its strengths against rivals. While its extensive retail network and specialized expertise provide advantages in customer engagement and service, it faces scale and cost pressures from larger players like Home Depot (HD) and Amazon (AMZN) in retail, and POOL in distribution. PNR and HAYW pose competition in the equipment and technology space. Leslie's strategic initiatives, particularly the LFC network and Uber (UBER) partnership, are direct responses aimed at enhancing the convenience moat against online and mass retailers. The focus on Pro and DIY omnichannel loyalty aims to deepen relationships and capture share against competitors offering less integrated or specialized solutions. Success hinges on executing these initiatives effectively to drive traffic, improve conversion, manage costs, and generate the cash flow necessary to reduce debt and strengthen the balance sheet.

Conclusion

Leslie's is navigating a critical period, transitioning from a phase of post-pandemic normalization into a focused transformation aimed at leveraging its unique assets and expertise. The core investment thesis rests on the company's ability to execute its strategic initiatives centered on customer centricity, convenience, asset utilization, and cost optimization to drive sustainable profitable growth and improve its financial health. While recent financial results reflect the challenging external environment and the inherent seasonality of the business, operational indicators like improved conversion and in-stock levels offer early proof points of the strategy's potential. The company's unmatched physical footprint, coupled with investments in technology like AccuBlue and the strategic rollout of LFCs and same-day delivery, provides a differentiated platform to serve the pool care needs of both DIY and Pro customers more effectively than competitors. However, substantial debt levels, macroeconomic sensitivity, and execution risks associated with the transformation initiatives remain key factors for investors to monitor. The commitment to debt reduction as the top capital allocation priority, supported by disciplined operational improvements and cost control, is essential for long-term value creation. The success of Leslie's hinges on its ability to translate its strategic vision into consistent operational execution, demonstrating that its foundational strengths and targeted initiatives can overcome current headwinds and position the company for a return to its historical trajectory of predictable growth and profitability in a normalized market.