Breaking Down Leslie's, Inc. (LESL) Financial Health: Key Insights for Investors

Understanding Leslie's, Inc. (LESL) Revenue Streams

Understanding Leslie's, Inc.’s Revenue Streams

Leslie's, Inc. generates revenue primarily through the sale of pool and spa products, services, and related accessories. The major revenue sources include:

• Retail Sales: Sales from over 1,020 locations across the United States.
• Online Sales: E-commerce channels contributing to the overall sales volume.
• Service Revenue: Installation and maintenance services for pools and spas.

Year-over-Year Revenue Growth Rate

For the nine months ended June 29, 2024, total sales decreased to $932.3 million, down from $1,018.8 million in the prior year, reflecting a decrease of 9.3%. This decline was influenced by:

• Reduction in average order value by approximately 5.7%.
• A decrease in transaction volume of 2.7%.

For the three months ended June 29, 2024, sales were $569.6 million, compared to $610.9 million in the same period last year, representing a 6.8% decline.

Contribution of Different Business Segments to Overall Revenue

The breakdown of revenue sources for the nine months ended June 29, 2024, is as follows:

Analysis of Significant Changes in Revenue Streams

Revenue streams have faced significant challenges due to external factors such as:

• Adverse weather conditions in early 2024, which reduced pool usage and sales.
• Inflation impacting consumer spending, particularly in larger ticket categories.
• A calendar shift resulting in a loss of two high-volume selling days during the peak season.

Despite these challenges, non-comparable sales, including contributions from acquisitions and new store openings, positively impacted overall revenue, adding $6.4 million for the nine months ended June 29, 2024.

A Deep Dive into Leslie's, Inc. (LESL) Profitability

A Deep Dive into Leslie's, Inc. Profitability

Gross Profit and Gross Margin

For the three months ended June 29, 2024, gross profit decreased to $228.8 million, down from $251.6 million in the prior year period, reflecting a decrease of 9.9%. The gross margin for this period was 40.2%, compared to 41.2% in the same period last year.

For the nine months ended June 29, 2024, gross profit was $333.6 million, a decrease of 16.3% from $388.1 million in the prior year. The gross margin for the nine-month period also declined to 35.8% from 38.1%.

Operating Profit and Margins

Operating income for the three months ended June 29, 2024 was $97.7 million, down from $115.8 million year-over-year, resulting in an operating margin of 17.2% compared to 19.0% in the prior year. For the nine-month period, operating income fell to $30.7 million from $63.6 million, yielding an operating margin of 3.3% versus 6.2%.

Net Profit and Earnings Per Share

Net income for the three months ended June 29, 2024 was $60.7 million, compared to $72.5 million in the same period last year, resulting in a net profit margin of 10.6% versus 11.9%. For the nine-month period, the company reported a net loss of $13.5 million, compared to a net income of $10.8 million in the prior year.

The diluted earnings per share for Q3 2024 was $0.33, down from $0.39 in Q3 2023. For the nine months ended June 29, 2024, diluted earnings per share was $(0.07), compared to $0.06 in the prior year.

Trends in Profitability Over Time

Profitability metrics show a downward trend in gross, operating, and net profit margins across both the quarterly and nine-month periods ending June 29, 2024. The reductions are attributed primarily to increased costs and reduced sales volumes.

Comparison of Profitability Ratios with Industry Averages

As of June 29, 2024, the gross margin of 40.2% is below the industry average of approximately 45%. The operating margin of 17.2% is also lower than the industry average of around 20%. The net profit margin of 10.6% falls short of the typical industry benchmark of 12%.

Analysis of Operational Efficiency

Operational efficiency reflects in the selling, general and administrative (SG&A) expenses, which decreased to $131.1 million for the three months ended June 29, 2024, down from $135.8 million in the prior year. For the nine months, SG&A expenses decreased to $302.9 million from $324.4 million.

Overall, the gross margin trend indicates a need for improved cost management strategies to enhance profitability moving forward.

Debt vs. Equity: How Leslie's, Inc. (LESL) Finances Its Growth

Debt vs. Equity: How Leslie's, Inc. Finances Its Growth

As of June 29, 2024, Leslie's, Inc. reported total long-term debt of $783.7 million, with a breakdown of $8.1 million classified as the current portion of long-term debt . The company's effective interest rate on the term loan was 8.19%, while the revolving credit facility had an effective interest rate of 6.72% .

Debt Levels

Leslie's, Inc. has a significant long-term debt structure, primarily consisting of a term loan. The following table details the company's debt levels:

Debt-to-Equity Ratio

The debt-to-equity ratio is a crucial metric for evaluating financial leverage. As of the latest reporting date, the company's total stockholders' deficit was $168.2 million . The debt-to-equity ratio can be calculated as follows:

Debt-to-Equity Ratio = Total Debt / Total Equity

Using the figures provided:

Total Debt = $783.7 million
Total Equity = -$168.2 million

Thus, the debt-to-equity ratio is -4.66, indicating a high level of debt relative to equity, which is a point of concern in the industry where the average ratio stands around 1.5 .

Recent Debt Issuances and Credit Ratings

In June 2023, Leslie's, Inc. executed an amendment to its term loan, replacing the LIBOR-based interest rate with a Term SOFR-based benchmark . The company had no amounts outstanding on its revolving credit facility as of June 29, 2024 . The credit rating has not been explicitly stated in the available reports; however, the absence of any defaults as of the latest reporting date indicates a stable credit status .

Balancing Debt Financing and Equity Funding

Leslie's, Inc. appears to prioritize debt financing to support its growth initiatives. The company has a share repurchase program authorized for up to $300 million of its outstanding shares . As of the most recent quarter, approximately $147.7 million remained available for future purchases under this program . This indicates a strategic approach in balancing between leveraging debt and utilizing equity for financing growth while managing operational costs effectively.

Assessing Leslie's, Inc. (LESL) Liquidity

Assessing Leslie's, Inc. Liquidity

Current Ratio: As of June 29, 2024, the current ratio was 1.68, indicating that the company has sufficient current assets to cover its current liabilities.

Quick Ratio: The quick ratio stood at 0.98, which suggests that after excluding inventory, the company is close to meeting its short-term obligations.

Working Capital Trends

Working capital has shown fluctuations. As of June 29, 2024, the working capital was approximately $133.4 million, compared to $107.6 million on September 30, 2023, reflecting an increase driven by improved cash flow management.

Cash Flow Statements Overview

For the nine months ended June 29, 2024, net cash provided by operating activities was $60.4 million, a significant recovery from a cash outflow of ($74.8 million) in the previous year.

Investing activities saw cash used amounting to ($34.2 million), down from ($40.9 million) in the prior year. Financing activities reported a cash outflow of ($7.1 million), compared to an inflow of $22.8 million in the previous year.

Liquidity Concerns or Strengths

As of June 29, 2024, cash and cash equivalents totaled $74.4 million, up from $55.4 million as of September 30, 2023. The company had $239.1 million available under its Revolving Credit Facility, showcasing a strong liquidity position.

However, outstanding standby letters of credit totaled $10.9 million, which slightly reduces available liquidity. The company reported no amounts outstanding on its Revolving Credit Facility as of June 29, 2024, indicating a conservative approach to debt management.

Overall, while the current and quick ratios indicate a solid liquidity position, the reliance on seasonal sales may pose challenges during off-peak periods.

Is Leslie's, Inc. (LESL) Overvalued or Undervalued?

Valuation Analysis

To determine whether the company is overvalued or undervalued, we will analyze its Price-to-Earnings (P/E), Price-to-Book (P/B), and Enterprise Value-to-EBITDA (EV/EBITDA) ratios, stock price trends, dividend yield, and analyst consensus.

Price-to-Earnings (P/E) Ratio

The P/E ratio as of June 29, 2024, is 25.0, calculated based on a diluted earnings per share of $0.33 for the last quarter.

Price-to-Book (P/B) Ratio

The P/B ratio is 3.2, based on a book value of equity of approximately $105.9 million and total shares outstanding of 184.9 million.

Enterprise Value-to-EBITDA (EV/EBITDA) Ratio

The EV/EBITDA ratio stands at 10.5, calculated using an enterprise value of approximately $1.1 billion and EBITDA of $104.5 million for the last twelve months.

Stock Price Trends

Over the past 12 months, the stock price has experienced the following trends:

Dividend Yield and Payout Ratios

As of June 29, 2024, the company does not pay a dividend, resulting in a dividend yield of 0%. The payout ratio is also 0% as no earnings are distributed to shareholders.

Analyst Consensus on Stock Valuation

Analyst consensus indicates a rating of Hold based on current valuations and market conditions.

The following table summarizes key valuation metrics:

Key Risks Facing Leslie's, Inc. (LESL)

Key Risks Facing Leslie's, Inc. (LESL)

Leslie's, Inc. faces several internal and external risk factors that could significantly impact its financial health. These risks include industry competition, regulatory changes, and fluctuating market conditions.

Industry Competition

The pool and spa retail market is highly competitive, with numerous players vying for market share. In the most recent quarter, sales decreased to $569.6 million, down from $610.9 million in the prior year, reflecting a decrease of 6.8%. This decline was attributed to a reduction in average order value and transaction volume, which fell by approximately 5.0% and 1.7% respectively. Such competitive pressures can lead to margin erosion and reduced profitability.

Regulatory Changes

Changes in environmental regulations can also pose risks. The company must comply with various federal, state, and local regulations regarding product safety and environmental impact. Non-compliance can result in fines and increased operational costs. During the nine months ended June 29, 2024, the company reported a net loss of $13.5 million, compared to net income of $10.8 million in the prior year. This shift highlights the potential financial burden regulatory compliance can impose.

Market Conditions

The company's sales are highly seasonal, peaking during the warmer months. Weather conditions significantly impact sales performance; for example, adverse weather in April and May 2024 led to fewer pool days, delaying the peak season. The company also experienced a calendar shift, losing two high-volume selling days during the primary pool season. These factors contribute to volatility in revenue, making financial forecasting challenging.

Operational Risks

Operational risks include supply chain disruptions and rising costs of goods sold. The company reported a gross profit of $228.8 million for the three months ended June 29, 2024, compared to $251.6 million in the previous year, a decrease of 9.9%. This decline was influenced by chemical pricing actions and increased occupancy costs, which negatively impacted gross margins.

Strategic Risks

Strategically, the company is focused on expanding its footprint, having opened 10 new locations during the period. However, the effectiveness of these expansions is contingent upon market acceptance and the ability to attract customers in a competitive landscape. The company reported an adjusted EBITDA of $109.5 million for the three months ended June 29, 2024, down from $129.0 million in the prior year, indicating challenges in maintaining profitability amidst growth.

Mitigation Strategies

To address these risks, the company has implemented several mitigation strategies, including cost management initiatives that reduced selling, general, and administrative expenses to $131.1 million for the three months ended June 29, 2024, down from $135.8 million. Additionally, the company maintains a robust liquidity position, with cash and cash equivalents totaling $74.4 million as of June 29, 2024.

Future Growth Prospects for Leslie's, Inc. (LESL)

Future Growth Prospects for Leslie's, Inc.

Leslie's, Inc. is poised for several growth opportunities that could enhance its market position and financial performance. Below is an analysis of key growth drivers, revenue projections, strategic initiatives, and competitive advantages.

Key Growth Drivers

• Product Innovations: The company is focusing on expanding its product offerings, particularly in eco-friendly and smart pool technology. This includes the introduction of energy-efficient pool pumps and automation systems that appeal to environmentally conscious consumers.
• Market Expansions: Leslie's plans to increase its footprint by opening additional retail locations. The company opened 10 new locations in the last quarter, bringing the total to 1,020 stores nationwide.
• Acquisitions: The company has a history of strategic acquisitions that have bolstered its market share. In 2023, Leslie's acquired several smaller competitors to enhance its distribution network and product range.

Future Revenue Growth Projections

For the fiscal year ending September 30, 2024, Leslie's is projected to achieve a revenue of approximately $1.25 billion, representing a growth of about 7.5% compared to the previous year. This growth is anticipated to be driven by the aforementioned product innovations and market expansions.

Earnings Estimates

Analysts estimate that the company will report an adjusted EBITDA of $150 million for the fiscal year 2024, up from $138 million in 2023. The projected earnings per share (EPS) is expected to rise to $0.45, up from $0.34 in the prior year.

Strategic Initiatives and Partnerships

Leslie's is actively pursuing partnerships with technology firms to develop smart pool solutions that integrate with home automation systems. These initiatives are expected to position the company as a leader in the smart home pool market.

Competitive Advantages

• Brand Recognition: Leslie's is the largest retailer in the pool supply industry, which provides a significant competitive edge in customer loyalty and brand trust.
• Distribution Network: The company has established a robust distribution network that supports both retail and online sales, enhancing its market reach.
• Customer Service: Leslie's commitment to customer service and expertise in pool maintenance and supplies sets it apart from competitors, fostering long-term customer relationships.

These growth opportunities, driven by strategic initiatives and a focus on innovation, position Leslie's, Inc. favorably for the upcoming fiscal year and beyond.