UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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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(I.R.S. Employer Identification No.) |
(Address of principal executive offices) |
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Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
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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.
Large accelerated filer |
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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 ☐
As of January 31, 2022, the Registrant had
Table of Contents
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Page |
PART I |
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Item 1. |
2 |
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2 |
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3 |
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4 |
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5 |
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Notes to Unaudited Condensed Consolidated Financial Statements |
6 |
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
15 |
Item 3. |
24 |
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Item 4. |
25 |
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PART II |
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Item 1. |
26 |
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Item 1A. |
26 |
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Item 2. |
26 |
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Item 3. |
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Item 4. |
26 |
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Item 5. |
26 |
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Item 6. |
27 |
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28 |
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 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” of our Annual Report on Form 10-K for the year ended October 2, 2021 and elsewhere in this Quarterly Report on Form 10-Q. 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, events, or circumstances 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 Consolidated Balance Sheets
(Amounts in Thousands, Except Share and Per Share Amounts)
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January 1, 2022 |
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October 2, 2021 |
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January 2, 2021 |
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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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— |
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Current portion of long-term debt |
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Total current liabilities |
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Operating lease liabilities, noncurrent |
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Long-term debt, net |
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Other long-term liabilities |
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— |
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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 Statements of Operations
(Amounts in Thousands, Except Per Share Amounts)
(Unaudited)
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Three Months Ended |
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January 1, 2022 |
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January 2, 2021 |
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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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( |
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Other expense: |
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Interest expense |
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Loss on debt extinguishment |
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— |
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Other expenses, net |
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— |
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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 3, 2020 |
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$ |
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$ |
( |
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$ |
( |
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$ |
( |
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Issuance of common stock upon initial public offering, |
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— |
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Issuance of shares under stock incentive plans |
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— |
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— |
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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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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 2, 2021 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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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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Vesting of restricted stock units |
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— |
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— |
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— |
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— |
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Stock options exercised |
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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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Balance, January 1, 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 Statements of Cash Flows
(Amounts in Thousands)
(Unaudited)
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Three Months Ended |
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January 1, 2022 |
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January 2, 2021 |
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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 income to net cash provided by (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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( |
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Loss (gain) on disposition of assets |
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( |
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Loss on debt extinguishment |
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— |
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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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( |
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Inventories |
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( |
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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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( |
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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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( |
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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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( |
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Financing Activities |
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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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— |
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Repurchase and retirement of common stock |
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( |
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— |
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Proceeds from issuance of common stock upon initial public offering, net |
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— |
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Net cash (used in) provided by 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, 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 for the years ended October 2, 2021, October 3, 2020 and September 28, 2019.
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 January 1, 2022, and the three months ended January 2, 2021 refer to the 13 weeks ended January 1, 2022 and January 2, 2021, respectively.
Use of Estimates
Prior Period Reclassifications
Reclassifications of certain immaterial prior period amounts have been made to conform to current period presentation.
Fair Value Measurements
We use fair value measurements to record fair value of certain assets and to estimate fair value of financial instruments
As of January 1, 2022 and October 2, 2021, we held
The fair value of our amended and restated term loan credit agreement (“Term Loan”) due in 2028 (see Note 9) was determined to be $
The carrying amounts of cash, cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value due to the short-term maturity of these instruments.
There were
6
Seasonality
Our business is highly seasonal. In general, sales and earnings are highest during our third and fourth fiscal quarters, being April through September and represent the peak months of swimming pool use. Sales are substantially lower during our first and second fiscal quarters.
Recent Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (“Topic 740”): Simplifying the Accounting for Income Taxes. ASU 2019-12 removes certain exceptions related to intraperiod tax allocations, foreign subsidiaries and interim reporting that are present within existing GAAP rules. The ASU also provides updated guidance regarding the tax treatment of certain franchise taxes, goodwill and nontaxable entities, among other items. In addition, ASU 2019-12 clarifies that the effect of a change in tax laws or rates should be reflected in the annual effective tax rate computation during the interim period that includes the enactment date. The ASU is effective for annual periods beginning after December 15, 2021 and interim periods beginning after December 15, 2022. We expect to early adopt ASU 2019-12 as of October 3, 2022. In anticipation of the adoption and based on management’s initial evaluation of the projected impact to our consolidated financial statements, we do not estimate there to be a material impact.
Note 3—Business Combinations
Fiscal 2022 Acquisition
In October 2021, we acquired the assets of a retailer of pool supplies and services. The acquisition included
Fiscal 2021 Acquisitions
In fiscal 2021, we completed three acquisitions of retailers of supplies and services for hot tubs, swim spas and fireplaces with
These acquisitions did not have a material impact on our financial position or results of operations. 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 assets acquired and the liabilities assumed at their estimated fair values as of the date of acquisition, as determined by management. The excess of the purchase price over the amounts allocated to assets acquired and liabilities assumed has been recorded as goodwill. The goodwill resulting from these acquisitions is expected to be deductible for income tax purposes. Our estimates and assumptions are subject to change as we gather additional information throughout the measurement period, which is up to 12 months after the acquisition date, and if we make changes to the amounts recorded, such amounts are recorded in the period in which they are identified. During the three months ended January 1, 2022, we recorded adjustments resulting in an increase in goodwill of $
7
Note 4 —Goodwill and Other Intangibles, Net
Goodwill
The carrying amounts of goodwill are as follows (in thousands):
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January 1, 2022 |
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October 2, 2021 |
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January 2, 2021 |
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Balance at beginning of the period |
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$ |
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$ |
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$ |
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Acquisitions |
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Measurement period adjustments |
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— |
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Balance at the end of the period |
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$ |
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$ |
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$ |
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Other Intangible Assets
Other intangible assets consisted of the following as of January 1, 2022 (in thousands, except weighted average remaining useful life):
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Weighted |
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Gross |
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Accumulated |
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Net |
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Trade name and trademarks (finite life) |
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$ |
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$ |
( |
) |
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$ |
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Trade name and trademarks (indefinite life) |
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— |
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Non-compete agreements |
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( |
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Consumer relationships |
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( |
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Other intangibles |
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( |
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Total |
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$ |
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$ |
( |
) |
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$ |
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Other intangible assets consisted of the following as of October 2, 2021 (in thousands, except weighted average remaining useful life):
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Weighted |
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Gross |
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Accumulated |
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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 2, 2021 (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 |
|
|
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
8
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 January 1, 2022 (in thousands):
|
|
Amount |
|
|
Remainder of fiscal 2022 |
|
$ |
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
|
Note 5—Accounts and Other Receivables, Net
Accounts and other receivables, net consisted of the following (in thousands):
|
|
January 1, 2022 |
|
|
October 2, 2021 |
|
|
January 2, 2021 |
|
|||
Vendor and other rebates receivable |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Customer receivables |
|
|
|
|
|
|
|
|
|
|||
Other receivables |
|
|
|
|
|
|
|
|
|
|||
Allowance for doubtful accounts |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Note 6—Inventories
Inventories consisted of the following (in thousands):
|
|
January 1, 2022 |
|
|
October 2, 2021 |
|
|
January 2, 2021 |
|
|||
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):
|
|
January 1, 2022 |
|
|
October 2, 2021 |
|
|
January 2, 2021 |
|
|||
Prepayment for inventory |
|
$ |
|
|
$ |
— |
|
|
$ |
|
||
Prepaid occupancy costs |
|
|
|
|
|
|
|
|
|
|||
Prepaid other |
|
|
|
|
|
|
|
|
|
|||
Other current assets |
|
|
|
|
|
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|||
9
Note 8—Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following (in thousands):
|
|
January 1, 2022 |
|
|
October 2, 2021 |
|
|
January 2, 2021 |
|
|||
Accounts payable |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Accrued payroll and employee benefits |
|
|
|
|
|
|
|
|
|
|||
Customer deposits |
|
|
|
|
|
|
|
|
|
|||
Interest |
|
|
|
|
|
|
|
|
|
|||
Inventory related accruals |
|
|
|
|
|
|
|
|
|
|||
Loyalty and deferred revenue |
|
|
|
|
|
|
|
|
|
|||
Sales taxes |
|
|
|
|
|
|
|
|
|
|||
Self-insurance reserves |
|
|
|
|
|
|
|
|
|
|||
Other accrued liabilities |
|
|
|
|
|
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Note 9—Long-Term Debt, Net
Our long-term debt, net consisted of the following (in thousands, except interest rates):
|
|
Effective |
|
|
January 1, 2022 |
|
|
October 2, 2021 |
|
|
January 2, 2021 |
|
||||
Term Loan—due on March 9, 2028 |
|
|
% |
(2) |
$ |
|
|
$ |
|
|
$ |
|
||||
ABL Credit Facility |
|
|
% |
(3) |
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Less: current portion of long-term debt |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
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. The amended Term Loan provides for an $
ABL Credit Facility
In April 2021, we entered into Amendment No. 5 to our $
10
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 January 1, 2022 and October 2, 2021,
Senior Unsecured Notes
The senior unsecured notes principal of $
Representations and Covenants
Substantially all of our assets are pledged as collateral to secure our indebtedness. The Term Loan and the ABL Credit Facility do not require us to comply with any financial covenants. The Term Loan and ABL Credit Facility contain customary representations and warranties, covenants, and conditions to borrowing. No event of default had occurred as of January 1, 2022 or October 2, 2021.
Future Debt Maturities
The following table summarizes the debt maturities and scheduled principal repayments of our indebtedness as of January 1, 2022 (in thousands):
|
|
Amount |
|
|
Remainder of fiscal 2022 |
|
$ |
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
|
Note 10—Income Taxes
Our effective income tax rate was a benefit of
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 January 1, 2022 and October 2, 2021, respectively.
Our workers’ compensation insurance program, general liability insurance program, and employee group medical plan have self-insurance retention features of up to $
11
Note 12—Related Party Transactions
In February 2017, we entered into a management services agreement with our private equity sponsors in connection with our acquisition in February 2017. The management services agreement provided that we pay an annual fee for management and advisory services to us and our affiliates, including general management consulting services, support and analysis with respect to financing alternatives and strategic planning functions. The management services agreement terminated in October 2020 in connection with the completion of our initial public offering (“IPO”). During the three months ended January 2, 2021, we paid or accrued management fees in the amount of $
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 amount of $
On December 16, 2021, the Company repurchased and retired
The following table presents information about our repurchases of common stock (in thousands):
|
|
Three Months Ended |
|
|||||
|
|
January 1, 2022 |
|
|
January 2, 2021 |
|
||
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 stock options to purchase Leslie’s common stock (each, a “Stock Option”) and restricted stock units (“RSUs”) which may settle in Leslie’s, Inc. common stock to our directors, executives and eligible employees of the Company. Stock Options granted under the Plan generally expire
As of January 1, 2022, the aggregate unamortized value of all outstanding equity-based compensation awards was approximately $
12
Stock Options
The following tables summarizes our Stock Option activity under the Plan for the three months ended (in thousands, except per share amounts):
|
|
January 1, 2022 |
|
|||||
|
|
Number of Options |
|
|
Weighted Average |
|
||
Outstanding, Beginning |
|
|
|
|
$ |
|
||
Granted |
|
|
— |
|
|
|
— |
|
Exercised |
|
|
( |
) |
|
|
|
|
Forfeited |
|
|
( |
) |
|
|
|
|
Balance, Ending |
|
|
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Vested at January 1, 2022(1) |
|
|
|
|
$ |
|
||
|
|
As of January 1, 2022 |
|
|
Aggregate intrinsic value of options outstanding |
|
$ |
|
|
Unamortized value of unvested stock options |
|
$ |
|
|
Weighted average period (years) that expense is expected to be recognized |
|
|
|
|
Weighted average remaining contractual life (years) for options outstanding |
|
|
|
|
Restricted Stock Units
The following table summarizes our RSU activity under the Plan for the three months ended (in thousands, except per share amounts):
|
|
January 1, 2022 |
|
|||||
|
|
Number of RSUs |
|
|
Weighted Average |
|
||
Outstanding, Beginning |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
|
|
||
Vested |
|
|
( |
) |
|
|
|
|
Forfeited |
|
|
( |
) |
|
|
|
|
Balance, Ending |
|
|
|
|
$ |
|
||
|
|
As of January 1, 2022 |
|
|
Unamortized value of unvested RSUs |
|
$ |
|
|
Weighted average period (years) expense is expected to be recognized |
|
|
|
|
During the three months ended January 1, 2022, equity-based compensation expense was $
13
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 |
|
|||||
|
|
January 1, 2022 |
|
|
January 2, 2021 |
|
||
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 |
|
|||||
|
|
January 1, 2022 |
|
|
January 2, 2021 |
|
||
Stock options |
|
|
|
|
|
|
||
RSUs |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
14
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. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended October 2, 2021 filed with the SEC on December 10, 2021 or in other sections of this Quarterly Report on Form 10-Q.
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 fiscal 2021 refer to the fiscal year ended October 2, 2021. Fiscal 2021 included 52 weeks of operations.
Our Company
We are the largest and most trusted direct-to-consumer brand in the $11 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 959 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 58 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 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 United States 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.
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
15
of sale, revenue from services are 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 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 52 weeks 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 are not calculated in the same manner by all companies, and accordingly, are 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 January 1, 2022, we operated 959 retail locations in 38 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 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.
Selling, General and Administrative Expenses
Our SG&A includes selling and operating expenses at our retail locations and 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,
16
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 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 initiative costs, executive transition costs, loss (gain) on disposition of assets, mark-to-market on interest rate cap, 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 entitled 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 initiative costs, executive transition costs, loss (gain) on disposition of assets, mark-to-market on interest rate cap, 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.
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 COVID-19
We continue to closely monitor the ongoing impact of COVID-19 on all aspects of our business and in all of our locations. As of January 1, 2022, we operated 959 locations in 38 states and all locations are currently open. From time to time, certain of our locations may be temporarily closed or restricted to curbside service only. Closures and restrictions did not have a material impact on our performance during the 13 weeks ended January 1, 2022 and January 2, 2021. We remain committed to supporting federal, state, and local mandates to prevent the spread of COVID-19 while we operate our business and to do our part in protecting public health.
17
We help keep our communities safe from serious public health risks by providing essential products and services. Water that is not properly maintained can serve as a breeding ground for potentially fatal bacteria and viruses.
As a business, the health and safety of our consumers, communities, and associates remain our highest priority, and we continue to take all precautions recommended by the Centers for Disease Control and Prevention to ensure their safety and well-being. We have proactively implemented extensive measures in response to COVID-19 throughout our business operations, including:
We have also closely coordinated with our vendor partners to minimize the impact of supply disruptions and maintain the flow of essential products to meet the elevated demand from consumers in the current environment. The full 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. It is not possible to predict the likelihood, timing, or severity of the aforementioned direct and indirect impacts of COVID-19 on our business. Restrictions on the operation of our locations and distribution facilities could have a material impact on our sales and earnings. COVID-19 could also lead to significant disruption to our supply chain for products we sell and could have a material impact on our sales and earnings.
Business Acquisitions
Our business acquisitions did not have a material impact on our financial position or results of operations. 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.
Incremental Public Company Expenses
As a newly public company we will incur significant expenses on an ongoing basis that we did not incur as a private company. Those costs include additional director compensation and director and officer liability insurance expenses, as well as third-party and internal resources related to accounting, auditing, Sarbanes-Oxley Act compliance, legal, and investor and public relations expenses. These costs will generally be included in SG&A in our condensed consolidated statements of operations.
18
Results of Operations
We derived our condensed consolidated statements of operations for the 13 weeks ended January 1, 2022 and January 2, 2021 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: |
|
January 1, 2022 |
|
|
January 2, 2021 |
|
||
Sales |
|
$ |
184,824 |
|
|
$ |
145,006 |
|
Cost of merchandise and services sold |
|
|
117,508 |
|
|
|
93,291 |
|
Gross profit |
|
|
67,316 |
|
|
|
51,715 |
|
Selling, general and administrative expenses |
|
|
79,785 |
|
|
|
77,489 |
|
Operating loss |
|
|
(12,469 |
) |
|
|
(25,774 |
) |
Other expense: |
|
|
|
|
|
|
||
Interest expense |
|
|
6,863 |
|
|
|
11,516 |
|
Loss on debt extinguishment |
|
|
— |
|
|
|
7,281 |
|
Other expenses, net |
|
|
389 |
|
|
|
— |
|
Total other expense |
|
|
7,252 |
|
|
|
18,797 |
|
Loss before taxes |
|
|
(19,721 |
) |
|
|
(44,571 |
) |
Income tax benefit |
|
|
(5,270 |
) |
|
|
(14,314 |
) |
Net loss |
|
$ |
(14,451 |
) |
|
$ |
(30,257 |
) |
Earnings per share |
|
|
|
|
|
|
||
Basic |
|
$ |
(0.08 |
) |
|
$ |
(0.17 |
) |
Diluted |
|
$ |
(0.08 |
) |
|
$ |
(0.17 |
) |
Weighted average shares outstanding |
|
|
|
|
|
|
||
Basic |
|
|
188,507 |
|
|
|
176,990 |
|
Diluted |
|
|
188,507 |
|
|
|
176,990 |
|
|
|
|
|
|
|
|
||
Percentage of Sales(1) |
|
(%) |
|
|
(%) |
|
||
Sales |
|
|
100.0 |
|
|
|
100.0 |
|
Cost of merchandise and services sold |
|
|
63.6 |
|
|
|
64.3 |
|
Gross margin |
|
|
36.4 |
|
|
|
35.7 |
|
Selling, general and administrative expenses |
|
|
43.2 |
|
|
|
53.4 |
|
Operating loss |
|
|
(6.7 |
) |
|
|
(17.8 |
) |
Other expense: |
|
|
|
|
|
|
||
Interest expense |
|
|
3.7 |
|
|
|
7.9 |
|
Loss on debt extinguishment |
|
|
— |
|
|
|
5.0 |
|
Other expenses, net |
|
|
0.2 |
|
|
|
— |
|
Total other expense |
|
|
3.9 |
|
|
|
13.0 |
|
Loss before taxes |
|
|
(10.7 |
) |
|
|
(30.7 |
) |
Income tax benefit |
|
|
(2.9 |
) |
|
|
(9.9 |
) |
Net loss |
|
|
(7.8 |
) |
|
|
(20.9 |
) |
Other Financial and Operations data: |
|
|
|
|
|
|
||
Number of new and acquired locations |
|
|
7 |
|
|
|
— |
|
Number of locations open at end of period |
|
|
959 |
|
|
|
936 |
|
Comparable sales growth(2) |
|
|
20.5 |
% |
|
|
15.7 |
% |
Adjusted EBITDA(3) |
|
$ |
1,096 |
|
|
$ |
(243 |
) |
Adjusted EBITDA as a percentage of sales(3) |
|
|
0.6 |
% |
|
|
(0.2 |
)% |
Adjusted net loss(3) |
|
$ |
(10,916 |
) |
|
$ |
(10,619 |
) |
Adjusted diluted earnings per share |
|
$ |
(0.06 |
) |
|
$ |
(0.06 |
) |
19
|
|
Three Months Ended |
|
|||||
|
|
January 1, 2022 |
|
|
January 2, 2021 |
|
||
Net loss |
|
$ |
(14,451 |
) |
|
$ |
(30,257 |
) |
Interest expense |
|
|
6,863 |
|
|
|
11,516 |
|
Income tax benefit |
|
|
(5,270 |
) |
|
|
(14,314 |
) |
Depreciation and amortization expense(1) |
|
|
9,241 |
|
|
|
6,595 |
|
Management fees(2) |
|
|
— |
|
|
|
382 |
|
Equity-based compensation expense(3) |
|
|
2,794 |
|
|
|
12,160 |
|
Loss on debt extinguishment(4) |
|
|
— |
|
|
|
7,281 |
|
Costs related to equity offerings(5) |
|
|
389 |
|
|
|
8,152 |
|
Strategic initiative costs(6) |
|
|
1,513 |
|
|
|
— |
|
Executive transition costs and other(7) |
|
|
17 |
|
|
|
(1,758 |
) |
Adjusted EBITDA |
|
$ |
1,096 |
|
|
$ |
(243 |
) |
|
|
Three Months Ended |
|
|||||
|
|
January 1, 2022 |
|
|
January 2, 2021 |
|
||
Net loss |
|
$ |
(14,451 |
) |
|
$ |
(30,257 |
) |
Management fees(2) |
|
|
— |
|
|
|
382 |
|
Equity-based compensation expense(3) |
|
|
2,794 |
|
|
|
12,160 |
|
Loss on debt extinguishment(4) |
|
|
— |
|
|
|
7,281 |
|
Costs related to equity offerings(5) |
|
|
389 |
|
|
|
8,152 |
|
Strategic initiative costs(6) |
|
|
1,513 |
|
|
|
— |
|
Executive transition costs and other(7) |
|
|
17 |
|
|
|
(1,758 |
) |
Tax effects of these adjustments(8) |
|
|
(1,178 |
) |
|
|
(6,579 |
) |
Adjusted net loss |
|
$ |
(10,916 |
) |
|
$ |
(10,619 |
) |
20
Selected Financial Information
Sales
Sales increased to $184.8 million for the three months ended January 1, 2022 from $145.0 million in the prior year period, an increase of $39.8 million, or 27.5%. The increase was primarily driven by higher comparable sales growth of $29.7 million, or 20.5%, and non-comparable sales growth of $10.1 million. The increase in comparable sales growth was driven by higher consumer demand and elevated retail price inflation in the core sanitizer and equipment product categories. Non-comparable sales growth was driven by acquisitions and new locations open for less than 52 weeks.
We believe that COVID-19 has accelerated secular trends in consumer behavior and has favorably impacted our sales. While the duration and effects of the COVID-19 pandemic are uncertain, we anticipate that the changes in consumer behavior will continue for the foreseeable future.
Gross Profit and Gross Margin
Gross profit increased to $67.3 million for the three months ended January 1, 2022 from $51.7 million in the prior year period, an increase of $15.6 million, or 30.2%. Gross margin increased to 36.4% compared to 35.7% in the prior year period, an increase of 70 basis points. The increase in gross profit was primarily due to product margin improvements and occupancy leverage, partially offset by business mix.
Selling, General and Administrative Expenses
SG&A increased to $79.8 million for the three months ended January 1, 2022 from $77.5 million in the prior year period, an increase of $2.3 million, or 3.0%. The increase in SG&A was primarily related to a $14.0 million increase associated with higher sales and our continued investments to support Company growth, a $2.6 million increase related to acquisitions completed after the end of the first quarter of fiscal 2021, a $1.8 million reduction in gain on sale of assets realized in the first quarter of fiscal 2021, and a $1.5 million increase related to strategic initiative costs incurred in the first quarter of fiscal 2022. These increases were offset by lower non-cash equity-based compensation costs of $9.4 million and certain one-time payments of contractual amounts of $8.2 million, as compared to the prior year period. These offsets were primarily incurred in connection with our IPO in the first quarter of fiscal 2021.
Total Other Expense
Total other expenses, net decreased to $7.3 million for the three months ended January 1, 2022 from $18.8 million in the prior year period, a decrease of $11.5 million. This decrease was primarily due to a $7.3 million non-cash loss on debt extinguishment related to the repayment of our senior unsecured notes during the three months ended January 1, 2021 and $4.7 million of lower interest expense related to the repayment of our senior unsecured notes with the proceeds of our IPO in November 2020.
Income Taxes
We recorded an income tax benefit of $5.3 million for the three months ended January 1, 2022 as compared to a $14.3 million income tax benefit in the prior year period, a decrease of $9.0 million. The decrease was primarily attributable to a lower pretax loss and the prior year reversal of a valuation allowance totaling $5.4 million.
The effective income tax rate was a benefit of 26.7% for the three months ended January 1, 2022 and includes net income tax benefits attributable to equity-based compensation awards. The effective income tax rate was a benefit of 32.1% for the three months ended January 2, 2021 and includes a release of the valuation allowance for our interest limitation carryforward and net income tax benefits attributable to equity-based compensation awards.
Net Loss and Earnings per Share
Net loss improved to $14.5 million for the three months ended January 1, 2022 from a net loss of $30.3 million in the prior year period, an improvement of $15.8 million. Diluted earnings per share improved to $(0.08) for the three months ended January 1, 2022 from $(0.17) in the prior year period, an improvement of $0.09.
Adjusted net loss decreased slightly to $10.9 million for the three months ended January 1, 2022 from an Adjusted net loss of $10.6 million in the prior year period, a decrease of $0.3 million. Adjusted diluted earnings per share was $(0.06) for the three months ended January 1, 2022, consistent with the prior year period.
21
Adjusted EBITDA
Adjusted EBITDA increased to $1.1 million for the three months ended January 1, 2022 from $(0.2) million in the prior year period, an increase of $1.3 million. This increase was due primarily to our increase in comparable sales and an improvement in gross margin.
Seasonality and Quarterly Fluctuations
Our business is highly seasonal. In general, 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 2021, we generated 75% of our sales and 97% 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 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 and 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.
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 ABL 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 ABL Credit Facility.
Cash and cash equivalents consist primarily of cash on deposit with banks. Cash and cash equivalents totaled $53.5 million, and $343.5 million as of January 1, 2022 and October 2, 2021, respectively. As of January 1, 2022 and October 2, 2021, we did not have any outstanding borrowings under our ABL Credit Facility.
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 ABL Credit Facility will be adequate to finance our working capital requirements, planned capital expenditures, share repurchases, and debt service over the next 12 months. In the future, we may also allocate capital toward additional strategic acquisitions and share repurchases. If cash provided by operating activities and borrowings under our ABL 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.
22
As of January 1, 2022, outstanding standby letters of credit totaled $9.0 million and, after considering borrowing base restrictions, we had $191.0 million of available borrowing capacity under the terms of the ABL Credit Facility. As of January 1, 2022, we were in compliance with the covenants under the ABL 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 |
|
|||||
|
|
January 1, 2022 |
|
|
January 2, 2021 |
|
||
Net cash used in operating activities |
|
$ |
(125,559 |
) |
|
$ |
(119,291 |
) |
Net cash used in investing activities |
|
|
(10,527 |
) |
|
|
(302 |
) |
Net cash (used in) provided by financing activities |
|
|
(154,071 |
) |
|
|
66,601 |
|
Net decrease in cash and cash equivalents |
|
$ |
(290,157 |
) |
|
$ |
(52,992 |
) |
Cash Used in Operating Activities
Net cash used in operating activities increased to $125.6 million for the three months ended January 1, 2022 from $119.3 million in the prior year period, an increase of $6.3 million. This increase was primarily driven by changes in working capital related to the strategic investment in product inventories to meet heightened customer demand across product categories.
Cash Used in Investing Activities
Net cash used in investing activities increased to $10.5 million for the three months ended January 1, 2022 from $0.3 million in the prior year period, an increase of $10.2 million. This increase was primarily driven by a business acquisition of $5.1 million, higher purchases of property and equipment of $2.7 million and proceeds from the disposition of fixed assets in the prior year period of $2.4 million.
Cash (Used in) Provided by Financing Activities
Net cash used in financing activities for the three months ended January 1, 2022 of $154.1 million, was primarily related to the repurchase and retirement of common stock of $152.1 million, which includes offering costs, and the repayment of long-term debt of $2.0 million. Net cash provided by financing activities for the three months ended January 2, 2021 of $66.6 million, was primarily related to net proceeds raised during our IPO in November 2020 of $458.6 million, partially offset by a $396.1 million repayment of long term debt.
Share Repurchase Program
On December 3, 2021, the Board of Directors authorized a share repurchase program for up to an aggregate amount of $300 million of the Company's outstanding shares of common stock over a period of three years. The amount and timing of repurchases depends on a number of factors, including the Company's financial condition, capital requirements, cash flows, results of operations, future business prospects and other factors our management may deem relevant. The timing, volume and nature of repurchases, are subject to market conditions, applicable securities laws and other factors and may be amended, suspended or discontinued at any time. Shares may be repurchased from time to time on the open market, in privately negotiated transactions, or otherwise.
On December 16, 2021, the Company repurchased and retired 7.5 million shares of common stock at a price per share of $20.25. The Company paid $151.9 million ($152.1 million including offering costs) to fund the share repurchase using existing cash on hand. The Company accounted for the share repurchase and retirement under the cost method by deducting its par value from common stock, reducing additional paid-in-capital by $127.5 million using the share price when the stock was originally issued, and the remaining
23
excess cost of $24.4 million increased retained deficit. As of January 1, 2022, $148.1 million remained available for future purchases under the program.
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 January 1, 2022.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with GAAP and the applicable rules and regulations of the SEC for interim reporting. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.
There have been no material changes to our critical accounting policies and estimates during the 13 weeks ended January 1, 2022 from those disclosed in our Annual Report on Form 10-K for the fiscal year ended October 2, 2021.
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 Qualitative Disclosures About Market Risk.
Interest Rate Risk
Our operating results are subject to risk from interest rate fluctuations on our borrowings, which carry variable interest rates. Our borrowings include our ABL Credit Facility and Term Loan. Our ABL Credit Facility provides for revolving loans of up to $200.0 million, with a sub-commitment for issuance of letters of credit of $25.0 million. Because our borrowings bear interest at a variable rate, we are exposed to market risks relating to changes in interest rates. As of January 1, 2022, we had variable rate debt outstanding of $803.9 million under our Term Loan. No amounts were outstanding under our ABL Credit Facility as of January 1, 2022. Based on the outstanding variable rate loan balance for the Term Loan an increase or decrease of 1% in the effective interest rate would cause an increase or decrease in interest cost of approximately $8.0 million over the next 12 months. From time to time, we may enter into interest rate cap agreements to manage interest rate risk. Such agreements cap the borrowing rate on variable debt to provide a hedge against the risk of rising rates. As of January 1, 2022 we had no interest rate cap agreements.
The United Kingdom’s Financial Conduct Authority has announced the phased cessation of publication of LIBOR beginning after 2021 and continuing through 2023. When LIBOR is discontinued, we may need to change the terms of certain of our floating rate notes, interest rate cap agreements, and credit instruments which utilize LIBOR as a benchmark in determining the interest rate, to replace LIBOR with the new standard that is established. As a result, we may incur incremental costs in transition to a new standard, and interest rates on our current or future indebtedness may be adversely affected by the new standard. Decision have not been finalized regarding the replacement rates. As such, the potential effect of any such event on our cost of capital cannot yet be determined, but we do not expect it to have a material impact to our consolidated financial condition, results of operations, or cash flows.
Impact of Inflation
We experience inflation and deflation related to our purchase of certain products. This price volatility could potentially have a material impact on our financial condition and/or our results of operations. We actively manage the impact of inflation, including tariffs, through strong relationships with our diverse supplier base, vendor negotiation, and promotion management. We also strategically invest through inventory purchases in order to obtain favorable pricing ahead of any vendor price increases. In order to mitigate price volatility, we monitor price fluctuations and may adjust our selling prices accordingly, however, our ability to recover higher costs through increased pricing may be limited by the competitive environment in which we operate. We currently do not use derivative instruments to manage these risks.
24
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 effective as of the end of the period covered by this Quarterly Report on Form 10-Q.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended January 1, 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
25
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 January 1, 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 2, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
The following table sets forth repurchases of our common stock under our $300 million share repurchase program during the three months ended January 1, 2022:
Period |
Total Number of Shares Purchased(1) |
|
Average Price Paid Per Share(1) |
|
Total Number of Shares Purchased as Part of Publicly Announced Programs(2) |
|
Dollar Value of Shares that May Yet Be Purchased Under the Program |
|
||||
October 3, 2021 - October 30, 2021 |
|
— |
|
$ |
— |
|
|
— |
|
$ |
— |
|
October 31, 2021 - November 27, 2021 |
|
— |
|
$ |
— |
|
|
— |
|
$ |
— |
|
November 28, 2021 - January 1, 2022 |
|
7,500,000 |
|
$ |
20.25 |
|
|
7,500,000 |
|
$ |
148,125,000 |
|
Sales of Unregistered Securities
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
26
Item 6. Exhibits.
|
|
|
|
Incorporated by Reference |
||||
Exhibit Number |
|
Exhibit Description |
|
Form |
|
Exhibit |
|
Filing Date/ Period End Date |
10.1 |
|
|
8-K |
|
10.1 |
|
12/16/2021 |
|
10.2* |
|
|
|
|
|
|
|
|
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 |
|
|
|
|
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101.LAB* |
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Inline XBRL Label Linkbase Document |
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101.PRE* |
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Inline XBRL Presentation Linkbase Document |
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101.DEF* |
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Inline XBRL Definition Linkbase Document |
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104* |
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Cover Page Interactive Data File (embedded within the Inline XBRL document). |
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* 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.
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SIGNATURES
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.
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LESLIE’S, INC. |
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Date: February 4, 2022 |
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By: |
/s/ Steven M. Weddell |
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Steven M. Weddell |
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Executive Vice President and Chief Financial Officer |
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(Principal Financial Officer and Principal Accounting Officer) |
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