10-Q

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 1, 2022


☐	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 001-39667

LESLIE’S, INC.

(Exact Name of Registrant as Specified in its Charter)


Delaware	20-8397425
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
2005 East Indian School Road Phoenix, AZ	85016
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (602) 366-3999

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

LESL

The Nasdaq Global Select Market

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. Yes ☒ No ☐

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). Yes ☒ No ☐

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.

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 ☐ No ☒

As of January 31, 2022, the Registrant had 182,539,417 shares of common stock, $0.001 par value per share, outstanding.

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		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements	2
	Condensed Consolidated Balance Sheets	2
	Condensed Consolidated Statements of Operations	3
	Condensed Consolidated Statements of Stockholders’ Deficit	4
	Condensed Consolidated Statements of Cash Flows	5
	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.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	25

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3.	Defaults Upon Senior Securities	26
Item 4.	Mine Safety Disclosures	26
Item 5.	Other Information	26
Item 6.	Exhibits	27

Signatures		28

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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:

•

our ability to execute on our growth strategies;

•

our ability to maintain favorable relationships with suppliers and manufacturers;

•

competition from mass merchants and specialty retailers;

•

impacts on our business from the sensitivity of our business to weather conditions, changes in the economy, and the housing market;

•

our ability to implement technology initiatives that deliver the anticipated benefits, without disrupting our operations;

•

our ability to attract and retain senior management and other qualified personnel;

•

regulatory changes and development affecting our current and future products;

•

our ability to obtain additional capital to finance operations;

•

commodity price inflation and deflation;

•

impacts on our business from the COVID-19 pandemic;

•

impacts on our business from cyber incidents and other security threats or disruptions; and

•

other risks and uncertainties, including those listed in the section titled “Risk Factors” in our filings with the United States Securities and Exchange Commission.

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.

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

LESLIE’S, INC.

CONDENSED Consolidated Balance Sheets

(Amounts in Thousands, Except Share and Per Share Amounts)


	January 1, 2022			October 2, 2021			January 2, 2021
	(Unaudited)			(Audited)			(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	53,341		$	343,498		$	102,809
Accounts and other receivables, net		39,353			38,860			37,116
Inventories		244,632			198,789			174,535
Prepaid expenses and other current assets		38,173			20,564			25,604
Total current assets		375,499			601,711			340,064
Property and equipment, net		65,883			70,335			62,628
Operating lease right-of-use assets		207,291			212,284			191,125
Goodwill and other intangibles, net		132,428			129,020			120,636
Deferred tax assets		2,327			3,734			14,729
Other assets		27,837			25,148			16,658
Total assets	$	811,265		$	1,042,232		$	745,840
Liabilities and stockholders’ deficit
Current liabilities
Accounts payable and accrued expenses	$	188,824		$	233,597		$	126,864
Operating lease liabilities		56,873			61,071			56,398
Income taxes payable		411			6,945			—
Current portion of long-term debt		8,100			8,100			8,341
Total current liabilities		254,208			309,713			191,603
Operating lease liabilities, noncurrent		153,834			160,037			139,796
Long-term debt, net		784,527			786,125			795,394
Other long-term liabilities		—			3,915			5,457
Total liabilities		1,192,569			1,259,790			1,132,250
Commitments and contingencies
Stockholders’ deficit
Common stock, $0.001 par value, 1,000,000,000 shares authorized and 182,496,645, 189,821,011 and 186,618,446 issued and outstanding as of January 1, 2022, October 2, 2021 and January 2, 2021, respectively.		182			190			187
Additional paid in capital		80,062			204,711			192,753
Retained deficit		(461,548	)		(422,459	)		(579,350	)
Total stockholders’ deficit		(381,304	)		(217,558	)		(386,410	)
Total liabilities and stockholders’ deficit	$	811,265		$	1,042,232		$	745,840

See accompanying notes which are an integral part of these condensed consolidated financial statements.

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LESLIE’S, INC.

CONDENSED Consolidated Statements of Operations

(Amounts in Thousands, Except Per Share Amounts)

(Unaudited)


	Three Months Ended
	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

See accompanying notes which are an integral part of these condensed consolidated financial statements.

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LESLIE’S, INC.

CONDENSED Consolidated Statements of Stockholders’ Deficit

(Amounts in Thousands)

(Unaudited)


	Common Stock						Additional Paid in Capital			Retained			Total Stockholders’
	Shares			Amount			(Deficit)			Deficit			Deficit
Balance, October 3, 2020		156,500		$	157		$	(278,063	)	$	(549,093	)	$	(826,999	)
Issuance of common stock upon initial public offering, net of offering costs		30,000			30			458,656			—			458,686
Issuance of shares under stock incentive plans		118			—			—			—			—
Equity-based compensation		—			—			12,160			—			12,160
Net loss		—			—			—			(30,257	)		(30,257	)
Balance, January 2, 2021		186,618		$	187		$	192,753		$	(579,350	)	$	(386,410	)

Balance, October 2, 2021		189,821		$	190		$	204,711		$	(422,459	)	$	(217,558	)
Vesting of restricted stock units		170			—			—			—			—
Stock options exercised		6			—			100			—			100
Equity-based compensation		—			—			2,751			—			2,751
Repurchase and retirement of common stock		(7,500	)		(8	)		(127,500	)		(24,638	)		(152,146	)
Net loss		—			—			—			(14,451	)		(14,451	)
Balance, January 1, 2022		182,497		$	182		$	80,062		$	(461,548	)	$	(381,304	)

See accompanying notes which are an integral part of these condensed consolidated financial statements.

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LESLIE’S, INC.

CONDENSED Consolidated Statements of Cash Flows

(Amounts in Thousands)

(Unaudited)


	Three Months Ended
	January 1, 2022			January 2, 2021
Operating Activities
Net loss	$	(14,451	)	$	(30,257	)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		9,241			6,595
Equity-based compensation		2,751			12,160
Amortization of deferred financing costs and debt discounts		496			648
Provision for doubtful accounts		249			59
Deferred income taxes		1,407			(8,146	)
Loss (gain) on disposition of assets		17			(1,758	)
Loss on debt extinguishment		—			7,281
Changes in operating assets and liabilities:
Accounts and other receivables		(742	)		(5,694	)
Inventories		(43,723	)		(25,569	)
Prepaid expenses and other current assets		(17,593	)		(2,943	)
Other assets		(2,741	)		(2,215	)
Accounts payable and accrued expenses		(48,528	)		(65,626	)
Income taxes payable		(6,534	)		(1,857	)
Operating lease assets and liabilities, net		(5,408	)		(1,969	)
Net cash used in operating activities		(125,559	)		(119,291	)
Investing Activities
Purchases of property and equipment		(5,402	)		(2,706	)
Business acquisitions, net of cash acquired		(5,146	)		—
Proceeds from disposition of fixed assets		21			2,404
Net cash used in investing activities		(10,527	)		(302	)
Financing Activities
Repayment of long term debt		(2,025	)		(392,085	)
Proceeds from options exercised		100			—
Repurchase and retirement of common stock		(152,146	)		—
Proceeds from issuance of common stock upon initial public offering, net		—			458,686
Net cash (used in) provided by financing activities		(154,071	)		66,601
Net decrease in cash and cash equivalents		(290,157	)		(52,992	)
Cash and cash equivalents, beginning of period		343,498			155,801
Cash and cash equivalents, end of period	$	53,341		$	102,809
Supplemental Information:
Interest	$	6,725		$	19,635
Income taxes, net of refunds received		(50	)		920

See accompanying notes which are an integral part of these condensed consolidated financial statements.

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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 959 company-operated locations in 38 states and e-commerce websites.

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

To prepare financial statements that conform to GAAP, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Our most significant estimates relate to sales returns, inventory obsolescence reserves, lease assumptions, vendor rebate programs, income taxes, self-insurance, valuation of intangible assets and goodwill and intangible asset impairment evaluations. We continually review our estimates and make adjustments as necessary, but actual results could be significantly different from what we expected when we made these 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 not recorded at fair value but required to be disclosed at fair value.

As of January 1, 2022 and October 2, 2021, we held no assets that are required to be measured at fair value on a recurring basis.

The fair value of our amended and restated term loan credit agreement (“Term Loan”) due in 2028 (see Note 9) was determined to be $800.4 million and $802.9 million as of January 1, 2022 and October 2, 2021, respectively. These fair value estimates, determined to be Level 2, are subjective in nature and involve uncertainties and matters of judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect these estimates.

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 no transfers between levels in the fair value hierarchy during the three months ended January 1, 2022 and January 2, 2021.

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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.

In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (“Topic 805”): Accounting for contract assets and contract liabilities from contracts with customers, which includes certain amendments to improve, simplify, and provide consistency for recognition and measurement of acquired contract assets and contract liabilities from revenue contracts in a business combination. The amendments require that an acquirer recognize and measure such contract assets and contract liabilities under Topic 606, Revenue from Contracts with Customers, as if it had originated the contracts. The amendments also allow for election of certain practical expedients, which are applied on an acquisition-by-acquisition basis. The ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted, including for any interim period, and if elected, the amendments are applied retrospectively for any acquisitions that occurred in the fiscal year of interim adoption. We expect to early adopt ASU 2021-08 as of October 3, 2022.

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 seven locations in the greater Phoenix, Arizona area. 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. If we make changes to the amounts recorded, such adjustments will be recorded in the period in which they are identified.

Fiscal 2021 Acquisitions

In fiscal 2021, we completed three acquisitions of retailers of supplies and services for hot tubs, swim spas and fireplaces with eight locations in Denver, Colorado, Medford, Oregon, and the Washington, DC area.

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 $1.5 million related to these acquisitions.

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Note 4 —Goodwill and Other Intangibles, Net

Goodwill

The carrying amounts of goodwill are as follows (in thousands):


	January 1, 2022		October 2, 2021		January 2, 2021
Balance at beginning of the period	$	101,114	$	93,295	$	93,295
Acquisitions		3,200		7,819		—
Measurement period adjustments		1,475		—		—
Balance at the end of the period	$	105,789	$	101,114	$	93,295

Other Intangible Assets

Other intangible assets consisted of the following as of January 1, 2022 (in thousands, except weighted average remaining useful life):


	Weighted Average Remaining Useful Life (in Years)		Gross Carrying Value		Accumulated Amortization			Net Carrying Amount
Trade name and trademarks (finite life)		6.5	$	5,940	$	(5,311	)	$	629
Trade name and trademarks (indefinite life)	Indefinite			17,750		—			17,750
Non-compete agreements		7.2		8,633		(7,174	)		1,459
Consumer relationships		6.3		19,000		(12,545	)		6,455
Other intangibles		6.9		6,620		(6,274	)		346
Total			$	57,943	$	(31,304	)	$	26,639

Other intangible assets consisted of the following as of October 2, 2021 (in thousands, except weighted average remaining useful life):


	Weighted Average Remaining Useful Life (in Years)		Gross Carrying Value		Accumulated Amortization			Net Carrying Amount
Trade name and trademarks (finite life)		6.6	$	5,940	$	(5,274	)	$	666
Trade name and trademarks (indefinite life)	Indefinite			17,750		—			17,750
Non-compete agreements		7.5		8,633		(7,123	)		1,510
Consumer relationships		6.4		19,000		(11,688	)		7,312
Other intangibles		7.0		6,620		(5,952	)		668
Total			$	57,943	$	(30,037	)	$	27,906

Other intangible assets consisted of the following as of January 2, 2021 (in thousands, except weighted average remaining useful life):


	Weighted Average Remaining Useful Life (in Years)		Gross Carrying Value		Accumulated Amortization			Net Carrying Amount
Trade name and trademarks (finite life)		3.4	$	5,540	$	(5,167	)	$	373
Trade name and trademarks (indefinite life)	Indefinite			17,750		—			17,750
Non-compete agreements		8.2		8,633		(6,958	)		1,675
Consumer relationships		5.9		17,200		(10,485	)		6,715
Other intangibles		7.1		6,620		(5,769	)		851
Total			$	55,743	$	(28,379	)	$	27,364

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Amortization expense was $1.3 million and $0.5 million for the three months ended January 1, 2022 and January 2, 2021, respectively. No impairment of goodwill or other intangible assets was recorded during the three months ended January 1, 2022 or January 2, 2021.

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	$	1,167
2023		1,923
2024		1,285
2025		1,188
2026		942
Thereafter		2,384
Total	$	8,889

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	$	26,476		$	23,222		$	22,753
Customer receivables		11,415			13,473			5,533
Other receivables		4,155			4,621			9,523
Allowance for doubtful accounts		(2,693	)		(2,456	)		(693	)
Total	$	39,353		$	38,860		$	37,116

Note 6—Inventories

Inventories consisted of the following (in thousands):


	January 1, 2022		October 2, 2021		January 2, 2021
Raw materials	$	4,741	$	4,244	$	2,577
Finished goods		239,891		194,545		171,958