10-Q

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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 July 28, 2023, the Registrant had 184,004,936 shares of common stock, $0.001 par value per share, outstanding.

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 or outcomes 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” in our Annual Report on Form 10-K for the year ended October 1, 2022, and in Part II, Item 1A, “Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended April 1, 2023. 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 or outcomes 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.

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

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 included in our Annual Report on Form 10-K for the year ended October 1, 2022.

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 July 1, 2023 and July 2, 2022 refer to the 13 weeks ended July 1, 2023 and July 2, 2022, respectively. References to the nine months ended July 1, 2023 and July 2, 2022 refer to the 39 weeks ended July 1, 2023 and July 2, 2022, respectively.

Use of Estimates

Management is required to make certain estimates and assumptions during the preparation of the condensed consolidated financial statements in accordance with GAAP. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the condensed consolidated financial statements. They also impact the reported amount of net income (loss) during any period. Actual results could differ from those estimates.

Significant estimates underlying the accompanying condensed consolidated financial statements include inventory reserves, lease assumptions, vendor rebate programs, our loyalty program, the determination of income taxes payable and deferred income taxes, sales returns reserve, self-insurance liabilities, the recoverability of intangible assets and goodwill, fair value of assets acquired in a business combination, and contingent consideration related to business combinations.

Seasonality

Our business is highly seasonal. Sales and earnings are highest during our third and fourth fiscal quarters, being April through September, which represent the peak months of swimming pool use. Sales are substantially lower during our first and second fiscal quarters.

Summary of Other Significant Accounting Policies

There have been no changes to our Significant Accounting Policies since our Annual Report on Form 10-K for the year ended October 1, 2022, other than the adoption of Reference Rate Reform discussed further below. For more information regarding our Significant Accounting Policies and Estimates, see Note 2—Summary of Significant Accounting Policies included in our Annual Report on Form 10-K for the year ended October 1, 2022.

Table of Contents

Recent Accounting Pronouncements

In March 2020, January 2021 and December 2022, the FASB issued ASU No. 2020-04, 2021-01 and 2022-06, respectively, regarding Reference Rate Reform (collectively “Topic 848”). This collective guidance is in response to accounting concerns regarding contract modifications and hedge accounting because of impending rate reform associated with structural risks of interbank offered rates, and particularly, the risk of cessation of the London Inter-Bank Offer Rate (“LIBOR”) related to regulators in several jurisdictions around the world having undertaken reference rate reform initiatives to identify alternative reference rates. The intended cessation date of the overnight 1-, 3-, 6-, and 12-month tenors of LIBOR is expected to be June 30, 2023. In addition, Topic 848 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The guidance is effective upon issuance and may be applied through December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The primary contracts for which LIBOR is used are our Revolving Credit Facility and Term Loan (as defined in Note 9—Long-Term Debt, Net). The Company transitioned from a LIBOR-based rate to a Term Secured Overnight Financing Rate (“Term SOFR”)-based rate for our Revolving Credit Facility and Term Loan and elected the optional expedients under the standard as of the first day of the second and third quarters, respectively. This adoption did not have a material impact to our condensed consolidated financial statements.


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)


		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 the 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	24

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	28

Signatures		29


	July 1, 2023			October 1, 2022			July 2, 2022
	(Unaudited)			(Audited)			(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	19,430		$	112,293		$	193,130
Accounts and other receivables, net		49,263			45,295			47,266
Inventories		436,557			361,686			361,391
Prepaid expenses and other current assets		31,454			23,104			30,542
Total current assets		536,704			542,378			632,329
Property and equipment, net		85,396			78,087			71,653
Operating lease right-of-use assets		250,378			236,477			221,694
Goodwill and other intangibles, net		219,835			213,701			155,663
Deferred tax assets		194			1,268			1,230
Other assets		44,918			37,720			34,422
Total assets	$	1,137,425		$	1,109,631		$	1,116,991
Liabilities and stockholders’ deficit
Current liabilities
Accounts payable and accrued expenses	$	242,510		$	266,972		$	330,881
Operating lease liabilities		61,342			60,373			63,303
Income taxes payable		3,345			12,511			30,611
Current portion of long-term debt		8,100			8,100			8,100
Total current liabilities		315,297			347,956			432,895
Operating lease liabilities, noncurrent		193,004			179,835			161,473
Revolving Credit Facility		31,000			—			—
Long-term debt, net		774,884			779,726			781,322
Other long-term liabilities		3,050			65			70
Total liabilities		1,317,235			1,307,582			1,375,760
Commitments and contingencies
Stockholders’ deficit
Common stock, $0.001 par value, 1,000,000,000 shares authorized and 184,004,936, 183,480,545, and 183,027,684 issued and outstanding as of July 1, 2023, October 1, 2022, and July 2, 2022, respectively.		184			183			183
Additional paid in capital		97,313			89,934			87,050
Retained deficit		(277,307	)		(288,068	)		(346,002	)
Total stockholders’ deficit		(179,810	)		(197,951	)		(258,769	)
Total liabilities and stockholders’ deficit	$	1,137,425		$	1,109,631		$	1,116,991


	Three Months Ended					Nine Months Ended
	July 1, 2023		July 2, 2022			July 1, 2023		July 2, 2022
Sales	$	610,891	$	673,633		$	1,018,839	$	1,086,529
Cost of merchandise and services sold		359,295		370,026			630,777		629,977
Gross profit		251,596		303,607			388,062		456,552
Selling, general and administrative expenses		135,789		131,469			324,427		300,872
Operating income		115,807		172,138			63,635		155,680
Other expense:
Interest expense		17,675		6,847			48,282		20,659
Other (income) expenses, net		—		(143	)		—		407
Total other expense		17,675		6,704			48,282		21,066
Income before taxes		98,132		165,434			15,353		134,614
Income tax expense		25,585		42,448			4,592		33,519
Net income	$	72,547	$	122,986		$	10,761	$	101,095
Earnings per share:
Basic	$	0.39	$	0.67		$	0.06	$	0.55
Diluted	$	0.39	$	0.67		$	0.06	$	0.54
Weighted average shares outstanding:
Basic		183,932		182,937			183,725		184,707
Diluted		184,760		184,721			184,752		186,695


	Common Stock						Additional						Total
	Shares			Amount			Paid in Capital			Retained Deficit			Stockholders’ Deficit
Balance, April 2, 2022		182,784		$	183		$	83,074		$	(468,988	)	$	(385,731	)
Issuance of common stock under the Plan		244			—			1,049			—			1,049
Equity-based compensation		—			—			2,927			—			2,927
Net income		—			—			—			122,986			122,986
Balance, July 2, 2022		183,028		$	183		$	87,050		$	(346,002	)	$	(258,769	)

Balance, April 1, 2023		183,843		$	184		$	94,705		$	(349,854	)	$	(254,965	)
Issuance of common stock under the Plan		166			—			—			—			—
Equity-based compensation		—			—			2,649			—			2,649
Restricted stock units surrendered in lieu of withholding taxes		(4	)		—			(41	)		—			(41	)
Net income		—			—			—			72,547			72,547
Balance, July 1, 2023		184,005		$	184		$	97,313		$	(277,307	)	$	(179,810	)

	Common Stock						Additional						Total
	Shares			Amount			Paid in Capital			Retained Deficit			Stockholders’ Deficit
Balance, October 2, 2021		189,821		$	190		$	204,711		$	(422,459	)	$	(217,558	)
Issuance of common stock under the Plan		707			1			1,377			—			1,378
Equity-based compensation		—			—			8,462			—			8,462
Repurchase and retirement of common stock		(7,500	)		(8	)		(127,500	)		(24,638	)		(152,146	)
Net income		—			—			—			101,095			101,095
Balance, July 2, 2022		183,028		$	183		$	87,050		$	(346,002	)	$	(258,769	)

Balance, October 1, 2022		183,481		$	183		$	89,934		$	(288,068	)	$	(197,951	)
Issuance of common stock under the Plan		643			1			—			—			1
Equity-based compensation		—			—			9,159			—			9,159
Restricted stock units surrendered in lieu of withholding taxes		(119	)		—			(1,780	)		—			(1,780	)
Net income		—			—			—			10,761			10,761
Balance, July 1, 2023		184,005		$	184		$	97,313		$	(277,307	)	$	(179,810	)


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


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO