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As filed with the Securities and Exchange Commission on February 8, 2021
SECURITIES AND EXCHANGE COMMISSION
THE SECURITIES ACT OF 1933
(Exact name of Registrant as specified in its charter)
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(State or other jurisdiction of incorporation |
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(Primary Standard Industrial Classification Code Number) |
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(I.R.S. Employer Identification Number) |
2005 East Indian School Road
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Senior Vice President, General Counsel
2005 East Indian School Road
(Name, address, including zip code, and telephone number, including area code, of agent for service)
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Jennifer Bellah Maguire Peter W. Wardle Gibson, Dunn & Crutcher LLP |
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Marc D. Jaffe Stelios G. Saffos Latham & Watkins LLP 885 Third Avenue New York, New York 10022 (212) 906-1200 |
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this registration statement is declared effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.
☐
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
☐
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.
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Large accelerated filer ☐ |
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Accelerated filer ☐ |
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Non-accelerated filer ☒ |
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Smaller reporting company ☐ |
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Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.
☐
CALCULATION OF REGISTRATION FEE
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Securities to be Registered |
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Proposed Maximum Aggregate Offering Price |
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Common Stock, $0.001 par value per share |
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33,350,000 |
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$29.86 |
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$995,831,000 |
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$108,64 6 |
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(1) |
Includes 4,350,000 shares of common stock that the underwriters have the option to purchase. See “Underwriting.” |
(2) |
Estimated solely for the purpose of calculating the registration fee under Rule 457(c) of the Securities Act of 1933, as amended, based on the average of the high and low prices of a share of common stock on The Nasdaq Global Select Market on February 4, 2021, which was $29.86. |
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. The securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
Preliminary Prospectus dated February 8, 2021
The selling stockholders identified in this prospectus are offering 29,000,000 shares of our common stock. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders.
Our common stock is listed on The Nasdaq Global Select Market (“Nasdaq”) under the symbol “LESL.” On February 5, 2021, the last reported sales price of a share of our common stock on Nasdaq was $28.05.
Investing in our common stock involves risks. See the section titled “
Risk Factors,” beginning on page 16 for a discussion of information that should be considered in connection with an investment in our common stock.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
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Per Share |
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Total |
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$ |
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$ |
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Underwriting discounts and commissions(1) |
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$ |
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$ |
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Proceeds to the selling stockholders, before expenses |
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$ |
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$ |
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(1) |
See the section titled “Underwriting” for a description of compensation payable to the underwriters and estimated offering expenses. |
The underwriters may also exercise their option to purchase up to an additional 4,350,000 shares from the selling stockholders at the public offering price less the underwriting discount for 30 days after the date of this prospectus.
The shares will be ready for delivery on or about , 2021.
The date of this prospectus is , 2021.
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13 |
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F-1 |
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You should rely only on the information contained in this prospectus or in any related free-writing prospectus prepared by or on behalf of us. We, the selling stockholders and the underwriters have not authorized anyone to provide you with information different from, or in addition to, the information contained in this prospectus or in any related free-writing prospectus. The information contained in this prospectus is current only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the shares of common stock.
We, the selling stockholders and the underwriters have not taken any action that would permit a public offering of the shares of common stock outside the United States or permit the possession or distribution of this prospectus or any related free-writing prospectus outside the United States. Persons outside the United States who come into possession of this prospectus or any related free-writing prospectus must inform themselves about and observe any restrictions relating to the offering of the shares of common stock and the distribution of the prospectus outside the United States.
Leslie’s
®
, AccuBlue
®
, MyLife
®
, and other trademarks, trade names or service marks of Leslie’s, Inc. appearing in this prospectus are the property of Leslie’s, Inc. All other trademarks, trade names, and service marks appearing in this prospectus are the property of their respective owners. Solely for convenience, the trademarks and trade names in this prospectus may be referred to without the
®
and
™
symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights, or the rights of the applicable licensor to these trademarks and tradenames.
Market, Ranking, and Other Industry Data
In this prospectus, we refer to information regarding industry, market, and competitive position data that we obtained from our own internal estimates and research, as well as from independent market research, industry and general publications and surveys, governmental agencies, and publicly available information in addition to research, surveys, and studies conducted by third parties. In some cases, we do not expressly refer to the sources from which this data is derived. In that regard, when we refer to one or more sources of this type of data in any paragraph, you should assume that other data of this type appearing in the same paragraph is derived from the same sources, unless otherwise expressly stated or the context otherwise requires. All of the market and industry data used in this prospectus involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such assumptions and limitations.
In addition, while we believe the industry, market, and competitive position data included in this prospectus is reliable and based on reasonable assumptions, such data involve risks and uncertainties and are subject to change based on various factors, including those described in the section titled “Risk Factors.” These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties or by us.
Non-GAAP
Financial Measures
Comparable sales, comparable sales growth, adjusted EBITDA, adjusted net income and adjusted net income per share are our key
non-GAAP
financial measures. For more information about how we use these
non-GAAP
financial measures in our business, the limitations of these measures, and a reconciliation of these measures to the most directly comparable GAAP measures, please see the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations––Key Factors and Measures We Use to Evaluate Our Business.”
This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before deciding to purchase our common stock in this offering. You should read the entire prospectus carefully, including the sections titled “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and the related notes included elsewhere in this prospectus, before making an investment decision. If you invest in our common stock, you are assuming a high degree of risk.
Unless otherwise indicated or the context otherwise requires, all references in this prospectus to “we,” “our,” “us,” “Leslie’s,” “the Company,” and “our Company” refer to Leslie’s, Inc. and its consolidated subsidiaries.
We are committed to continuing our legacy as the most trusted authority in pool and spa care. Through our consumer-centric approach, we provide an unparalleled experience for all consumers across all channels, supported by leading product innovation, expert knowledge, and exceptional service.
We are the largest and most trusted
brand in the nearly $11 billion United States pool and spa care industry, serving residential, professional, and commercial consumers. Founded in 1963, we are the only
pool and spa care brand with national scale, operating an integrated marketing and distribution ecosystem powered by a physical network of 936 branded locations and a robust digital platform. We command a market-leading share of nearly 15% of residential aftermarket product spend as of 2019, which represents an increase of approximately 500 basis points since 2010, our physical network is larger than the sum of our twenty largest competitors, and our digital sales are estimated to be greater than five times as large as that of our largest digital competitor. 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. Over the last five years, we have spent more than $70 million in foundational investments across new technologies and capabilities focused on transforming our consumer experience and advancing our industry leadership. The unprecedented scale of our integrated marketing and distribution ecosystem, which is powered by our
network, uniquely enables us to efficiently reach and service every pool and spa in the continental United States—capabilities no competitor can match.
The aftermarket pool and spa care industry is one of the most fundamentally attractive consumer categories given its scale, predictability, and growth outlook. Since 1970, when industry market data was first collected, the market has demonstrated consistent growth due to the
non-discretionary
nature of ongoing water treatment to maintain safe, sanitized water. Without proper ongoing maintenance, water quality quickly degrades, yielding unsafe conditions and risking equipment failure. As a result, each pool and spa represents an annuity-like stream of chemical, equipment, and service revenue for their average life span of over 25 years. We estimate the average
in-ground
pool owner spends $24,000 or more on maintenance products and services over the life of a pool. According to P.K. Data, the United States market is comprised of a growing installed base of more than 14 million pools and spas, and the installed base of residential in ground pools has grown every year for at least 50 years. The industry generated revenue of nearly $11 billion in 2019 and grew at a 3.8% CAGR from 2015 to 2019.
The industry is currently experiencing a significant increase in demand, as the
COVID-19
pandemic has accelerated secular trends in consumer behavior. Consumers are increasingly focused on outdoor living, healthy lifestyles, sanitization and safety, migrating to lower density communities, and spending more time at home, all of which are fundamentally changing their spending patterns. In particular, the
reality of the pandemic has led to significant growth in new pool installations and pool usage. Based on research performed by P.K. Data, new pool permit activity through July 2020 has grown by 32% over the comparable period in 2019 and is forecasted to achieve unprecedented year-over-year growth in new pool installations in 2020. This significant increase in new pool construction activity represents a permanent increase in demand for aftermarket products and services. Nearly 200,000 new in ground pools are expected to be constructed in 2020 and 2021, representing nearly $5 billion in estimated lifetime maintenance spend. While our business is not dependent on new pool construction, we believe we are uniquely positioned to capture a meaningful portion of the related aftermarket spend.
Given we play primarily in the aftermarket business, we have a highly predictable, recurring revenue model, as evidenced by our 57 consecutive years of sales growth. More than 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 and commercial consumers. Consumers receive the benefit of extended vendor warranties when purchasing product through our locations or when our certified
in-field
technicians install or repair equipment
on-site.
We also 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 our history, positioning us as the most trusted water treatment solutions 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 the Great Recession and the
COVID-19
pandemic. Our growth has recently accelerated, and for fiscal year 2020, our sales increased 19.8%.
57 Years of Leadership and Disruptive Innovation in Pool & Spa Care
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 that 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, whatever the nature of their need may be, and however they wish to engage with us.
Over our
57-year
history, we have introduced innovative ways to serve pool and spa owners and the professionals who care for their pools and spas.
Owned and Exclusive Brands.
Since our inception in 1963, we have offered a portfolio of owned and exclusive brands. We continue to expand our selection of exclusive offerings through innovation, most recently with the launch of the Jacuzzi
®
and our RightFit
®
brands in 2016. Our exclusive brands and products account for approximately 55% of total sales and 80% of chemical sales. These proprietary brands and custom-formulated products are only available through our integrated platform and offer professional-grade quality to our consumers, while allowing us to achieve higher gross margins relative to sales of third-party products.
Complimentary and Proprietary Water Testing.
We pioneered complimentary
in-store
water testing, and over the course of our history have conducted millions of tests, which has helped us establish relationships, cultivate loyalty, and drive attractive lifetime value with our consumers as they rely on us for their water treatment needs. We have found that consumers who regularly test their water with us spend more with us per year than other consumers, and we believe that these consumers experience significantly fewer days where their pools are out of commission.
Complimentary
In-Store
Repair.
We provide complimentary
in-store
equipment repair, which we offer to all consumers with the purchase of Leslie’s replacement parts. Over the last fifteen years, we have conducted more than one million
in-store
repairs.
We employ the industry’s largest
in-field
service network, consisting of more than 200 pool and spa care service professionals who have the expertise to provide essential,
on-site
equipment installation and repair services for residential and commercial consumers throughout the continental United States.
In 2014, we launched the industry’s first loyalty program, which helps track loyalty members’ water treatment history and prescriptions and rewards them for shopping with us. As of October 3, 2020, our loyalty program has more than 3.3 million members, up more than 50% from 2.1 million active members as of September 2018. Our loyalty members spend twice as much with us on average compared to our other consumers.
In 2015, we made the strategic decision to resource this channel and accelerate sales growth to professional consumers. Through acquisitions, technology investments, and increased utilization of our integrated network we drove a sales CAGR of over 20% through fiscal year 2020. Our differentiated
model includes 936 convenient locations, including dedicated Leslie’s PRO locations in certain markets, extended operating hours, expansive product offering through our online platforms, multiple fulfillment capabilities, and the ability to provide pool professionals with referrals to residential consumers. Despite our strong growth, our penetration in the professional market remains modest with an estimated market share of less than 10%.
Leslie’s Evolution in the Digital World
Over the last five years, we have spent more than $70 million investing in new service offerings and digital capabilities that have modernized how consumers take care of their pools and spas.
We have built the largest digital presence in the industry. Our complementary platform of branded proprietary
e-commerce
websites and marketplace storefronts allows us to seamlessly serve the needs of all digital consumers through curated pricing and targeted merchandising strategies. In addition to our owned
e-commerce
websites, approximately 40% of our digital sales take place through online marketplaces. In all, our digital network is strategically designed to maximize total profitability. Our digital sales have grown at a CAGR of more than 35% between fiscal year 2015 and fiscal year 2020, and represented 26% of our total sales in fiscal year 2020, up from 8% in fiscal year 2015.
. In 2018, we introduced a custom-designed mobile app that allows consumers to create a personalized pool profile, sync
in-store
prescriptions, and monitor the performance of
at-home
water tests. As of January 2021, the mobile app had more than one half million downloads and an average user rating of 4.6/5.0. We plan to continue enhancing this critical element of our network by introducing new features, including transaction capabilities.
Consumer-Centric Integrated Ecosystem.
We architected a consumer-centric integrated ecosystem comprised of our physical network of 936 branded locations and a robust, data-driven digital platform. Over the last two years, we have invested in new capabilities, including global inventory visibility, buy online
pick-up
in store (“BOPIS”), buy online return in store (“BORIS”), and ship from store (“SFS”), each of which will come online in 2021. With our integrated physical and digital network, we will have the unique advantage of being able to reach all consumers in the continental United States in less than 24 hours, whether they are homeowners, pool and spa professionals, or commercial pool operators, whenever, wherever, and however they prefer to shop.
In January 2020, we launched our AccuBlue
®
in-store
water testing device and enhanced water testing experience. AccuBlue
®
,
which features exclusive and proprietary software that incorporates our 57 years of accumulated water treatment expertise, automates and gamifies the water testing experience, driving enhanced accuracy, higher throughput, greater consumer engagement, and increased consumer adherence to prescription recommendations. Locations that have been equipped with AccuBlue
®
are growing sales at a faster rate than our other locations, supported by an increase in number of water tests performed, an improved conversion rate, and an increase in number of products prescribed per test which has resulted in greater units per transaction. In December 2020, we completed the rollout of AccuBlue
®
across our physical network.
Highly Experienced and Visionary Management Team.
Over the last five years, we have built a diverse, multi-disciplinary management team to drive our consumer-first, digitally enabled growth. Since 2018, four of our eight senior leaders have joined our organization, bringing new expertise and capabilities that are highly complementary and synergistic with our core industry expertise that we have accumulated over decades.
Innovating the Future of Pool and Spa Care
As we look forward, we are committed to better serving our digital-first consumer by introducing an expanded portfolio of connected pool and spa products and services. We believe that we are uniquely positioned to leverage our market-leadership to continue to disrupt the pool and spa care category and further distance ourselves from our competition.
We are actively developing new technologies that seek to fundamentally change the way all consumers, whether a novice or an expert, care for their pools and spas. Through a new AccuBlue Home
TM
subscription offering, we will leverage our proprietary water diagnostics software to convert
on-demand
test results into actionable prescriptions and treatment plans tailored to the specific size and conditions of a consumer’s pool or spa, which we can seamlessly and automatically fulfill through our integrated network.
Certified Pool Maintenance Offering.
We are assembling a strategic network of qualified pool professionals to extend the Leslie’s brand into
on-site
water maintenance, completing our suite of service offerings in the residential pool ecosystem.
We continue to leverage our intellectual property and differentiated strategic position to be the innovator and disruptor in our industry. We plan to strategically reinvest in our business and bring to market new products and services that will continue to improve our ability to serve our consumers and win in the marketplace. In addition to our internal efforts, as the most recognized and trusted authority in the industry with the most direct access and deepest relationships with pool and spa owners, we continue to receive unsolicited opportunities from third parties to introduce to the market and commercialize new products and services on an exclusive basis.
Our Competitive Strengths
We believe that the following competitive strengths have been key drivers of our success to date, and strategically position us for continued success.
Undisputed
market leader in the aftermarket pool and spa care industry.
For 57 years, we have been dedicated to addressing our consumers’ pool needs so they can spend less time maintaining and more time enjoying their pools. We are the only
pool and spa care brand with a nationwide physical presence and an integrated digital platform, consisting of individually merchandised
e-commerce
websites, a mobile app with transaction capabilities, and online marketplace operations, is designed to address the needs of all pool and spa consumers. The remainder of the industry is highly fragmented across both offline and online providers. We command a market-leading share of nearly 15% of residential aftermarket product spend, which represents an increase of approximately 500 basis points since 2010, our physical network is larger than the sum of the next twenty largest competitors, and our digital sales are estimated to be greater than five times as large as that of our largest digital competitor.
We believe that our history, scale, and consumer-centric approach have contributed to industry-leading consumer affinity metrics. As a result of our consumer-centric approach, we have a Voice of Customer (VoC) score of approximately 75% based on our regular surveys of our consumer file, which demonstrates our consumers’ strong affinity for our brand.
Direct relationships with more than 11 million pool and spa owners and professionals, generating durable, annuity-like economics.
We are the largest national pool and spa care brand that has a direct relationship with pool and spa owners and the professionals who serve them. Across our integrated platform, we have a total file of approximately 11 million consumers. Through our team of highly trained pool and spa experts, we offer sophisticated product recommendations and other expert advice, which cultivates long-standing relationships with our consumers. The comprehensive nature of our product and service offering eliminates the need for consumers to leave the Leslie’s ecosystem, driving exceptional retention with annuity-like economics.
In 2014, we launched our loyalty membership program to further deepen our consumer relationships. The program, which serves more than 3.3 million consumers, allows members to save, earn, and redeem via discounts, points, and rewards. We track consumer preferences, order frequency, and pool profiles in order to curate and enhance our recommendations and promotions, anticipate product demand, and track lifetime value to better incentivize our loyalty members. On average, a loyalty member spends twice as much with us per year than a
non-loyalty
member.
Consumer-centric connected ecosystem for all pool and spa owners and the professionals who serve them using proprietary, leading brands across all channels.
We have built the most extensive and geographically diverse pool and spa care network in the United States, consisting of three formats: Residential, Professional (PRO), and Commercial. Our locations are strategically located in densely populated areas mainly throughout the Sunbelt, including California, Arizona, Texas, and Florida. Across our physical network, we employ a team of associates, including pool and spa care experts and service technicians, who act as solution providers to all of our consumers, including both
(“DIY”) and
(“DIFM”) pool owners as well as pool professionals.
As the world has become more digitally focused, and consumers increasingly demand “smart” home-enabled options, we have focused on architecting the industry-leading integrated digital platform of proprietary
e-commerce
websites designed to serve our residential, professional, and commercial consumers. Our proprietary
e-commerce
websites serve digital consumers through curated pricing and targeted merchandising strategies. In addition to our owned
e-commerce
websites, we offer our products through online marketplaces such as Amazon, eBay, and Walmart. As a result of our strategic investments in digital, we are uniquely positioned to serve our consumers with cross-channel capabilities and capture incremental online demand from new consumers while growing the total profitability of the network.
Comprehensive assortment of proprietary brands with recurring, essential, superior product formulations, and trusted, solution-based services for all consumers.
We offer a comprehensive product assortment, consisting of more than 30,000 products across chemicals, equipment and parts, cleaning and maintenance equipment, and safety, recreational, and fitness-related categories. More than 80% of our product sales are
non-discretionary
and recurring in nature; these products are critical to the ongoing maintenance of pools and spas. In addition, approximately 55% of our total sales and 80% of our chemical sales are derived from proprietary brands and custom-formulated products, which allows us to create an entrenched consumer relationship, control our supply chain, and capture attractive margins. Consumers choose our exclusive, proprietary brands and custom-formulated products for their efficacy and value, a combination that we believe cannot be found elsewhere.
We pair our comprehensive product assortment with differentiated
in-store
and
on-site
service offerings. We pioneered the complimentary
in-store
water test and resulting pool or spa water prescription, which has driven consumer traffic and loyalty, and has created a “pharmacist-like” relationship with our consumers. Through innovation, we recently introduced significant upgrades to our water testing capabilities with the launch of our AccuBlue
®
platform. The AccuBlue
®
testing device screens for nine distinct water quality criteria. Our
in-store
experts leverage our proprietary AccuBlue
®
water diagnostics software engine to offer our consumers a customized prescription and treatment plan using our comprehensive range of exclusive products, walking them through product use sequencing
These detailed and sophisticated treatment algorithms are supported by our differentiated water treatment expertise built over decades. Historically, we have found that consumers who test their water with us regularly spend more with us per year than those who do not, underscoring the importance of this acquisition and retention vehicle. We also employ the industry’s largest network of
in-field
technicians who perform
on-site
evaluations, installation, and repair services for residential and commercial consumers.
Attractive financial profile characterized by consistent, profitable growth, and strong cash flow conversion offering multiple levers to drive shareholder value.
We have delivered 57 consecutive years of sales growth, demonstrating our ability to deliver strong financial results through all economic cycles. Our growth has been broad based across residential pool, residential spa, professional pool, and commercial pool consumers and has been driven by strong retention and profitable acquisition of sticky, long-term consumer relationships. Due to our scale, vertical integration, and operational excellence, we maintain high profitability. Due to our low maintenance capital intensity, we generate strong cash flows. As a result of our attractive financial profile, we have significant flexibility with respect to capital allocation, giving us the ability to drive long-term shareholder value through various operating and financial strategies.
Highly experienced and visionary management team that combines deep industry expertise and advanced,
capabilities.
Our strategic vision and culture are directed by our executive management team under the leadership of our Chief Executive Officer, Michael R. Egeck and our Executive Vice President and Chief Financial Officer, Steven M. Weddell. Our well-balanced executive management team is comprised of leaders with decades of experience in the pool and spa care industry as well as recently hired executives who bring new expertise and capabilities to Leslie’s from outside industries. Our management team is uniquely capable of executing upon our strategic vision and successfully continuing to create long-term shareholder value.
We believe we have significant opportunity to acquire new residential consumers and reactivate lapsed residential consumers, which we plan to do by executing on the following strategies:
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Acquire or reactivate consumers via optimized marketing strategy. We believe we have a sizeable opportunity to grow by serving the millions of pool and spa owners in our market who do not actively shop with us today. We plan to accelerate our acquisition of these potential new or reactivated consumers and, at the same time, reduce consumer acquisition cost by shifting our marketing mix toward more efficient digital and social channels. |
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Capture outsized share of new pool and spa consumers. We have observed considerable recent acceleration in new pool and hot tub installations, bringing new consumers to our market. We intend to bolster consumer file growth by deploying targeted marketing tactics to win outsized share of this new consumer cohort. |
Increase share of wallet among existing consumers.
We currently serve a file of approximately 5.5 million active consumers, which represents approximately
one-third
of the estimated total addressable market of pool and spa owners. We define “active consumers” as consumers who transacted with us during the 18-month period ended October 3, 2020 and “lapsed residential consumers” as those who have shopped with us in the past, but have not transacted with us in the last 18 months. We believe we have a significant opportunity to increase spend from existing consumers and drive higher lifetime value. We plan to do this by executing on the following strategies:
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Increase loyalty membership penetration and introduce program upgrades. We plan to continue to market our loyalty program in-store and online to convert more of our consumers to loyalty members. In addition, we are in the process of enhancing our loyalty program to offer more value-added features and further drive member engagement. We will explore opportunities to drive interest by selectively offering special incentives and rewards as well as introducing new value-added features. We believe these initiatives will drive higher transaction frequency and basket size, which will result in increased category spend and higher lifetime value with existing consumers. |
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Enhance retention marketing. While we have historically been satisfied with our consumer retention metrics, we believe there is opportunity to drive even greater retention. We plan to do this by more actively leveraging our consumer database to personalize the consumer experience with targeted messaging and product recommendations. |
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Expand our product and service offering. We plan to expand our offering by introducing new and innovative products and services in our existing categories and by expanding into adjacent categories. Specifically, we believe there is an opportunity with products targeted to spa owners, who have historically been underserved. |
Grow additional share in the professional market.
We believe we have a significant opportunity to grow our sales with pool care professionals, who individually spend more than 25x as much as residential consumers on pool supplies and equipment.
Our research suggests that small and
mid-size
pool professionals value convenience and referrals, both of which we are uniquely positioned to offer given our 900+ locations and industry’s largest consumer file. We plan to expand our physical network of PRO locations, which specifically cater to pool professionals, by opening new locations and selectively remodeling existing residential locations. We believe there is significant whitespace opportunity to operate more than 200 total PRO locations across the United States. We also plan to assemble an affiliated network of qualified pool professionals to extend the Leslie’s name into water maintenance. We believe that this initiative represents a natural adjacency and will resonate with existing residential consumers as well as help attract new residential consumers.
Utilize strategic M&A to consolidate share and further enhance capabilities.
The aftermarket pool and spa industry remains highly fragmented, which offers attractive opportunities to utilize strategic M&A to drive consolidation. We have historically used, and plan to continue to use, strategic acquisitions to obtain consumers and capabilities in both new and existing markets. We believe that we are the consolidator of choice in the industry, and we will continue to focus on acquiring high quality, market-leading businesses with teams, capabilities, and technologies that uniquely position us to create value by applying best practices across our entire physical and digital network to better serve new and existing consumer types.
Addressing underserved residential whitespace.
We have identified more than 700 underserved residential pool and spa care markets in the continental United States. With our omni-channel capabilities, successful track record of new location openings, and targeted digital marketing tactics, we believe we are well positioned to capitalize on this meaningful whitespace opportunity. We plan to assess each market independently and determine the most capital efficient way to serve these trade areas using a mix of digital assets and physical locations.
Continue to introduce disruptive innovation.
Leslie’s has a legacy of disruptive innovation in the pool and spa care industry. We plan to continue that legacy by continuously developing and introducing capabilities that create value for our consumers. Present areas of focus include water testing, maintenance prescriptions, new product offerings, and our product distribution ecosystem.
As the Internet of Things wave continues, we believe consumers will seek the convenience of “smart” home functionality in more facets of their daily lives. We believe this presents an opportunity to introduce a full service, connected home solution that effectively automates pool maintenance, including actively monitoring our customer’s water, diagnosing, developing, and prescribing a treatment plan, and delivering to our customer’s home the assortment of products needed to maintain a clear, safe, beautiful pool.
Our business is subject to numerous risks described in the section entitled “Risk Factors” and elsewhere in this prospectus. You should carefully consider these risks before making an investment. Some of these risks include:
Risks Related to the Nature of Our Business
:
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If we are unable to achieve comparable sales growth, our profitability and performance could be materially adversely impacted. |
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Past growth may not be indicative of future growth. |
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Loss of key members of management could adversely affect our business. |
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We are subject to legal or other proceedings that could have a material adverse effect on us. |
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Disruptions from disasters and similar events could have a material adverse effect on our business. |
Risks Related to Our Industry and the Broader Economy
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We face competition by manufacturers, retailers, distributors, and service providers in the residential, professional, and commercial pool and spa care market. |
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The demand for our swimming pool and spa related products and services may be adversely affected by unfavorable economic conditions. |
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The outbreak of COVID-19 could adversely impact our business and results of operations. |
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The demand for pool chemicals may be affected by consumer attitudes towards products for environmental or safety reasons. |
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Our results of operations may fluctuate from quarter to quarter for many reasons, including seasonality. |
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We are susceptible to adverse weather conditions. |
Technology and Privacy Related Risks
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If our online systems do not function effectively, our operating results could be adversely affected. |
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Any limitation or restriction to sell on online platforms could harm our profitability. |
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A significant disturbance or breach of our technological infrastructure could adversely affect our financial condition and results of operations. |
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Improper activities by third parties and other events or developments may result in future intrusions into or compromise of our networks, payment card terminals or other payment systems. |
Risks Related to Our Business Strategy
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We may acquire other companies or technologies, which could fail to result in a commercial product and otherwise disrupt our business. |
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Our operating results will be harmed if we are unable to effectively manage and sustain our future growth or scale our operations. |
Risks Related to the Manufacturing, Processing, and Supply of Our Products
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Our business includes the packaging and storage of chemicals and an accident related to these chemicals could subject us to liability and increased costs. |
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Product supply disruptions may have an adverse effect on our profitability and operating results. |
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The cost of raw materials could increase our cost of goods sold and cause our results of operations and financial condition to suffer. |
Risks Related to Commercialization of Our Products
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The commercial success of our planned or future products is not guaranteed. |
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We may implement a product recall or voluntary market withdrawal, which could significantly increase our costs, damage our reputation, and disrupt our business. |
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If we do not manage product inventory effectively and efficiently, it could adversely affect profitability. |
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If we do not continue to obtain favorable purchase terms with manufacturers, it could adversely affect our operating results. |
Risks Related to Government Regulation
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The nature of our business subjects us to compliance with employment, environmental, health, transportation, safety, and other governmental regulations. |
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Product quality, warranty claims or safety concerns could impact our sales and expose us to litigation. |
Risks Related to Intellectual Property Matters
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• |
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If we are unable to adequately protect our intellectual property rights, our competitive position could be harmed or we could be required to incur significant expenses to enforce or defend our rights. |
|
• |
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If we infringe on or misappropriate the proprietary rights of others, we may be liable for damages. |
Risks Related to Our Indebtedness
|
• |
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Our substantial indebtedness could materially adversely affect our financial condition and our ability to operate our business. |
|
• |
|
Our ability to generate sufficient cash depends on numerous factors beyond our control, and we may be unable to generate sufficient cash flow to service our debt obligations. |
|
• |
|
Restrictive covenants in the agreements governing our Credit Facilities may restrict our ability to pursue our business strategies, and failure to comply with these restrictions could result in acceleration of our debt. |
|
• |
|
Incurrence of substantially more debt could further exacerbate the risks associated with our substantial leverage. |
|
• |
|
The phaseout of the London Interbank Offered Rate (LIBOR), or the replacement of LIBOR with a different reference rate, may adversely affect interest rate. |
Risks Related to Ownership of Our Common Stock
|
• |
|
Our stock price may be volatile, resulting in substantial losses for investors. |
|
• |
|
Future sales of shares by existing stockholders could cause our stock price to decline. |
|
• |
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Stockholders’ ability to influence corporate matters may be limited because a small number of stockholders beneficially own a substantial amount of our common stock and continue to have substantial control over us. |
|
• |
|
Transactions engaged in by our principal stockholders, our officers or directors involving our common stock may have an adverse effect on the price of our stock. |
|
• |
|
We do not intend to pay dividends for the foreseeable future. |
|
• |
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Anti-takeover provisions in our charter and under Delaware law could limit certain stockholder actions. |
|
• |
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Certain provisions of our fifth amended and restated certificate of incorporation may have the effect of discouraging lawsuits against our directors and officers. |
|
• |
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We will continue to incur increased costs as a result of being a public company. |
|
• |
|
If we are unable to effectively implement or maintain a system of internal control over financial reporting, we may not be able to accurately or timely report our financial results. |
|
• |
|
We were previously a “controlled company” within the meaning of the corporate governance standards of Nasdaq, and, as a result, you may not have the same protections afforded to stockholders of other companies during the transition period afforded to us by the rules of Nasdaq. |
Our Corporate Information
We were incorporated as a Delaware corporation on February 6, 2007.
Our principal executive offices are located at 2005 East Indian School Road, Phoenix, Arizona 85016 and our telephone number is (602)
366-3999.
We maintain a website at the address www.lesliespool.com.
Information contained on, or accessible through, our website is not a part of this prospectus or the registration statement of which this prospectus forms a part, and you should not rely on that information when making a decision to invest in our common stock.
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Leslie’s, Inc. |
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Common stock offered by the selling stockholders |
|
29,000,000 shares (or 33,350,000 shares if the underwriters exercise in full their option to purchase additional shares). |
|
|
Option to purchase additional shares |
|
The selling stockholders have granted the underwriters a 30-day option to purchase up to 4,350,000 additional shares of our common stock from the selling stockholders at the public offering price. |
|
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Common stock to be outstanding immediately after the offering |
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The selling stockholders will receive all net proceeds from the sale of the shares of common stock to be sold in this offering, and we will not receive any of these proceeds. See the sections entitled “Use of Proceeds,” “Principal and Selling Stockholders” and “Underwriting.” |
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“LESL” |
Unless otherwise indicated, this prospectus reflects and assumes the following:
|
• |
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no vesting of the restricted stock units described below; and |
|
• |
|
no exercise by the underwriters of their option to purchase additional shares of common stock. |
The number of shares of our common stock to be outstanding after this offering is based on 186,873,341 shares of common stock outstanding as of February 7, 2021, and excludes:
|
• |
|
8,146,795 shares of common stock reserved for future issuance under our 2020 Omnibus Incentive Plan; |
|
• |
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5,690,649 shares of common stock issuable upon the settlement of restricted stock units outstanding as of February 7, 2021; and |
|
• |
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4,589,412 shares of common stock issuable upon the exercise of stock options outstanding as of February 7, 2021 under our 2020 Omnibus Incentive Plan, at a weighted average exercise price of $17.03 per share. |
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OTHER INFORMATION
The following table sets forth our summary consolidated statements of operations data for the three months ended January 2, 2021 and December 28, 2019 and the years ended October 3, 2020, September 28, 2019, and September 29, 2018, and our consolidated balance sheet data as of January 2, 2021, December 28, 2019, October 3, 2020, September 28, 2019, and September 29, 2018. We have derived the following consolidated statements of operations data for the years ended October 3, 2020, September 28, 2019, and September 29, 2018, and the balance sheet data as of October 3, 2020, September 28, 2019, and September 29, 2018 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the following statements of operations data for the three months ended January 2, 2021 and December 28, 2019 and balance sheet data as of January 2, 2021 and December 28, 2019 from our unaudited interim consolidated financial statements. The unaudited interim consolidated financial data, in management’s opinion, have been prepared on the same basis as the audited consolidated financial statements and the related notes included elsewhere in this prospectus, and include all adjustments, consisting only of normal recurring adjustments, that management considers necessary for a fair presentation of the information for the periods presented. Our historical results are not necessarily indicative of the results that may be expected for any future period. The following summary consolidated financial data should be read with the sections titled “Selected Historical Consolidated Financial and Other Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of operations data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
145,006 |
|
|
$ |
122,978 |
|
|
$ |
1,112,229 |
|
|
$ |
928,203 |
|
|
$ |
892,600 |
|
Cost of merchandise and services sold |
|
|
93,291 |
|
|
|
81,900 |
|
|
|
651,516 |
|
|
|
548,463 |
|
|
|
535,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,715 |
|
|
|
41,078 |
|
|
|
460,713 |
|
|
|
379,740 |
|
|
|
357,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
77,489 |
|
|
|
59,721 |
|
|
|
314,338 |
|
|
|
258,152 |
|
|
|
241,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,774 |
) |
|
|
(18,643 |
) |
|
|
146,375 |
|
|
|
121,588 |
|
|
|
115,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,516 |
|
|
|
22,417 |
|
|
|
84,098 |
|
|
|
98,578 |
|
|
|
91,656 |
|
Loss on debt extinguishment |
|
|
7,281 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
137 |
|
|
|
1,089 |
|
|
|
7,453 |
|
|
|
1,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,797 |
|
|
|
22,554 |
|
|
|
85,187 |
|
|
|
106,031 |
|
|
|
93,415 |
|
Income (loss) before taxes |
|
|
(44,571 |
) |
|
|
(41,197 |
) |
|
|
61,188 |
|
|
|
15,557 |
|
|
|
22,052 |
|
Income tax benefit (expense) |
|
|
(14,314 |
) |
|
|
(15,010 |
) |
|
|
2,627 |
|
|
|
14,855 |
|
|
|
4,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(30,257 |
) |
|
$ |
(26,187 |
) |
|
$ |
58,561 |
|
|
$ |
702 |
|
|
$ |
17,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
104,077 |
|
|
$ |
1,938 |
|
|
$ |
157,072 |
|
|
$ |
90,899 |
|
|
$ |
77,569 |
|
|
|
|
355,627 |
|
|
|
242,926 |
|
|
|
372,133 |
|
|
|
282,089 |
|
|
|
255,332 |
|
|
|
|
747,108 |
|
|
|
651,286 |
|
|
|
746,438 |
|
|
|
479,721 |
|
|
|
453,160 |
|
Total current liabilities |
|
|
192,871 |
|
|
|
198,489 |
|
|
|
258,196 |
|
|
|
165,522 |
|
|
|
137,165 |
|
|
|
|
1,133,518 |
|
|
|
1,564,221 |
|
|
|
1,573,437 |
|
|
|
1,367,078 |
|
|
|
1,342,109 |
|
Total stockholders’ deficit |
|
|
(386,410 |
) |
|
|
(912,935 |
) |
|
|
(826,999 |
) |
|
|
(887,357 |
) |
|
|
(888,949 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
$ |
(119,294 |
) |
|
$ |
(81,256 |
) |
|
$ |
103,409 |
|
|
$ |
57,821 |
|
|
$ |
43,280 |
|
Net cash used in investing activities |
|
|
(302 |
) |
|
|
(11,920 |
) |
|
|
(26,811 |
) |
|
|
(36,996 |
) |
|
|
(40,219 |
) |
Net cash provided by (used in) financing activities |
|
|
66,601 |
|
|
|
4,215 |
|
|
|
(10,425 |
) |
|
|
(7,495 |
) |
|
|
(24,386 |
) |
Other financial and operations data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of new and acquired locations |
|
|
— |
|
|
|
6 |
|
|
|
10 |
|
|
|
28 |
|
|
|
38 |
|
Number of locations open at end of period |
|
|
936 |
|
|
|
932 |
|
|
|
936 |
|
|
|
952 |
|
|
|
940 |
|
Comparable sales growth(2) |
|
|
15.7 |
% |
|
|
3.4 |
% |
|
|
18.0 |
% |
|
|
0.4 |
% |
|
|
(1.3 |
)% |
|
|
$ |
(243 |
) |
|
$ |
(9,004 |
) |
|
$ |
182,770 |
|
|
$ |
160,003 |
|
|
$ |
151,799 |
|
Adjusted EBITDA as a percentage of sales(3) |
|
|
(0.2 |
)% |
|
|
(7.3 |
)% |
|
|
16.4 |
% |
|
|
17.2 |
% |
|
|
17.0 |
% |
Adjusted net income (loss)(3) |
|
$ |
(10,619 |
) |
|
$ |
(24,314 |
) |
|
$ |
64,973 |
|
|
$ |
12,765 |
|
|
$ |
22,927 |
|
Adjusted net income (loss) per share |
|
|
(0.06 |
) |
|
|
(0.16 |
) |
|
|
0.42 |
|
|
|
0.08 |
|
|
|
0.15 |
|
(1) |
Consisted of 53 weeks. Please see the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for an explanation of our fiscal calendar. |
(2) |
Please see the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors and Measures We Use to Evaluate Our Business.” |
(3) |
Please see the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a reconciliation from our net income to adjusted EBITDA and net income to adjusted net income. |
Investing in our common stock involves a high degree of risk. You should consider and read carefully all of the risks and uncertainties described below as well as other information included in this prospectus, including our consolidated financial statements and related notes appearing at the end of this prospectus, before making an investment decision. The risks described below are not the only ones facing us. The occurrence of any of the following risks or additional risks and uncertainties not presently known to us or that we currently believe to be immaterial could materially and adversely affect our business, financial condition or results of operations. In such case, the trading price of our common stock could decline, and you may lose all or part of your original investment. This prospectus also contains forward-looking statements and estimates that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of specific factors, including the risks and uncertainties described below.
Additionally, the
COVID-19
pandemic may amplify many of the risks discussed below to which we are subject and, given the unpredictable, unprecedented and fluid nature of the pandemic, it may materially and adversely affect us in ways that are not anticipated by or known to us or that we do not consider to present significant risk. Therefore, we are unable to estimate the extent to which the pandemic and its related impacts will adversely affect our business, financial condition and results of operations as well as our stock price following completion of this offering.
Risks Related to the Nature of Our Business
Our success depends on our ability to maintain or increase comparable sales, and if we are unable to achieve comparable sales growth, our profitability and performance could be materially adversely impacted.
Our success depends on increasing comparable sales through our merchandising strategy and ability to increase sales and profits. To increase sales and profits, and therefore comparable sales growth, we focus on delivering value and generating consumer excitement by staffing our locations with pool and spa experts, developing compelling products, optimizing inventory management, maintaining strong location conditions, and effectively marketing current products and new product offerings. If these efforts become less successful, we may not be able to maintain or improve the levels of comparable sales that we have experienced in the past, which could adversely impact our profitability and overall business results. In addition, competition and pricing pressures from competitors may also materially adversely impact our operating margins. Our comparable sales growth could be lower than our historical average or our future target for many reasons, including general economic conditions, operational performance, price inflation or deflation, industry competition, new competitive entrants near our locations, price changes in response to competitive factors, the impact of new locations entering the comparable base, cycling against any year or quarter of above-average sales results, unfavorable weather conditions, supply shortages or other operational disruptions, the number and dollar amount of consumer transactions in our locations, our ability to provide product or service offerings that generate new and repeat visits to our locations, and the level of consumer engagement that we provide in our locations. Opening new locations in our established markets may result in inadvertent oversaturation, temporary or permanent diversion of consumers and sales from our existing locations to new locations and reduced comparable sales, thus adversely affecting our overall financial performance. These factors may cause our comparable sales results to be materially lower than in recent periods, which could harm our profitability and business.
Past growth may not be indicative of future growth.
Historically, we have experienced substantial sales growth through organic market share gains, new location openings and acquisitions that have increased our size, scope, and geographic footprint.
Our various business strategies and initiatives, including our growth initiatives, are subject to business, economic and competitive uncertainties and contingencies, many of which are beyond our control. While we contemplate continued growth through internal expansion and acquisitions, we may not be able to:
|
• |
|
acquire new consumers, retain existing consumers, and grow our share of the market; |
|
• |
|
provide a relevant omni-channel experience to rapidly evolving consumer expectations through our proprietary mobile app and e-commerce websites; |
|
• |
|
generate sufficient cash flows or obtain sufficient financing to support expansion plans and general operating activities; |
|
• |
|
identify suitable acquisition candidates and successfully integrate acquired businesses; |
|
• |
|
maintain favorable supplier arrangements and relationships; and |
|
• |
|
identify and divest assets that do not continue to create value consistent with our objectives. |
If we do not manage these potential difficulties successfully, our operating results could be adversely affected.
We may not be able to successfully manage our inventory to match consumer demand, which could have a material adverse effect on our business, financial condition, and results of operations.
We base our inventory purchases, in part, on our sales forecasts. If our sales forecasts overestimate consumer demand, we may experience higher inventory levels, which could result in the need to sell products at lower than anticipated prices, leading to decreased profit margins. Conversely, if our sales forecasts underestimate consumer demand, we may have insufficient inventory to meet demand, leading to lost sales, either of which could materially adversely affect our financial performance.
Loss of key members of management or failure to attract, develop, and retain highly qualified personnel could adversely affect our business.
Our future success depends on the continued efforts of the members of our executive management team. If one or more of our executives or other key personnel are unable or unwilling to continue in their present positions, or if we are unable to attract and retain high-quality executives or key personnel in the future, our business may be adversely affected.
We consider our employees to be the foundation for our growth and success. As such, our future success depends in large part on our ability to attract, train, retain, and motivate qualified personnel. During the height of our seasonal activities, we have additional employees, including seasonal and part-time employees who generally are not employed during the
off-season.
If we are unable to attract and hire additional personnel during these seasons, our operating results could be adversely affected.
We are subject to, and may in the future be subject to, legal or other proceedings that could have a material adverse effect on us.
From time to time, we are a party to legal proceedings, including matters involving personnel and employment issues, personal injury, antitrust claims, intellectual property claims, and other proceedings arising in or outside of the ordinary course of business. In addition, there are an
increasing number of cases being filed against companies generally, including class-action allegations under federal and state wage and hour laws. We could be exposed to legal proceedings arising out of the
COVID-19
pandemic, including wrongful death actions brought on behalf of employees who contracted
COVID-19
while performing their employment-related duties. We estimate our exposure to these legal proceedings and establish reserves for the probable and reasonably estimated liabilities. Assessing and predicting the outcome of these matters involves substantial uncertainties. Although not currently anticipated by management, unexpected outcomes in these legal proceedings or changes in management’s forecast assumptions or predictions could have a material adverse impact on our results of operations.
Disruptions from natural or
man-made
disasters or extreme weather, public safety issues, geopolitical events and security issues, labor or trade disputes, and similar events could have a material adverse effect on our business.
Natural or
man-made
disasters or extreme weather (including as a result of climate change), public safety issues, geopolitical events and security issues (including terrorist attacks and armed hostilities), labor or trade disputes, and similar events can lead to uncertainty and have a negative impact on demand for our products, in addition to causing disruptions to our supply chain. Discretionary spending on chemicals, equipment and parts, cleaning and maintenance equipment, and safety, recreational, and fitness-related products, such as ours, is generally adversely affected during times of economic, social, or political uncertainty. The potential for natural or
man-made
disasters or extreme weather, geopolitical events and security issues, labor or trade disputes, and similar events could create these types of uncertainties and negatively impact our business for the short- or long-term in ways that cannot presently be predicted.
Risks Related to Our Industry and the Broader Economy
We face competition by manufacturers, retailers, distributors, and service providers in the residential, professional, and commercial pool and spa care market.
Within our industry, competition is highly fragmented. We compete against a wide range of manufacturers, retailers, distributors, and service providers in the residential, professional, and commercial pool and spa care market. This includes original equipment manufacturers, regional and local retailers, home improvement retailers, mass-market retailers, and specialty
e-commerce
operators.
Most of our competition comes from regional and local independent retailers. National home improvement and retailers, such as Home Depot, Lowe’s, and local and regional hardware stores, compete with us mainly on a seasonal basis during the spring and summer months, but experience significantly higher foot traffic than our retail locations. We also face competition from mass-market retail competitors, such as Amazon, Walmart, and Costco, who devote shelf space to merchandise and products targeted to our consumers. Historically, mass-market retailers have generally expanded by adding new stores and product breadth, but their product offering of pool-related products has remained relatively constant. If pool and spa owners are attracted by the convenience afforded by any of our competitors, they may be less inclined to purchase products and/or services from us.
In addition, new competitors may emerge as there are no proprietary technologies or other significant barriers to prevent other firms from entering the swimming pool and spa supply retail market in the future. Should store and internet-based mass-market retailers increase their focus on the pool and spa industry, or increase the breadth of their pool, spa, and related product offerings, they may become a more significant competitor for our industry, which could have an adverse impact on our business. We may face additional competitive pressures if large pool supply retailers look to expand
their consumer base. Given the density and demand for pool and spa products, some geographic markets that we serve also tend to have a higher concentration of competitors than others, particularly Arizona, California, Florida, and Texas. These states encompass our largest markets and entry of significant new competitors into them could have a substantial impact on our total sales.
The demand for our swimming pool and spa related products and services may be adversely affected by unfavorable economic conditions.
Consumer discretionary spending affects our sales and is impacted by factors outside of our control, including general economic conditions, the residential housing market, unemployment rates and wage levels, interest rate fluctuations, inflation, disposable income levels, consumer confidence, and access to credit. In economic downturns, the demand for swimming pool and spa related products and services may decline, often corresponding with declines in discretionary consumer spending, the growth rate of pool-eligible households, and swimming pool construction. A weak economy may also cause consumers to defer discretionary replacement and refurbishment activity. Even in generally favorable economic conditions, severe and/or prolonged downturns in the housing market could have a material adverse impact on our financial performance. Similarly, slow growth in the number of pool-eligible households can have a lasting negative impact by limiting the potential for future growth of the pool and spa maintenance market.
We believe that homeowners’ access to consumer credit is a critical factor enabling the purchase of new pools, spas and related products. Unfavorable economic conditions and downturn in the housing market can result in significant tightening of credit markets, which limit the ability of consumers to access financing for new swimming pools, spas, and related supplies, and consequently, replacement, repair and maintenance of equipment. Tightening consumer credit could prevent consumers from obtaining financing for pool and spa projects, which could negatively impact our sales of products and services.
The outbreak of
COVID-19
and associated responses could adversely impact our business and results of operations.
The
COVID-19
pandemic has significantly impacted economic activity and markets throughout the world. In response, governmental authorities have imposed, and others in the future may impose,
orders,
orders, quarantines, executive orders, and similar government orders and restrictions to control the spread of
COVID-19.
Such orders or restrictions have resulted in temporary location closures, limitation of location hours, limitations on the number of people in locations or in warehouses, enhanced requirements on sanitation, social distancing practices, and travel restrictions, among other effects. We currently operate as an essential business under the relevant state and local regulations and if this changes, it will adversely impact our financial condition and operating results. Recently, there have been reports of increasing numbers of new
COVID-19
cases in certain of our markets, resulting in some governments extending or
re-imposing
restrictions. Accordingly,
COVID-19
may have negative impacts on our business in the future, and any future adverse impacts on our business may be worse than we anticipate. The ultimate impact will depend on the severity and duration of the current
COVID-19
pandemic and future resurgences and actions taken by governmental authorities and other third parties in response, each of which is uncertain, rapidly changing, and difficult to predict. Our recent growth rates amid the
COVID-19
pandemic may not be sustainable and may not be indicative of future growth.
The demand for pool chemicals may be affected by consumer attitudes towards products for environmental or safety reasons.
We could be adversely affected if consumers lose confidence in the safety and quality of our products. The demand for the pool chemicals sold by us may also be affected by changes in consumer
attitudes toward pool chemical products for environmental or safety reasons. To the extent more environmentally-friendly alternative pool and spa water treatment methods emerge, we may not be successful in adopting them in a timely manner.
Our results of operations may fluctuate from quarter to quarter for many reasons, including seasonality.
Our sales are highly seasonal and we experience fluctuations in quarterly results as a result of many factors. We have historically generated a greater percentage of our revenues during the warm weather months of April through September. Timing of consumer purchases will vary each year and sales can be expected to shift from one quarter to another. As a result, management believes that
comparisons of results of operations are not necessarily meaningful and should not be relied upon as any indication of future performance or results expected for the fiscal year. In addition, because our revenues are concentrated to a limited number of months, our business is more susceptible to adverse events occurring in those months than other businesses that have consistent levels of revenue throughout the year.
We are susceptible to adverse weather conditions.
Given the nature of our business, weather is one of the principal external factors affecting our business. 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. While warmer weather conditions favorably impact our sales, global warming trends and other significant climate changes can create more variability in the short-term or lead to other unfavorable weather conditions that could adversely impact our sales or operations. Drought conditions or water management initiatives may lead to municipal ordinances related to water use restrictions. Such restrictions could result in decreased pool installations, which could negatively impact our sales.
Certain extreme weather events, such as hurricanes and tropical storms, may impact demand for our products and services, our ability to deliver our products, provide services, continue to keep our facilities open and operational, or cause damage to our facilities. As a consequence of these or other catastrophic or uncharacteristic events, we may experience interruption to our operations, increased costs or loss of property, equipment or inventory, which would adversely affect our revenue and profitability.
Technology and Privacy Related Risks
If the technology-based systems that give our consumers the ability to shop with us online do not function effectively, our operating results, as well as our ability to grow our
e-commerce
business globally, could be materially adversely affected.
Many of our consumers shop with us through our physical network and digital platform, which includes our proprietary mobile app and
e-commerce
websites. Increasingly, consumers are using tablets and smart phones to shop online with us and with our competitors and to do comparison shopping. We are increasingly using social media and our proprietary mobile app to interact with our consumers and as a means to enhance their shopping experience. Any failure on our part to provide an attractive, effective, reliable, and user-friendly digital platform that offers a wide assortment of merchandise with rapid delivery options and that continually meets the changing expectations of online shoppers could place us at a competitive disadvantage, result in the loss of
e-commerce
and other
sales, harm our reputation with consumers, have a material adverse impact on the growth of our
e-commerce
business globally, and could have a material adverse impact on our business and results of operations.
Our
e-commerce
operation faces distinct risks, such as the failure to make and implement changes to our
e-commerce
websites and mobile app, the failure to maintain a relevant consumer experience in understanding and interacting with our
e-commerce
websites and mobile app, telecommunications disruptions, reliance on third-party software technologies, and rapid changes in technology, among others. If not managed, these risks could adversely impact our operating results.
A significant portion of our digital sales take place through online marketplaces and online retailers and any limitation or restriction, temporarily or otherwise, to sell on these online platforms could harm our profitability and results of operation.
To complement our platform of branded proprietary
e-commerce
websites and marketplace storefronts, approximately 40% of our digital sales take place through online marketplaces and online retailers and are subject to their terms of service and their various other policies. While we endeavor to materially comply with the terms of service and other policies of each online marketplace and online retailer through which we sell our products, these online marketplaces or online retailers may not have the same determination with respect to our compliance. These online marketplaces and online retailers may, in certain circumstances, refuse to continue hosting us or selling our products or temporarily suspend or discontinue our access to their online platform and any limitation or restriction (whether temporary or otherwise) on our ability to sell our products through these online platforms could harm our profitability and results of operations.
We rely on information technology systems to support our business operations. A significant disturbance or breach of our technological infrastructure could adversely affect our financial condition and results of operations. Additionally, failure to maintain the security of confidential information could damage our reputation and expose us to litigation.
Information technology supports several aspects of our business, including, among others, product sourcing, pricing, consumer service, transaction processing, financial reporting, collections, and cost management. Our ability to operate effectively on a
basis and accurately report our results depends on a solid technological infrastructure, which is inherently susceptible to internal and external threats. We are vulnerable to interruption by fire, natural disaster, power loss, telecommunication failures, internet failures, security breaches, catastrophic events, and other significant disruptions. Exposure to various types of cyberattacks such as malware, computer viruses, worms, or other malicious acts, as well as human error and technological malfunction, could also potentially disrupt our operations or result in a significant interruption in the delivery of our goods and services.
Advances in computer and software capabilities, encryption technology, and other discoveries increase the complexity of our technological environment, including how we and our customers each interact with our various software platforms. Such advances could delay or hinder our ability to process transactions or could compromise the integrity of our data, resulting in a material adverse impact on our financial condition and results of operations. We also may experience occasional system interruptions and delays, as a result of routine maintenance, periodic updates, or other factors, that make our information systems unavailable or slow to respond, including the interaction of our information systems with those of third parties. A lack of sophistication or reliability of our information systems could adversely impact our operations and consumer service and could require major repairs or replacements, resulting in significant costs and foregone revenue.
Our numerous procedures and protocols designed to mitigate cybersecurity risks (including processes to timely notify appropriate personnel for assessment and resolution and company-wide training programs), our investments in information technology security and our updates to our business continuity plan may not prevent or effectively mitigate adverse consequences from cybersecurity risks. Any failure by us to maintain or protect our information technology systems and data integrity, including from cyberattacks, intrusions or other breaches, could result in the unauthorized access to consumer data, credit card information, and personally identifiable information, theft of intellectual property or other misappropriation of assets, or otherwise compromise our confidential or proprietary information and disrupt our operations, putting us at a competitive disadvantage. Such a breach could result in damage to our reputation and subject us to potential litigation, liability, fines, and penalties, resulting in a possible material adverse impact on our financial condition and results of operations.
Improper activities by third parties, exploitation of encryption technology, new data-hacking tools and discoveries, and other events or developments may result in future intrusions into or compromise of our networks, payment card terminals or other payment systems.
We may not be able to anticipate the frequently changing techniques used to obtain unauthorized access to sensitive data or implement adequate preventive measures for all of them. Any unauthorized access into our consumers’ sensitive information, or data belonging to us or our suppliers, even if we are compliant with industry security standards, could put us at a competitive disadvantage, result in deterioration of our consumers’ confidence in us, and subject us to potential litigation, liability, fines, penalties, and consent decrees, resulting in a possible material adverse impact on our financial condition and results of operations.
As a merchant that accepts debit and credit cards for payment, we are subject to the Payment Card Industry Data Security Standard (“PCI DSS”) issued by the PCI Council and to the American National Standards Institute (“ANSI”) data encryption standards and payment network security operating guidelines, as well as the Fair and Accurate Credit Transactions Act (“FACTA”). Failure to comply with these guidelines or standard may result in the imposition of financial penalties or the allocation by the card brands of the costs of fraudulent charges to us. Despite our efforts to comply with these or other payment card standards and other information security measures, we cannot be certain that all of our IT systems will be able to prevent, contain, or detect all cyberattacks or intrusions from known malware or malware that may be developed in the future. To the extent that any disruption results in the loss, damage, or misappropriation of information, we may be adversely affected by claims from consumers, financial institutions, regulatory authorities, payment card associations, and others. In addition, privacy and information security laws and standards continue to evolve and could expose us to further regulatory burdens. The cost of complying with stricter laws and standards, including PCI DSS, ANSI, and FACTA data encryption standards and the California Consumer Privacy Act, which took effect in January 2020, could be significant.
Risks Related to Our Business Strategy
We may acquire other companies or technologies, which could fail to result in a commercial product or sales, divert our management’s attention, result in additional dilution to our stockholders, and otherwise disrupt our business.
We may in the future seek to acquire or invest in businesses or technologies that we believe could complement or expand our portfolio, enhance our technical capabilities, or otherwise offer growth opportunities. We may not be able to successfully complete any acquisition we choose to pursue and we may not be able to successfully integrate any acquired business, product or technology in a cost-effective
and non-disruptive manner.
The pursuit of potential acquisitions may divert the attention of management and cause us to incur various costs and expenses in identifying, investigating, and
pursuing suitable acquisitions, whether or not they are consummated. We may not be able to identify desirable acquisition targets or be successful in entering into an agreement with any particular target or obtain the expected benefits of any acquisition or investment. Similarly, we may not be able to successfully identify and acquire new technologies in a timely manner or at all. Acquisitions could also result in dilutive issuances of equity securities, the use of our available cash, or the incurrence of debt, which could harm our operating results. In addition, if an acquired business fails to meet our expectations, our business, financial condition, and results of operations may be negatively affected.
Our operating results will be harmed if we are unable to effectively manage and sustain our future growth or scale our operations.
We may not be able to manage our growth or future growth efficiently or profitably. Our revenue and operating margins, or revenue and margin growth, may be less than expected. If we are unable to scale our operations efficiently or maintain pricing without significant discounting, we may fail to achieve expected operating margins, which would have a material and adverse effect on our operating results. Growth may also stress our ability to adequately manage our operations, quality of products, safety, and regulatory compliance. If growth significantly decreases, it will negatively impact our cash reserves, and it may be necessary to obtain additional financing, which may increase indebtedness or result in dilution to shareholders. Further, we may not be able to obtain additional financing on acceptable terms, if at all.
Risks Related to the Manufacturing, Processing, and Supply of Our Products
Our business includes the packaging and storage of chemicals and an accident related to these chemicals could subject us to liability and increased costs.
We operate chemical repackaging facilities and we store chemicals in our locations and in our distribution facilities. Because some of the chemicals we repackage and store are hazardous materials, we must comply with various fire and safety ordinances. However, a release at a location or a fire at one of our facilities could give rise to liability claims against us and potential environmental liability. In addition, if an incident involves a repackaging or distribution facility, we might be required temporarily to use alternate sources of supply that could increase our cost of sales.
We cannot guarantee that our insurance coverage will be adequate to cover future claims that may arise or that we will be able to maintain adequate insurance in the future at rates we consider reasonable. Successful claims for which we are not fully insured may adversely affect our working capital and profitability. In addition, changes in the insurance industry have generally led to higher insurance costs and decreased availability of coverage.
We cannot guarantee that our internal training curriculum and compliance programs will cause our employees to follow the applicable operating procedures and regulations, or that no accidents or incidents will arise that could expose us to liability and have a negative impact on our operations and results.
Product supply disruptions may have an adverse effect on our profitability and operating results.
We rely on various suppliers and vendors to provide and deliver product inventory on a continuous basis, some of which are located outside of the United States. These suppliers (and those they depend upon for materials and services) are subject to risks, including from natural or
man-made
disasters or extreme weather (including as a result of climate change), public safety issues, geopolitical events and security issues (including terrorist attacks and armed hostilities), power outages, labor or
trade disputes, union organizing activities, financial liquidity problems, and similar events, as well as supply constraints and general economic, social, and political conditions that can limit their ability to provide us (or our suppliers) with quality products and services in a timely manner. The occurrence of these or other unexpected events can cause us to suffer significant product inventory losses and significant lost revenue. For example, due to the
COVID-19
pandemic and the resulting dislocation of workplaces and the economy, the ability of certain vendors to supply required products has been impaired as a result of the illness or absenteeism of their workforces, government mandated shutdown orders, impaired financial conditions, or for other reasons. The supply of each product may not return to
levels, and if so, products may return to
pre-COVID
levels at different times, and our efforts to ensure
in-stock
positions for all of the products that our consumers require may not be successful.
The cost of raw materials could increase our cost of goods sold and cause our results of operations and financial condition to suffer.
Our principal chemical raw materials are granular chlorine compounds, which are commodity materials. The prices of granular chlorine compounds are a function of, among other things, manufacturing capacity and demand. We have generally passed through chlorine price increases to our consumers. The price of granular chlorine compounds may increase in the future and we may not be able to pass on any such increase to our consumers. We purchase granular chlorine compounds primarily from the nation’s largest suppliers. The alternate sources of supply we currently view as reliable may ultimately be unable to supply us with all of our raw materials and finished goods, including chlorine products. Additionally, significant price fluctuations or shortages in raw materials needed for our products may increase our cost of goods sold and cause our results of operations and financial condition to suffer.
Risks Related to Commercialization of Our Products
Even if we are able to attain significant market acceptance of our planned or future products or services, the commercial success of our planned or future products is not guaranteed.
Our future financial success will depend substantially on our ability to effectively and profitably market and sell our planned and future products and services on a sustained basis, which ability is dependent on a number of additional and/or unpredictable factors. Successful growth of our sales and marketing efforts will depend on the strength of our marketing infrastructure and the effectiveness of our sales and marketing strategies. Our ability to satisfy product demand driven by our sales and marketing efforts will be largely dependent on the ability to maintain a commercially viable manufacturing process that is compliant with regulatory standards. If we fail to market and sell our planned or future products or services successfully, we will not be able to achieve profitability, which could have a material adverse effect on our business, financial condition, and results of operations.
We may implement a product recall or voluntary market withdrawal, which could significantly increase our costs, damage our reputation, and disrupt our business.
The manufacturing, packaging, marketing, and processing of our products involves an inherent risk that our processes do not meet applicable quality standards and requirements. In that event, we may voluntarily implement a recall or market withdrawal or may be required to do so by a regulatory authority. A recall or market withdrawal of one of our products would be costly and would divert management resources. A recall or withdrawal of one of our products, or a similar product processed by another entity, also could impair sales of our products because of confusion concerning the scope of the recall or withdrawal, or because of the damage to our reputation for quality and safety.
If we do not manage product inventory in an effective and efficient manner, it could adversely affect profitability.
Many factors affect the efficient use and planning of product inventory, such as effectiveness of predicting demand, preparing manufacturing to meet demand, meeting product mix and product demand requirements, and managing product expiration. We may be unable to manage our inventory efficiently, keep inventory within expected budget goals, keep our
inventory on hand or manage it efficiently, control expired product, or keep sufficient product on hand to meet demand. We may not be able to keep inventory costs within our target levels. Failure to do so may harm our long-term growth prospects.
If we do not continue to obtain favorable purchase terms with manufacturers, it could adversely affect our operating results.
Most raw materials and those products not repackaged by us are purchased directly from manufacturers. It is common in the swimming pool supply industry for certain manufacturers to offer extended payment terms on certain products to quantity purchasers such as us. These payment terms typically include favorable pricing and are available to us for
pre-season
or early season purchases. If we do not continue to maintain such favorable purchase terms with manufacturers, it could adversely affect our operating results.
Risks Related to Government Regulation
The nature of our business subjects us to compliance with employment, environmental, health, transportation, safety, and other governmental regulations.
We are subject to federal, state, and local laws and regulations relating to matters such as product labeling, weights and measures, zoning, land use, environmental protection, local fire codes, and workplace safety, including regulation by the Environmental Protection Agency, the Consumer Product Safety Commission, the Department of Transportation, the Occupational Safety and Health Administration, and the National Fire Protection Agency and corresponding state and local authorities. Most of these requirements govern the packaging, labeling, handling, transportation, storage, disposal, and sale of chemicals. We store certain types of chemicals at each of our locations and the storage of these items is strictly regulated by local fire codes. In addition, we sell algaecides and related products that are regulated under the Federal Insecticide, Fungicide and Rodenticide Act, and various state pesticide laws. These laws primarily relate to labeling, annual registration, and licensing. Compliance with applicable data privacy and security laws and regulations (including applicable industry standards) may also increase our costs of doing business.
Management has processes in place to facilitate and support our compliance with these requirements. However, failure to comply with these laws and regulations may result in investigations, the assessment of administrative, civil and criminal fines, damages, seizures, disgorgements, penalties, or the imposition of injunctive relief. Moreover, compliance with such laws and regulations in the future could prove to be costly. Although we presently do not expect to incur any capital or other expenditures relating to regulatory matters in amounts that may be material to us, we may be required to make such expenditures in the future. These laws and regulations have changed substantially and rapidly in recent years, and we anticipate that there will be continuing changes.
The clear trend in environmental, health, transportation, and safety regulations is to place more restrictions and limitations on activities that impact the environment, such as the use and handling of chemicals. Increasingly, strict restrictions and limitations have resulted in higher operating costs for us and it is possible that the costs of compliance with such laws and regulations will continue to increase.
Our attempts to anticipate future regulatory requirements that might be imposed and our plans to remain in compliance with changing regulations and to minimize the costs of such compliance may not be as effective as we anticipate.
We depend on a network of suppliers to source our products, including our own branded products. Product quality, warranty claims or safety concerns could negatively impact our sales and expose us to litigation.
We rely on manufacturers and other suppliers to provide us with the products we sell. As we increase the number of branded products we sell, our exposure to potential liability claims may increase. Product and service quality issues could negatively impact consumer confidence in our brands and our business. If our product and service offerings do not meet applicable safety standards or our consumers’ expectations regarding safety or quality, we could experience lost sales and increased costs and be exposed to legal, financial, and reputational risks, as well as governmental enforcement actions. Actual, potential or perceived product safety concerns, including health-related concerns, could expose us to litigation, as well as government enforcement actions, and result in costly product recalls and other liabilities.
In addition, if our products are defectively designed, manufactured or labeled, contain defective components or are misused, we may become subject to costly litigation initiated by consumers. Product liability claims could harm our reputation, divert management’s attention from our core business, be expensive to defend, and may result in sizable damage awards against us. Although we maintain product liability insurance, we may not have sufficient insurance coverage for future product liability claims. We may not be able to obtain insurance in amounts or scope sufficient to provide us with adequate coverage against all potential liabilities. Any product liability claims brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing continuing coverage, harm our reputation, significantly increase our expenses, and reduce product sales. Product liability claims could cause us to incur significant legal fees and deductibles and claims in excess of our insurance coverage would be paid out of cash reserves, harming our financial condition and operating results. In addition, successful product liability claims made against one of our competitors could cause claims to be made against us or expose us to a perception that we are vulnerable to similar claims. Claims against us, regardless of their merit or potential outcome, may also hurt our ability to obtain acceptance of our products or to expand our business.
Risks Related to Intellectual Property Matters
If we are unable to adequately protect our intellectual property rights, our competitive position could be harmed, we may not be able to build name recognition in our markets of interest, or we could be required to incur significant expenses to enforce or defend our rights.
In the course of our business, we employ various trademarks, trade names, and service marks as well as our logo in packaging and advertising of our products. Our commercial success will depend in part on our success in obtaining and maintaining issued trademarks, trade names, and service marks in the United States and protecting our proprietary technology. If we do not adequately protect our intellectual property and proprietary technology, competitors may be able to use our technologies or the goodwill we have acquired in the marketplace and erode or negate any competitive advantage we may have, which could harm our business and ability to achieve profitability.
Our ability to enforce our intellectual property rights depends on our ability to detect infringement. It may be difficult to detect infringers who do not advertise the components that are used in their products. Moreover, it may be difficult or impossible to obtain evidence of infringement in a competitor’s or potential competitor’s product. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded if we were to prevail may not be commercially meaningful.
If our trademarks and trade names are not adequately protected, we may not be able to build name recognition in our target markets and our business may be adversely affected. At times, competitors may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity, possibly leading to market confusion and potentially requiring us to pursue legal action. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of our unregistered trademarks or trade names. If we are unable to successfully register our trademarks and trade names and establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business may be adversely affected. Our efforts to enforce or protect our proprietary rights related to trademarks, domain names, copyrights, or other intellectual property may be ineffective and could result in substantial costs and diversion of resources and could adversely impact our financial condition or results of operations.
Our success depends in part on our ability to operate without infringing on or misappropriating the proprietary rights of others, and if we are unable to do so we may be liable for damages.
We cannot be certain that United States or foreign patents or patent applications of other companies do not exist or will not be issued that would prevent us from commercializing our products. Third parties may sue us for infringing or misappropriating their patent or other intellectual property rights. Intellectual property litigation is costly. If we do not prevail in litigation, in addition to any damages we might have to pay, we could be required to cease the infringing activity or obtain a license requiring us to make royalty payments. It is possible that a required license may not be available to us on commercially acceptable terms, if at all. In addition, a required license may
be non-exclusive, and
therefore our competitors may have access to the same technology licensed to us. If we fail to obtain a required license or are unable to design around another company’s patent, we may be unable to make use of some of the affected products, which would reduce our revenues.
The defense costs and settlements for patent infringement lawsuits are not covered by insurance. Patent infringement lawsuits can take years to settle. If we are not successful in our defenses or are not successful in obtaining dismissals of any such lawsuit, legal fees or settlement costs could have a material adverse effect on our results of operations and financial position.
Risks Related to Our Indebtedness
Our substantial indebtedness could materially adversely affect our financial condition and our ability to operate our business, react to changes in the economy or industry or pay our debts and meet our obligations under our debt agreements, and could divert our cash flow from operations to debt payments.
We have a substantial amount of indebtedness. As of February 7, 2021, our total borrowings under our Term Loan, and Credit Agreement, dated as of October 16, 2012, as amended from time to time, among Leslie’s Poolmart, Inc., the subsidiary borrowers from time to time party hereto, Leslie’s, Inc., each lender from time to time party hereto, Bank of America, N.A., as Administrative Agent, and U.S. Bank National Association, as
Co-Collateral
Agent (the “ABL Credit Facility,” and, together with the Term Loan, the “Credit Facilities”) was $809.1 million. Subject to restrictions in the agreements governing our Credit Facilities, we may incur additional debt.
Our substantial debt could have important consequences to our stockholders, including the following:
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it may be difficult for us to satisfy our obligations, including debt service requirements under our existing or future debt agreements, resulting in possible defaults on and acceleration of such debt; |
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our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, or other general corporate purposes may be impaired; |
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a substantial portion of cash flow from operations may be dedicated to the payment of principal and interest on our debt, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures, future business opportunities, and acquisitions or for other purposes; |
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we are more vulnerable to economic downturns and adverse industry conditions and our flexibility to plan for, or react to, changes in our business or industry is more limited; |
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our ability to capitalize on business opportunities and to react to competitive pressures, as compared to our competitors, may be compromised due to our high level of debt and restrictive covenants contained in the agreements governing our existing and any future debt; and |
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our ability to borrow additional funds or to refinance debt may be limited. |
Furthermore, all of our debt under our Credit Facilities bears interest at variable rates. If these rates were to increase significantly, our ability to borrow additional funds may be reduced and the risks related to our substantial debt would intensify.
Servicing our debt requires a significant amount of cash. Our ability to generate sufficient cash depends on numerous factors beyond our control, and we may be unable to generate sufficient cash flow to service our debt obligations.
Our business may not generate sufficient cash flow from operating activities to service our debt obligations. Our ability to make payments on and to refinance our debt and to fund planned capital expenditures depends on our ability to generate cash in the future. To some extent, this is subject to general economic, financial, competitive, legislative, regulatory, and other factors that are beyond our control.
If we are unable to generate sufficient cash flow from operations to service our debt and meet our other commitments, we may need to refinance all or a portion of our debt, sell material assets or operations, delay capital expenditures, or raise additional debt or equity capital. We may not be able to effect any of these actions on a timely basis, on commercially reasonable terms or at all, and these actions may not be sufficient to meet our capital requirements. In addition, the terms of our existing or future debt agreements may restrict us from pursuing any of these alternatives.
Restrictive covenants in the agreements governing our Credit Facilities may restrict our ability to pursue our business strategies, and failure to comply with any of these restrictions could result in acceleration of our debt.
The operating and financial restrictions and covenants in the agreements governing our Credit Facilities may materially adversely affect our ability to finance future operations or capital needs or to engage in other business activities. Such agreements limit our ability, among other things, to:
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incur additional debt or issue certain preferred shares; |
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pay dividends on or make distributions in respect of our common stock or make other restricted payments; |
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make certain investments; |
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consolidate, merge, sell, or otherwise dispose of our assets; |
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make certain payments in respect of certain debt obligations; |
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enter into certain transactions with our affiliates; and |
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designate our subsidiaries as unrestricted subsidiaries. |
A breach of any of these covenants could result in an event of default under our Credit Facilities. Upon the occurrence of an event of default under any of our Credit Facilities, the lenders could elect to declare all amounts outstanding under our Credit Facilities to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders under our Credit Facilities could proceed against the collateral granted to them to secure the debt under the Credit Facilities. We have pledged substantially all of our assets as collateral to secure our Credit Facilities. Our future operating results may not be sufficient to enable compliance with our Credit Facilities, and we may not have sufficient assets to repay amounts outstanding under our Credit Facilities. In addition, in the event of an acceleration of our debt upon an event of default, we may not have or be able to obtain sufficient funds to make any accelerated payments.
Furthermore, the terms of any future debt we may incur could have further additional restrictive covenants. We may not be able to maintain compliance with these covenants in the future, and in the event that we are not able to maintain compliance, we cannot assure you that we will be able to obtain waivers from the lenders or amend the covenants.
Despite current debt levels, we and our subsidiaries may still be able to incur substantially more debt. This could further exacerbate the risks associated with our substantial leverage.
We and our subsidiaries may be able to incur substantial additional debt in the future. Although the agreements governing our Credit Facilities contain restrictions on the incurrence of additional debt, these restrictions are subject to a number of qualifications and exceptions, and the debt incurred in compliance with these restrictions could be substantial. Additionally, we may successfully obtain waivers of these restrictions. If we incur additional debt above the levels currently in effect, the risks associated with our leverage, including those described above, would increase.
The phaseout of the London Interbank Offered Rate (LIBOR), or the replacement of LIBOR with a different reference rate, may adversely affect interest rate.
On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. It is unclear if LIBOR will cease to exist at that time or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. On November 30, 2020, ICE Benchmark Administration (“IBA”), the administrator of LIBOR, with the support of the United States Federal Reserve and the United Kingdom’s Financial Conduct Authority, announced plans to consult on ceasing publication of USD LIBOR on December 31, 2021 for only the one week and two month USD LIBOR tenors, and on June 30, 2023 for all other USD Libor tenors. While this announcement extends the transition period to June 2023, the United States Federal Reserve concurrently issued a statement advising banks to stop new USD LIBOR issuances by the end of 2021. In light of these recent announcements, the future of LIBOR at this time is uncertain and any changes in the methods by which LIBOR is determined or regulatory activity related to LIBOR’s phaseout could cause LIBOR to perform differently than in the past or cease to exist. Although regulators and IBA have made clear that the recent announcements should not be read to say that LIBOR has ceased or will cease, in the event LIBOR does cease to exist, we may need to renegotiate our credit agreements and related agreements, which may result in interest rates and/or payments that do not correlate over time with the interest rates and/or payments that would have been
made on our obligations if LIBOR was available in its current form. Changes in the method of calculating LIBOR, or the replacement of LIBOR with an alternative rate or benchmark, may adversely affect interest rates and result in higher borrowing costs. This could materially and adversely affect our results of operations, cash flow and liquidity.
Risks Related to the Offering and Ownership of Our Common Stock
An active trading market for our common stock may not be sustained.
Although our common stock is traded on Nasdaq under the symbol “LESL,” there is a very limited trading history and an active trading market for our common stock may not be sustained. Accordingly, no assurance can be given as to the following:
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the likelihood that an active trading market for our common stock will be sustained; |
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the liquidity of any such market; |
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the ability of our stockholders to sell their shares of common stock; or |
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the price that our stockholders may obtain for their common stock. |
If an active market for our common stock with meaningful trading volume is not maintained, the market price of our common stock may decline materially below the offering price and you may not be able to sell your shares. The public offering price for our shares in this offering will be determined by negotiations between the selling stockholders and representatives of the underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell our common stock at prices equal to or greater than the price you paid in this offering.
The market price and trading volume of our stock may be volatile or may decline regardless of our operating performance, resulting in substantial losses for investors, and could decline substantially following this offering.
The market price and trading volume of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
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actual or anticipated fluctuations in our results of operations; |
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the financial projections we may provide to the public, any changes in these projections, or our failure to meet these projections; |
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failure of securities analysts to initiate or maintain coverage of us, changes in financial estimates or ratings or negative reports by any securities analysts who follow us or our failure to meet these estimates or the expectations of investors; |
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announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures, results of operations, or capital commitments; |
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changes in operating performance and stock market valuations of other retail companies generally, or those in our industry in particular; |
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price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole; |
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• |
|
changes in our board of directors or management; |
|
• |
|
sales of large blocks of our common stock, including sales by our executive officers or directors; |
|
• |
|
lawsuits threatened or filed against us; |
|
• |
|
changes in laws or regulations applicable to our business; |
|
• |
|
changes in our capital structure, such as future issuances of debt or equity securities; |
|
• |
|
short sales, hedging, and other derivative transactions involving our capital stock; |
|
• |
|
general economic conditions in the United States; |
|
• |
|
other events or factors, including those resulting from war, incidents of terrorism, pandemics, or other public health emergencies or responses to these events; and |
|
• |
|
the other factors described in the sections titled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.” |
Future sales of shares by existing stockholders could cause our stock price to decline.
If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market after the contractual
lock-up
agreements described below expire and other restrictions on resale lapse, the trading price of our common stock could be adversely impacted. As of February 7, 2021, we had outstanding 186,873,341 million shares of common stock. Approximately 73% of these shares are subject to a
180-day
contractual
lock-up
with the underwriters in connection with our initial public offering (“IPO”), with such
lock-up
agreements to expire on April 26, 2021. The underwriters may permit our executive officers, directors, employees, and current stockholders who are subject to the contractual
lock-up
to sell shares prior to the expiration of the
lock-up
agreements. The representatives for the underwriters in the IPO agreed to waive the IPO
lock-up
with respect to the filing by us of the registration statement of which this prospectus forms a part and the offer and sale by the selling stockholders of the shares in this offering. Upon the expiration of the lock-up agreements, all such shares will be eligible for resale in the public market, subject to applicable securities laws, including the Securities Act. In addition, as discussed in “Certain Relationships and Related Party Transactions,” following the expiration of the
180-day
contractual
lock-up,
certain officers, directors, and employees will be prohibited from selling shares for an additional 540 days, subject to limited waivers and exceptions, with such additional
lock-up
period expiring on October 18, 2022. Upon expiration of each of these
lock-up
periods, the trading price of our common stock could be adversely impacted if any of these certain significant stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market.
Stockholders’ ability to influence corporate matters may be limited because a small number of stockholders beneficially own a substantial amount of our common stock and continue to have substantial control over us.
As of February 7, 2021, our officers, directors, and principal stockholders (greater than 5% stockholders) collectively beneficially own approximately 69% of our issued and outstanding common stock (55% following completion of this offering or 53% if the underwriters exercise their option to purchase additional shares in full). As a result, these stockholders will be able to exert significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our Company or its assets, and may have interests that are different from our other stockholders’ and may vote in a way with which other stockholders disagree and which may be adverse to the interests of our other stockholders. In addition, this concentration of ownership may have the effect of preventing, discouraging, or deferring a change of control, which could depress the market price of our common stock.
Transactions engaged in by our principal stockholders, our officers or directors involving our common stock may have an adverse effect on the price of our stock.
As described above, our officers, directors, and principal stockholders (greater than 5% stockholders) collectively control approximately 69% of our issued and outstanding common stock as of February 7, 2021 (55% following completion of this offering or 53% if the underwriters exercise their option to purchase additional shares in full). Sales of our shares by these stockholders, including in this offering, could have the effect of lowering our stock price. The perceived risk associated with the possible sale of a large number of shares by these stockholders, or the adoption of significant short positions by hedge funds or other significant investors, could cause some of our stockholders to sell their stock, thus causing the price of our stock to decline. In addition, actual or anticipated downward pressure on our stock price due to actual or anticipated sales of stock by our directors or officers could cause other institutions or individuals to engage in short sales of our common stock, which may further cause the price of our stock to decline.
From time to time, our directors and executive officers may sell shares of our common stock on the open market. These sales will be publicly disclosed in filings made with the Securities and Exchange Commission (the “SEC”). In the future, our directors and executive officers may sell a significant number of shares for a variety of reasons unrelated to the performance of our business. Our stockholders may perceive these sales as a reflection on management’s view of the business and result in some stockholders selling their shares of our common stock. These sales could cause the price of our stock to drop.
Certain of our stockholders have the right to engage or invest in the same or similar businesses as us.
Catterton and GIC Pte. Ltd. (“GIC”) each engage in other investments and business activities in addition to their ownership of us. Under our fifth amended and restated certificate of incorporation,
Catterton and GIC each have the right, and have no duty to abstain from exercising such right, to engage or invest in the same or similar businesses as us, do business with any of our customers or vendors, or employ or otherwise engage any of our officers, directors or employees. If
Catterton, GIC or any of their respective officers, directors or employees acquire knowledge of a potential transaction that could be a corporate opportunity, they have no duty, to the fullest extent permitted by law, to offer such corporate opportunity to us, our stockholders or our affiliates.
In the event that any of our directors and officers who is also a director, officer or employee of
Catterton or GIC acquires knowledge of a corporate opportunity or is offered a corporate opportunity, provided that this knowledge was not acquired solely in such person’s capacity as our director or officer and such person acts in good faith to the fullest extent permitted by law, then even if
Catterton or GIC pursue or acquire the corporate opportunity or if
Catterton or GIC do not present the corporate opportunity to us, such person is deemed to have fully satisfied such person’s fiduciary duties owed to us and is not liable to us.
We do not intend to pay dividends for the foreseeable future.
We currently intend to retain any future earnings to finance the operation and expansion of our business and we do not expect to declare or pay any dividends in the foreseeable future. As a result, stockholders must rely on sales of their common stock after price appreciation as the only way to realize any future gains on their investment.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us more difficult, limit attempts by our stockholders to replace or remove our current management, and limit the market price of our common stock.
Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws include provisions that:
|
• |
|
permit the board of directors to establish the number of directors and fill any vacancies and newly created directorships; |
|
• |
|
provide that, from and after the date on which our private equity sponsors cease to beneficially own at least a majority of the outstanding shares of our common stock (the “Trigger Event”), a director may be removed only for cause and only by the affirmative vote of the holders of at least 66 2/3% in voting power of all the then-outstanding shares of stock of the Company entitled to vote thereon, voting together as a single class; |
|
• |
|
provide that, from and after the Trigger Event, the affirmative vote of the holders of at least 66 2/3% in voting power of all the then-outstanding shares of stock of the Company entitled to vote thereon, voting together as a single class, is required in order to amend certain provisions of our fifth amended and restated certificate of incorporation regarding the amendment of our fifth amended and restated certificate of incorporation, the composition and authority of our board of directors, the election and removal of directors, limitations of director liability, stockholder meetings, corporate opportunities, choice of forum and the interpretation of our fifth amended and restated certificate of incorporation; |
|
• |
|
authorize the board of directors to amend our bylaws without the assent or vote of shareholders, provided that, from and after the Trigger Event, stockholders may amend the bylaws with the affirmative vote of the holders of at least 66 2/3% in voting power of all the then-outstanding shares of stock of the Company entitled to vote thereon, voting together as a single class; |
|
• |
|
from and after the Trigger Event and with the exception of actions required or permitted to be taken by the holders of preferred stock, prohibit stockholder action by written consent, instead requiring stockholder actions to be taken at a meeting of our stockholders; |
|
• |
|
permit our board of directors, without further action by our stockholders, to fix the rights, preferences, privileges, and restrictions of preferred stock, the rights of which may be greater than the rights of our common stock; |
|
• |
|
restrict the forum for certain litigation against us to Delaware; |
|
• |
|
establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings; and |
|
• |
|
provide for a staggered board. |
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. As a result, these provisions may adversely affect the market price and market for our common stock if they are viewed as limiting the liquidity of our stock or as discouraging takeover attempts in the future.
The provision of our fifth amended and restated certificate of incorporation, requiring exclusive forum in certain courts in the State of Delaware or the federal district court for the District of
Delaware for certain types of lawsuits, may have the effect of discouraging lawsuits against our directors and officers.
Our fifth amended and restated certificate of incorporation requires, to the fullest extent permitted by law, that (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, or other employees or stockholders to us or our stockholders, creditors or other constituents, or a claim of aiding and abetting any such breach of fiduciary duty, (iii) any action asserting a claim against us or our directors or officers arising pursuant to any provision of the Delaware General Corporation Law (the “DGCL”), or our fifth amended and restated certificate of incorporation or our amended and restated bylaws or as to which the DGCL confers jurisdiction on the Court of Chancery of the State of Delaware, (iv) any action to interpret, apply, enforce or determine the validity of our fifth amended and restated certificate of incorporation or amended and restated bylaws, (v) any action asserting a claim against us or our directors or officers governed by the internal affairs doctrine or (vi) any action asserting an “internal corporate claim” as that term is defined in Section 115 of the DGCL will have to be brought only in the Court of Chancery of the State of Delaware (or if the Court of Chancery of the State of Delaware lacks subject matter jurisdiction, any other state court of the State of Delaware, or if no state court of the State of Delaware has subject matter jurisdiction, the federal district court for the District of Delaware), unless we consent in writing to the selection of an alternative forum. The foregoing provision will not apply to claims arising under the Securities Act of 1933, as amended (the “Securities Act”), or the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Unless we consent in writing to the selection of an alternative forum, the federal district court for the District of Delaware shall be, to the fullest extent permitted by law, the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act against us or any of our directors or officers. Although we believe these exclusive forum provisions benefit us by providing increased consistency in the application of Delaware law and federal securities laws in the types of lawsuits to which each applies, the exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, or stockholders, which may discourage lawsuits with respect to such claims. Our stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder as a result of our exclusive forum provisions. Further, in the event a court finds either exclusive forum provision contained in our fifth amended and restated certificate of incorporation to be unenforceable or inapplicable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, operating results, and financial condition.
We will continue to incur increased costs as a result of being a public company, and our management will continue to be required to devote substantial time to compliance with our public company responsibilities and corporate governance practices.
As a company with publicly-traded securities, we expect to incur costs associated with corporate governance requirements that are applicable to us as a public company, including rules and regulations of the SEC, under the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the Exchange Act, as well as the Nasdaq listing requirements. These rules and regulations are expected to significantly increase our accounting, legal, and financial compliance costs and make some activities more time-consuming. We also expect these rules and regulations to make it more expensive for us to maintain directors’ and officers’ liability insurance. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. Furthermore, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. We cannot predict or estimate the amount of additional costs we will continue to incur as a public company or the timing of such costs. Accordingly, increases in costs incurred as a result of becoming a publicly traded company may adversely affect our business, financial condition, and results of operations.
If we are unable to effectively implement or maintain a system of internal control over financial reporting, we may not be able to accurately or timely report our financial results and our stock price could be adversely affected.
As a result of becoming a public company, we will be required by Section 404 of the Sarbanes-Oxley Act to evaluate the effectiveness of our internal control over financial reporting as of the end of each fiscal year and include a management report assessing the effectiveness of our internal control over financial reporting, beginning with our Annual Report on Form
10-K
for the year ending October 2, 2021. In the following year, we must include a report issued by our independent registered public accounting firm based on its audit of the Company’s internal control over financial reporting, in each case. We may identify weaknesses or deficiencies that we may be unable to remedy before the requisite deadline for those reports or we may be unable to complete our assessment in a timely manner.
Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition or results of operations. The effectiveness of our controls and procedures may be limited by a variety of factors, including:
|
• |
|
faulty human judgment and simple errors, omissions, or mistakes; |
|
• |
|
fraudulent action of an individual or collusion of two or more people; |
|
• |
|
inappropriate management override of procedures; and |
|
• |
|
the possibility that any enhancements to controls and procedures may still not be adequate to assure timely and accurate financial control. |
Our ability to comply with the annual internal control report requirements will depend on the effectiveness of our financial reporting and data systems and controls across the Company. We expect these systems and controls to involve significant expenditures and to become increasingly complex as our business grows. To effectively manage this complexity, we will need to continue to improve our operational, financial, and management controls, and our reporting systems and procedures. Any weaknesses or deficiencies or any failure to implement required new or improved controls, or difficulties encountered in the implementation or operation of these controls, could harm our operating results and cause us to fail to meet our financial reporting obligations or result in material misstatements in our financial statements, which could limit our ability to access the capital markets, adversely affect our business and investor confidence in us, and reduce our stock price.
At the completion of our IPO, we were a “controlled company” within the meaning of the corporate governance standards of Nasdaq, but have since lost “controlled company” status and are relying on the
one-year
transition period afforded by the rules of Nasdaq. During this transition period, you may not have the same protections afforded to stockholders of companies that are subject to such requirements.
At the completion of our IPO, more than 50% of the voting power in the election of our directors was held by an individual, group, or another company, and as a result, we were a “controlled company” within the meaning of the corporate governance standards of Nasdaq. As of November 11, 2020, we were no longer a controlled company and must comply with certain corporate governance requirements by the conclusion of the
one-year
transition period afforded by the rules of Nasdaq, or November 11, 2021, including the requirements that:
|
• |
|
a majority of our board of directors consists of “independent directors,” as defined under the rules of such exchange; |
|
• |
|
our board of directors has a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and |
|
• |
|
our board of directors has a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities. |
As a result, the majority of our directors are not currently independent and, with the exception of the audit committee, no committee of our board of directors is composed entirely of independent directors. Accordingly, until such time at which we comply with the above-mentioned corporate governance requirements, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of Nasdaq.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this prospectus, 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; |
|
• |
|
our ability to establish and maintain intellectual property protection for our products, as well as our ability to operate our business without infringing the intellectual property rights of others; |
|
• |
|
impacts on our business from the COVID-19 pandemic; and |
|
• |
|
other risks and uncertainties, including those listed in the section titled “Risk Factors.” |
You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this prospectus 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 the section titled “Risk Factors” and elsewhere in this prospectus. 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 prospectus. 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 prospectus. 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 prospectus 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 prospectus to reflect events or circumstances after the date of this prospectus 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.
The selling stockholders will receive all net proceeds from the sale of the shares of our common stock to be sold in this offering. We will not receive any of the proceeds from the sale of our common stock by the selling stockholders, including from any exercise by the underwriters of their option to purchase additional shares. The expenses of the offering, not including the underwriting discount, are estimated at approximately $1.0 million and are payable by us. See “Underwriting”.
We have never declared nor paid any cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not expect to pay any dividends on our common stock in the foreseeable future. Any future determination relating to our dividend policy will be made by our board of directors and will depend on a number of factors, including: our actual and projected financial condition, liquidity, and results of operations; our capital levels and needs; tax considerations; any acquisitions or potential acquisitions that we may examine; statutory and regulatory prohibitions and other limitations; the terms of any credit agreements or other borrowing arrangements that restrict the amount of cash dividends that we can pay; general economic conditions; and other factors deemed relevant by our board of directors. We are not obligated to pay dividends on our common stock.
The following table sets forth our cash and cash equivalents and capitalization as of January 2, 2021.
|
|
|
|
|
Cash and cash equivalents |
|
$ |
104,077 |
|
|
|
|
|
|
Term Loan—due on August 16, 2023 |
|
|
809,093 |
|
ABL Credit Facility—due on August 13, 2025 |
|
|
0 |
|
|
|
|
|
|
Common stock, $0.001 par value, 1,001,000,000 authorized, 186,618,446 shares, issued and outstanding |
|
|
187 |
|
Preferred stock, $0.001 par value, no shares authorized, issued and outstanding, actual, 1,000,000 shares authorized and no shares issued and outstanding, as adjusted |
|
|
0 |
|
Additional paid in capital |
|
|
192,753 |
|
|
|
|
(579,350 |
) |
|
|
|
|
|
Total stockholders’ deficit |
|
|
(386,410 |
) |
|
|
|
|
|
|
|
$ |
422,683 |
|
|
|
|
|
|
The number of shares of common stock that will be outstanding after this offering is based on 186,873,341 million shares of common stock outstanding as of February 7, 2021 and excludes shares of common stock reserved for future issuance under our 2020 Omnibus Incentive Plan.
You should read this information in conjunction with our consolidated financial statements and the related notes and the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Selected Historical Consolidated Financial and Other Information,” and “Description of Capital Stock” included elsewhere in this prospectus.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER INFORMATION
You should read the following selected consolidated financial data together with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus. The selected consolidated financial data included in this section are not intended to replace the consolidated financial statements and are qualified in their entirety by the consolidated financial statements and the related notes included elsewhere in this prospectus.
We have derived the following selected consolidated statements of operations data for the fiscal years ended October 3, 2020, September 28, 2019 and September 29, 2018 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the following selected consolidated statements of operations data for the three months ended January 2, 2021 and December 28, 2019 and selected consolidated balance sheet data as of January 2, 2021 from our unaudited interim consolidated financial statements included elsewhere in this prospectus. The unaudited interim consolidated financial data, in management’s opinion, have been prepared on the same basis as the audited consolidated financial statements and the related notes included elsewhere in this prospectus, and include all adjustments, consisting only of normal recurring adjustments, that management considers necessary for a fair presentation of the information for the periods presented. Our historical results are not necessarily indicative of the results that may be expected for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands, except per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of operations data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
145,006 |
|
|
$ |
122,978 |
|
|
$ |
1,112,229 |
|
|
$ |
928,203 |
|
|
$ |
892,600 |
|
Cost of merchandise and services sold |
|
|
93,291 |
|
|
|
81,900 |
|
|
|
651,516 |
|
|
|
548,463 |
|
|
|
535,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,715 |
|
|
|
41,078 |
|
|
|
460,713 |
|
|
|
379,740 |
|
|
|
357,136 |
|
Selling, general and administrative expenses |
|
|
77,489 |
|
|
|
59,721 |
|
|
|
314,338 |
|
|
|
258,152 |
|
|
|
241,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,774 |
) |
|
|
(18,643 |
) |
|
|
146,375 |
|
|
|
121,588 |
|
|
|
115,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,516 |
|
|
|
22,417 |
|
|
|
84,098 |
|
|
|
98,578 |
|
|
|
91,656 |
|
Loss on debt extinguishment |
|
|
7,281 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
137 |
|
|
|
1,089 |
|
|
|
7,453 |
|
|
|
1,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,797 |
|
|
|
22,554 |
|
|
|
85,187 |
|
|
|
106,031 |
|
|
|
93,415 |
|
Income (loss) before taxes |
|
|
(44,571 |
) |
|
|
(41,197 |
) |
|
|
61,188 |
|
|
|
15,557 |
|
|
|
22,052 |
|
Income tax benefit (expense) |
|
|
(14,314 |
) |
|
|
(15,010 |
) |
|
|
2,627 |
|
|
|
14,855 |
|
|
|
4,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(30,257 |
) |
|
$ |
(26,187 |
) |
|
$ |
58,561 |
|
|
$ |
702 |
|
|
$ |
17,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.17 |
) |
|
$ |
(0.17 |
) |
|
$ |
0.37 |
|
|
$ |
0.00 |
|
|
$ |
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
104,077 |
|
|
$ |
1,938 |
|
|
$ |
157,072 |
|
|
$ |
90,899 |
|
|
$ |
77,569 |
|
|
|
|
355,627 |
|
|
|
242,926 |
|
|
|
372,133 |
|
|
|
282,089 |
|
|
|
255,332 |
|
|
|
|
747,108 |
|
|
|
651,286 |
|
|
|
746,438 |
|
|
|
479,721 |
|
|
|
453,160 |
|
Total current liabilities |
|
|
192,871 |
|
|
|
198,489 |
|
|
|
258,196 |
|
|
|
165,522 |
|
|
|
137,165 |
|
|
|
|
1,133,518 |
|
|
|
1,564,221 |
|
|
|
1,573,437 |
|
|
|
1,367,078 |
|
|
|
1,342,109 |
|
Total stockholders’ deficit |
|
|
(386,410 |
) |
|
|
(912,935 |
) |
|
|
(826,999 |
) |
|
|
(887,357 |
) |
|
|
(888,949 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands, except per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
$ |
(119,294 |
) |
|
$ |
(81,256 |
) |
|
$ |
103,409 |
|
|
$ |
57,821 |
|
|
$ |
43,280 |
|
Net cash used in investing activities |
|
|
(302 |
) |
|
|
(11,920 |
) |
|
|
(26,811 |
) |
|
|
(36,996 |
) |
|
|
(40,219 |
) |
Net cash provided by (used in) financing activities |
|
|
66,601 |
|
|
|
4,215 |
|
|
|
(10,425 |
) |
|
|
(7,495 |
) |
|
|
(24,386 |
) |
Other financial and operations data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of new locations and acquired |
|
|
— |
|
|
|
6 |
|
|
|
10 |
|
|
|
28 |
|
|
|
38 |
|
Number of locations open at end of period |
|
|
936 |
|
|
|
932 |
|
|
|
936 |
|
|
|
952 |
|
|
|
940 |
|
Comparable sales growth(2) |
|
|
15.7 |
% |
|
|
3.4 |
% |
|
|
18.0 |
% |
|
|
0.4 |
% |
|
|
(1.3 |
)% |
|
|
$ |
(243 |
) |
|
$ |
(9,004 |
) |
|
$ |
182,770 |
|
|
$ |
160,003 |
|
|
$ |
151,799 |
|
Adjusted EBITDA as a percentage of sales(3) |
|
|
(0.2 |
)% |
|
|
(7.3 |
)% |
|
|
16.4 |
% |
|
|
17.2 |
% |
|
|
17.0 |
% |
Adjusted net income (loss)(3) |
|
$ |
(10,619 |
) |
|
$ |
(24,314 |
) |
|
$ |
64,973 |
|
|
$ |
12,765 |
|
|
$ |
22,927 |
|
Adjusted net income (loss) per share |
|
|
(0.06 |
) |
|
|
(0.16 |
) |
|
$ |
0.42 |
|
|
$ |
0.08 |
|
|
$ |
0.15 |
|
(1) |
Consisted of 53 weeks. Please see the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for an explanation of our fiscal calendar. |
(2) |
Please see the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors and Measures We Use to Evaluate Our Business.” |
(3) |
Please see the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors and Measures We Use to Evaluate Our Business” for a reconciliation from our net income to adjusted EBITDA and net income to adjusted net income. |
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 the section titled “Selected Historical Consolidated Financial and Other Information” and our historical audited and unaudited consolidated financial statements and related notes, which are included elsewhere in this prospectus. 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” or in other sections of this prospectus.
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 year 2020 and fiscal year 2019 refer to the fiscal years ended October 3, 2020 and September 28, 2019. Fiscal year 2020 included 53 weeks of operations. Fiscal year 2019 included 52 weeks of operations. Each of the three months ended January 2, 2021 and the three months ended December 28, 2019 included 13 weeks of operations.
We are the largest and most trusted
brand in the nearly $11 billion U.S. pool and spa care industry, serving residential, professional, and commercial consumers. Founded in 1963, we are the only
pool and spa care brand with national scale, operating an integrated marketing and distribution ecosystem powered by a physical network of 936 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
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 57 consecutive years of sales growth. More than 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 and commercial consumers. Consumers receive the benefit of extended vendor warranties when purchasing product through our locations or when our certified
in-field
technicians install or repair equipment
on-site.
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 our history, 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 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 GAAP measures we use are sales, gross profit and gross margin, selling, general and administrative expenses, and operating income. The
key non-GAAP measures
we use are comparable sales, comparable sales growth, adjusted EBITDA, adjusted net income, and adjusted net income per share.
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. We recognize product sales upon purchase of merchandise by the consumer. Sales related to services are recognized when services are performed. Terms are customarily point of sale or free on board shipping point, net of related discounts and sales tax. When we receive payment from consumers before the consumer has taken possession of the merchandise or the service has been performed, the amount received is recorded as deferred revenue 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.
We opened or acquired 10 locations in fiscal year 2020, 28 locations in fiscal year 2019, 38 locations in fiscal year 2018, and 6 locations in the three months ended December 28, 2019. We consolidated operations in certain markets and closed 26 locations in fiscal year 2020, 16 locations in fiscal year 2019, 5 locations in fiscal year 2018, and 26 locations in the three months ended December 28, 2019. We did not open, acquire, or close any locations in the three months ended January 2, 2021. As of January 2, 2021, we operate 936 retail locations in 37 states across the United States. We own 27 locations and lease 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 cost, 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 treated as a reduction of merchandise costs. We recognize 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 can be expected to continue to increase as our company grows.
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 selling, general and administrative expenses (“SG&A”), include 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, 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 will be expected to increase over time to support the needs of our growing company. The components of our SG&A may not be comparable to the components of similar measures of other companies.
Operating income is gross profit less SG&A. Operating income excludes interest expense, loss on debt extinguishment, income tax expense, and other expenses, net. We use operating income as an indicator of the productivity of our business and our ability to manage expenses.
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 defined as earnings before interest (including amortization of debt costs), taxes, depreciation, amortization, loss (gain) on disposition of fixed assets, management fees, equity-based compensation expense,
on interest rate cap, loss on debt extinguishment, and special items. 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 and Adjusted Net Income per Share
Adjusted net income and adjusted net income per share are additional key measures used by management and our board of directors to assess our financial performance. Adjusted net income and adjusted net income 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 is defined as net income adjusted to exclude loss (gain) on disposition of assets, management fees, equity-based compensation expense,
on interest rate cap, loss on debt extinguishment, and special items. Adjusted net income per share is defined as adjusted net income divided by the weighted average number of common shares outstanding.
The tables below provide a reconciliation from our net income to adjusted EBITDA and net income to adjusted net income for the thirteen weeks ended January 2, 2021 and December 28, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(30,257 |
) |
|
$ |
(26,187 |
) |
|
|
|
11,516 |
|
|
|
22,417 |
|
|
|
|
(14,314 |
) |
|
|
(15,010 |
) |
Depreciation and amortization expenses(a) |
|
|
6,595 |
|
|
|
7,276 |
|
(Gain) loss on disposition of assets(b) |
|
|
(1,758 |
) |
|
|
443 |
|
|
|
|
382 |
|
|
|
1,323 |
|
Equity-based compensation expense(d) |
|
|
12,160 |
|
|
|
597 |
|
|
|
|
— |
|
|
|
22 |
|
Loss on debt extinguishment(f) |
|
|
7,281 |
|
|
|
— |
|
|
|
|
8,152 |
|
|
|
115 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(243 |
) |
|
$ |
(9,004 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(30,257 |
) |
|
$ |
(26,187 |
) |
(Gain) loss on disposition of assets(b) |
|
|
(1,758 |
) |
|
|
443 |
|
|
|
|
382 |
|
|
|
1,323 |
|
Equity-based compensation expense(d) |
|
|
12,160 |
|
|
|
597 |
|
|
|
|
— |
|
|
|
22 |
|
Loss on debt extinguishment(f) |
|
|
7,281 |
|
|
|
— |
|
|
|
|
8,152 |
|
|
|
115 |
|
Tax effects of these adjustments(h) |
|
|
(6,579 |
) |
|
|
(627 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
(10,619 |
) |
|
$ |
(24,314 |
) |
|
|
|
|
|
|
|
|
|
(a) |
Includes depreciation related to our distribution centers and stores, which is included within the cost of merchandise and services sold line item in our condensed consolidated statements of operations. |
(b) |
Consists of (gain) loss on disposition of assets associated with store closures or the sale of property and equipment. |
(c) |
Represents amounts paid or accrued in connection with our management services agreement. The management services agreement terminated upon the completion of our IPO in the first quarter of fiscal year 2021. |
(d) |
Represents non-cash charges related to equity-based compensation. |
(e) |
Includes non-cash charges related to the change in fair value of our interest rate cap agreements. |
(f) |
Represents non-cash expense due to the write-off of deferred financing costs related to the repayment of our senior unsecured floating rate notes due 2024 during the first quarter of fiscal year 2021. |
(g) |
Other non-recurring, non-cash or discrete items as determined by management, such as transaction related costs, personnel-related costs, legal expenses, strategic project costs, and miscellaneous costs. The first quarter of fiscal year 2021 includes one-time payments of contractual amounts incurred in connection with our IPO. |
(h) |
Represents the tax effect of the total adjustments based on our actual statutory tax rate for fiscal year 2020 and our estimated statutory tax rate for fiscal year 2021. |
The tables below provide a reconciliation from our net income to adjusted EBITDA and net income to adjusted net income for fiscal year 2020, fiscal year 2019, and fiscal year 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
58,561 |
|
|
$ |
702 |
|
|
$ |
17,126 |
|
|
|
|
84,098 |
|
|
|
98,578 |
|
|
|
91,656 |
|
|
|
|
2,627 |
|
|
|
14,855 |
|
|
|
4,926 |
|
Depreciation and amortization expenses(a) |
|
|
28,925 |
|
|
|
30,424 |
|
|
|
31,611 |
|
Loss on disposition of assets(b) |
|
|
785 |
|
|
|
1,751 |
|
|
|
1,057 |
|
|
|
|
4,900 |
|
|
|
4,533 |
|
|
|
3,223 |
|
Equity-based compensation expense(d) |
|
|
1,785 |
|
|
|
2,130 |
|
|
|
1,785 |
|
|
|
|
22 |
|
|
|
4,288 |
|
|
|
(3,045 |
) |
|
|
|
1,067 |
|
|
|
2,742 |
|
|
|
3,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
182,770 |
|
|
$ |
160,003 |
|
|
$ |
151,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
58,561 |
|
|
$ |
702 |
|
|
$ |
17,126 |
|
Loss on disposition of assets(b) |
|
|
785 |
|
|
|
1,751 |
|
|
|
1,057 |
|
|
|
|
4,900 |
|
|
|
4,533 |
|
|
|
3,223 |
|
Equity-based compensation expense(d) |
|
|
1,785 |
|
|
|
2,130 |
|
|
|
1,785 |
|
|
|
|
22 |
|
|
|
4,288 |
|
|
|
(3,045 |
) |
|
|
|
1,067 |
|
|
|
2,742 |
|
|
|
3,460 |
|
Tax effects of these adjustments(g) |
|
|
(2,147 |
) |
|
|
(3,381 |
) |
|
|
(206 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
64,973 |
|
|
$ |
12,765 |
|
|
$ |
23,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
Includes depreciation related to our distribution centers and stores, which is included within the cost of merchandise and services sold line item in our consolidated statements of operations. |
(b) |
Consists of loss on disposition of assets associated with store closures or the sale of property and equipment. |
(c) |
Represents amounts paid or accrued in connection with our management services agreement. The management services agreement terminated upon the completion of our IPO. |
(d) |
Represents non-cash charges related to equity-based compensation. |
(e) |
Includes non-cash charges related to the change in fair value of our interest rate cap agreements. |
(f) |
Other non-recurring, non-cash or discrete items as determined by management, such as transaction related costs, personnel-related costs, legal expenses, strategic project costs, and miscellaneous costs. |
(g) |
Represents the tax effect of the total adjustments based on our statutory tax rate for each fiscal year. |
Factors Affecting the Comparability of our Results of Operations
Our results over the past three years 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.
We are closely monitoring the impact of
COVID-19
on all aspects of our business and in all of our locations. As of January 2, 2021, we operated 936 locations in 37 states and all locations are currently open. During the thirteen weeks ended January 2, 2021, we maintained operations in nearly all of our markets as an ‘essential’ business, as defined by various federal, state, and local authorities, by providing essential products and services that maintain the safety and sanitization of homes and businesses. Certain of our locations were temporarily closed or restricted to curbside service only. These closures and restrictions did not have a material impact on our performance during the thirteen weeks ended 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.
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:
|
• |
|
Required team members who are experiencing symptoms or have been in close contact with someone who has symptoms or has been exposed to the coronavirus to stay home; |
|
• |
|
Provided additional employee benefits related to COVID-19; |
|
• |
|
Distributed personal protective equipment and implemented new monitoring protocols, including the installation of contactless temperature scanners in our corporate offices and distribution centers; |
|
• |
|
Enhanced facility cleaning including routine sanitization of high touch surfaces; |
|
• |
|
Implemented social distancing guidelines and capacity restrictions in our locations and reduced operating hours; |
|
• |
|
Encouraged contactless payments and introduced curbside pickup and contact-free service calls; |
|
• |
|
Incurred front line recognition pay for associates in our locations, distribution centers, and service technicians during the third and fourth quarters of 2020; |
|
• |
|
Executed remote workforce plan for associates in our corporate offices; and |
|
• |
|
Enacted mandatory travel restrictions. |
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 will depend significantly on the duration and severity of the pandemic, the actions taken to contain or
mitigate its impact, and the change 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. We may further restrict the operations of our locations and distribution facilities and these measures 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.
In January 2018, we acquired a provider of supplies and services for swimming pools, spas, and above ground pools, and related equipment. The acquisition included five locations in Pennsylvania.
In May 2018, we acquired a pool and spa parts distributor headquartered in Tucson, Arizona. The acquisition included inventory and assets at facilities located in Arizona and Tennessee.
In January 2019, we acquired a provider of supplies and services for swimming pools, spas, barbecues, and fireplaces based in Washington. The acquisition included nine locations in the Pacific Northwest and expanded our physical presence to 36 states.
In October 2019, we acquired the assets of a retailer of supplies and services for hot tubs, swim spas, and saunas. The acquisition included six locations in the Pacific Northwest and expanded our physical presence to 37 states. The acquisition 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 the acquisition from the date of acquisition. The total purchase consideration was allocated to the assets acquired and 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 the acquisition is deductible for income tax purposes. The purchase accounting for this acquisition is complete.
The consolidated financial statements include the results of operations of the acquisitions since their respective acquisition dates. The acquisitions did not have a material impact on our financial position or results of operations, either individually or in the aggregate. The total purchase consideration was allocated to the assets acquired and 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.
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 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 expensed under SG&A in the consolidated statement of operations.
The following tables summarize key components of our results of operations for the periods indicated, both in dollars and as a percentage of our sales.
Three Months Ended January 2, 2021 Compared to Three Months Ended December 28, 2019
We derived the condensed consolidated statements of operations for the thirteen weeks ended January 2, 2021 and December 28, 2019 from our consolidated financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands, except per share amounts) |
|
|
|
|
|
|
Statement of operations data: |
|
|
|
|
|
|
|
|
|
|
$ |
145,006 |
|
|
$ |
122,978 |
|
Cost of merchandise and services sold |
|
|
93,291 |
|
|
|
81,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
51,715 |
|
|
|
41,078 |
|
Selling, general and administrative expenses |
|
|
77,489 |
|
|
|
59,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,774 |
) |
|
|
(18,643 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
11,516 |
|
|
|
22,417 |
|
Loss on debt extinguishment |
|
|
7,281 |
|
|
|
— |
|
|
|
|
— |
|
|
|
137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
18,797 |
|
|
|
22,554 |
|
|
|
|
(44,571 |
) |
|
|
(41,197 |
) |
|
|
|
(14,314 |
) |
|
|
(15,010 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
(30,257 |
) |
|
$ |
(26,187 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.17 |
) |
|
$ |
(0.17 |
) |
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
176,989,755 |
|
|
|
156,500,000 |
|
|
|
|
|
|
|
(%) |
|
|
|
(%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0 |
|
|
|
100.0 |
|
Cost of merchandise and services sold |
|
|
64.3 |
|
|
|
66.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
35.7 |
|
|
|
33.4 |
|
Selling, general and administrative expenses |
|
|
53.4 |
|
|
|
48.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(17.8 |
) |
|
|
(15.2 |
) |
|
|
|
7.9 |
|
|
|
18.2 |
|
Loss on debt extinguishment |
|
|
5.0 |
|
|
|
— |
|
|
|
|
— |
|
|
|
0.1 |
|
|
|
|
13.0 |
|
|
|
18.3 |
|
|
|
|
(30.7 |
) |
|
|
(33.5 |
) |
|
|
|
(9.9 |
) |
|
|
(12.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
(20.9 |
) |
|
|
(21.3 |
) |
|
|
|
|
|
|
|
|
|
Other financial and operations data: |
|
|
|
|
|
|
|
|
Number of new and acquired locations |
|
|
— |
|
|
|
6 |
|
Number of open at end of period |
|
|
936 |
|
|
|
932 |
|
Comparable sales growth(2) |
|
|
15.7 |
% |
|
|
3.4 |
% |
|
|
$ |
(243 |
) |
|
$ |
(9,004 |
) |
Adjusted EBITDA as a percentage of sales(3) |
|
|
(0.2 |
)% |
|
|
(7.3 |
)% |
|
|
$ |
(10,619 |
) |
|
$ |
(24,314 |
) |
Adjusted net loss per share |
|
$ |
(0.06 |
) |
|
$ |
(0.16 |
) |
(1) |
Components may not add to totals due to rounding. |
(2) |
See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors and Measures We Use to Evaluate Our Business.” |
(3) |
See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors and Measures We Use to Evaluate Our Business” for a reconciliation from our net income to adjusted EBITDA and net income to adjusted net income. |
Sales increased to $145.0 million in the three months ended January 2, 2021 from $123.0 million in the prior year period, an increase of $22.0 million or 17.9%. The increase was the result of a comparable sales increase of 15.7% and
non-comparable
sales growth primarily attributable to acquisitions. The comparable sales increase of $19.3 million in the three months ended January 2, 2021 was driven by an increase in consumer demand across all product categories due to higher use of residential pools and spas. 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 $51.7 million in the three months ended January 2, 2021 from $41.1 million in the prior year period, an increase of $10.6 million or 25.9%. The increase in gross profit was primarily driven by the increase in comparable sales. Gross margin increased to 35.7% in the three months ended January 2, 2021 compared to 33.4% in the prior year period, an increase of 225 basis points.
Selling, General and Administrative Expenses
SG&A increased to $77.5 million in the three months ended January 2, 2021 from $59.7 million in the prior year period, an increase of $17.8 million or 29.8%. The increase in SG&A was driven by an increase in
non-cash
equity-based compensation of $11.6 million, primarily due to vesting of performance-based equity units, and
one-time
payments of contractual amounts of $8.2 million. These amounts were incurred in connection with our initial public offering that we completed in November 2020. The increase in SG&A was partially offset by expenses related to the strategic consolidation of certain locations during the first quarter of fiscal year 2020 of $4.0 million. As a percentage of sales, SG&A increased to 53.4% in the three months ended January 2, 2021 compared to 48.6% in the prior year period, an increase of 488 basis points.
Total other expense decreased to $18.8 million in the three months ended January 2, 2021 from $22.6 million in the prior year period, a decrease of $3.8 million. The decrease in the three months ended January 2, 2021 was primarily driven by lower interest expense on our floating rate debt of $10.9 million and was partially offset by a loss on debt extinguishment of $7.3 million related to the repayment of our Senior Unsecured Notes.
We recorded an income tax benefit of $14.3 million in the three months ended January 2, 2021 and a benefit of $15.0 million in the prior year period. The change in income tax benefit was the result of the impact of limitations on interest expense deductibility in accordance with section 163(j) of the Tax Cuts and Jobs Act of 2017 in each period and related changes in our valuation allowance.
Net Loss and Net Loss per Share
Consequently, net loss increased to $30.3 million in the three months ended January 2, 2021 from a loss of $26.2 million in the prior year period, a decrease of $4.1 million. Net loss per share remained flat at a loss of $0.17 in the three months ended January 2, 2021 when compared to the prior year period.
Adjusted EBITDA improved to a loss of $0.2 million in the three months ended January 2, 2021 from a loss of $9.0 million in the prior year period, an increase of $8.8 million. The increase is due primarily to our increase in comparable sales and an improvement in gross margin.
Adjusted Net Loss and Adjusted Net loss per Share
Adjusted net loss improved to a loss of $10.6 million in the three months ended January 2, 2021 from an adjusted net loss of $24.3 million in the prior year period. Adjusted net loss per share improved to a loss of $0.06 in the three months ended January 2, 2021 from an adjusted net loss per share of $0.16 in the prior year period.
Fiscal Year 2020 Compared to Fiscal Year 2019
We derived the consolidated statements of operations for fiscal year 2020, fiscal year 2019 and fiscal year 2018 from our consolidated financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands, except per share amounts) |
|
|
|
|
|
|
|
|
|
Statement of operations data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,112,229 |
|
|
$ |
928,203 |
|
|
$ |
892,600 |
|
Cost of merchandise and services sold |
|
|
651,516 |
|
|
|
548,463 |
|
|
|
535,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
460,713 |
|
|
|
379,740 |
|
|
|
357,136 |
|
Selling, general and administrative expenses |
|
|
314,338 |
|
|
|
258,152 |
|
|
|
241,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
146,375 |
|
|
|
121,588 |
|
|
|
115,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84,098 |
|
|
|
98,578 |
|
|
|
91,656 |
|
|
|
|
1,089 |
|
|
|
7,453 |
|
|
|
1,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85,187 |
|
|
|
106,031 |
|
|
|
93,415 |
|
|
|
|
61,188 |
|
|
|
15,557 |
|
|
|
22,052 |
|
|
|
|
2,627 |
|
|
|
14,855 |
|
|
|
4,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
58,561 |
|
|
$ |
702 |
|
|
$ |
17,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
Cost of merchandise and services sold |
|
|
58.6 |
|
|
|
59.1 |
|
|
|
60.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41.4 |
|
|
|
40.9 |
|
|
|
40.0 |
|
Selling, general and administrative expenses |
|
|
28.3 |
|
|
|
27.8 |
|
|
|
27.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.2 |
|
|
|
13.1 |
|
|
|
12.9 |
|
|
|
|
7.6 |
|
|
|
10.6 |
|
|
|
10.3 |
|
|
|
|
0.1 |
|
|
|
0.8 |
|
|
|
0.1 |
|
|
|
|
7.7 |
|
|
|
11.4 |
|
|
|
10.5 |
|
|
|
|
5.5 |
|
|
|
1.7 |
|
|
|
2.5 |
|
|
|
|
0.2 |
|
|
|
1.6 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.3 |
|
|
|
0.1 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other financial and operations data: |
|
|
|
|
|
|
|
|
|
|
|
|
Number of new and acquired locations |
|
|
10 |
|
|
|
28 |
|
|
|
38 |
|
Number of locations open at end of period |
|
|
936 |
|
|
|
952 |
|
|
|
940 |
|
Comparable sales growth(2) |
|
|
18.0 |
% |
|
|
0.4 |
% |
|
|
(1.3 |
)% |
|
|
$ |
182,770 |
|
|
$ |
160,003 |
|
|
$ |
151,799 |
|
Adjusted EBITDA as a percentage of sales(3) |
|
|
16.4 |
% |
|
|
17.2 |
% |
|
|
17.0 |
% |
|
|
$ |
64,973 |
|
|
$ |
12,765 |
|
|
$ |
22,927 |
|
Adjusted net income per share |
|
$ |
0.42 |
|
|
$ |
0.08 |
|
|
$ |
0.15 |
|
(1) |
Components may not add to totals due to rounding. |
(2) |
See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors and Measures We Use to Evaluate Our Business.” |
(3) |
See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors and Measures We Use to Evaluate Our Business” for a reconciliation from our net income to adjusted EBITDA and net income to adjusted net income. |
Fiscal year 2020 included a 53
rd
week, which added approximately $18.0 million in sales, $1.5 million in net income, and $3.0 million in adjusted EBITDA.
Sales increased to $1,112.2 million in fiscal year 2020 from $928.2 million in fiscal year 2019, an increase of $184.0 million or 19.8%. The increase was the result of a comparable sales increase of 18.0% and
non-comparable
sales growth primarily attributable to acquisitions and the 53
rd
week. The comparable sales increase of $163.3 million in fiscal year 2020 was driven by an increase in consumer demand across all product categories due to higher use of residential pools and spas. 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 $460.7 million in fiscal year 2020 from $379.7 million in fiscal year 2019, an increase of $81.0 million or 21.3%. Gross profit increased by $72.4 million related to higher comparable sales and by $8.8 million related to higher
non-comparable
sales, and was partially offset by $0.2 million in higher occupancy expenses. Gross margin increased to 41.4% in fiscal year 2020 compared to 40.9% in fiscal year 2019, an increase of 51 basis points.
Selling, General and Administrative Expenses
SG&A increased to $314.3 million in fiscal year 2020 from $258.2 million in fiscal year 2019, an increase of $56.2 million or 21.8%. The increase in SG&A was primarily driven by increased costs related to higher sales volume of $20.6 million, higher compensation expense of $10.9 million, expenses associated with
COVID-19
of $8.6 million for temporary wage increases and personal protective equipment, expenses related to strategic consolidations of certain locations of $3.5 million,
one-time
bonus incentive accruals of $2.9 million, and higher general and administrative expenses of $9.7 million partially driven by higher investments in leadership and information technology. As a percentage of sales, SG&A increased to 28.3% in fiscal year 2020 compared to 27.8% in fiscal year 2019, an increase of 45 basis points.
Total other expense decreased to $85.2 million in fiscal year 2020 from $106.0 million in fiscal year 2019, a decrease of $20.8 million. The decrease in fiscal year 2020 was primarily driven by lower interest expense on our floating rate debt of $14.5 million, a reduction in fair market valuation adjustments related to our interest rate cap agreements of $4.3 million, and a reduction of other expenses of $2.0 million.
We recorded an income tax expense of $2.6 million in fiscal year 2020 and an expense of $14.9 million in fiscal year 2019, a decrease of $12.2 million. The change in income tax expenses was the result of higher
pre-tax
income during fiscal year 2020 and was more than offset by the impact of limitations on interest expense deductibility in accordance with section 163(j) of the Tax Cuts and Jobs Act of 2017 in each period.
Net Income and Net Income per Share
Consequently, net income increased to $58.6 million in fiscal year 2020 from an income of $0.7 million in fiscal year 2019, an increase of $57.9 million. Net income per share increased to $0.37 in fiscal year 2020 from a net income per share of $0.00 in fiscal year 2019.
Adjusted EBITDA increased to $182.8 million in fiscal year 2020 from $160.0 million in fiscal year 2019, an increase of $22.8 million or 14.2%. The increase is due primarily to our increase in comparable sales and an improvement in gross margin. Adjusted EBITDA as a percentage of sales decreased to 16.4% in fiscal year 2020 compared to 17.2% in fiscal year 2019, a decrease of 81 basis points.
Adjusted Net Income and Adjusted Net Income per Share
Adjusted net income increased to $65.0 million in fiscal year 2020 from an adjusted net income of $12.8 million in fiscal year 2019, an increase of $52.2 million. Adjusted net income per share increased to $0.42 in fiscal year 2020 from an adjusted net income per share of $0.08 in fiscal year 2019.
Fiscal Year 2019 Compared to Fiscal Year 2018
Sales increased to $928.2 million in fiscal year 2019 from $892.6 million in fiscal year 2018, an increase of $35.6 million or 4.0%. This increase was driven primarily by a $31.9 million increase related to
non-comparable
sales related to acquisitions and higher comparable sales of $3.7 million. Comparable sales increased by 0.4% in fiscal year 2019 when compared to the prior year.
Gross Profit and Gross Margin
Gross profit increased to $379.7 million in fiscal year 2019 from $357.1 million in fiscal year 2018, an increase of $22.6 million or 6.3%. Gross profit increased by $18.0 million related to higher comparable sales and by $8.8 million related to higher
non-comparable
sales. The increase in gross profit was partially offset by higher occupancy expenses of $2.6 million and higher distribution expenses of $1.6 million. Gross margin increased to 40.9% in fiscal year 2019 compared to 40.0% in fiscal year 2018, an increase of 90 basis points.
Selling, General and Administrative Expenses
SG&A increased to $258.2 million in fiscal year 2019 from $241.7 million in fiscal year 2018, an increase of $16.5 million or 6.8%. The increase in SG&A was primarily driven by costs related to higher sales volume of $8.8 million, higher compensation expense of $5.2 million, and higher corporate support expenses of $2.5 million. As a percentage of sales, SG&A increased to 27.8% in fiscal year 2019 compared to 27.1% in fiscal year 2018, an increase of 74 basis points.
Total other expense increased to $106.0 million in fiscal year 2019 from $93.4 million in fiscal year 2018, an increase of $12.6 million. The increase was primarily driven by higher interest expense on our floating rate debt of $6.9 million, the impact related to the change in fair value of our interest rate cap agreements of $7.3 million, and partially offset by lower other expenses of $1.6 million.
Income tax expense increased to $14.9 million in fiscal year 2019 from $4.9 million in fiscal year 2018. The increase in income tax expense and the effective tax rate is related to a higher valuation allowance recorded in the current year due to limitations on interest expense deductibility in accordance with section 163(j) of the Tax Cuts and Jobs Act of 2017. As of September 28, 2019 and
September 29, 2018, we recorded a deferred tax asset of $17.9 million and $5.7 million, respectively, and a valuation allowance of $16.8 million and $5.7 million, respectively, related to our interest expense limitation.
Net Income and Net Income per Share
Consequently, net income decreased to $0.7 million in fiscal year 2019 from $17.1 million in fiscal year 2018, a decrease of $16.4 million. Net income per share decreased to $0.00 in fiscal year 2019 compared to $0.11 in fiscal year 2018.
Adjusted EBITDA increased to $160.0 million in fiscal year 2019 compared to $151.8 million in fiscal year 2018, an increase of $8.2 million or 5.4%. The increase in adjusted EBITDA primarily related to the incremental sales associated with an increase in our
non-comparable
sales and an improvement in gross margin. Adjusted EBITDA as a percentage of sales increased to 17.2% in fiscal year 2019 compared to 17.0% in fiscal year 2018, an increase of 23 basis points.
Adjusted Net Income and Adjusted Net Income Per Share
Adjusted net income decreased to $12.8 million in fiscal year 2019 compared to $23.4 million in fiscal year 2018, a decrease of $10.1 million. Adjusted net income per share decreased to $0.08 in fiscal year 2019 compared to $0.15 in fiscal year 2018.
Seasonality and Quarterly Fluctuations
Our business is highly seasonal. In general, sales and earnings are highest during our fiscal year third and fourth quarters, which include April through September and represent the peak months of swimming pool use. In fiscal year 2020, we generated 77% of our sales and 109% of our adjusted EBITDA in the third and fourth quarters of our fiscal year. Sales are substantially lower during our fiscal first and second 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 fiscal first and second quarters of the year 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. As a result of lower sales volumes during our fiscal first and second quarters, we reach peak borrowing during our fiscal second quarter.
The principal external factor affecting our business is weather. Hot weather can increase purchases of chemicals and other
non-discretionary
products, purchases of discretionary products, and can drive increased activity around installation and repair services we offer. 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
Our primary sources of liquidity are net cash provided by operating activities and availability under our ABL Credit Facility. Historically, we have funded working capital requirements, capital expenditures, payments related to acquisitions, and debt service requirements 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 $104.1 million as of January 2, 2021, $157.1 million as of October 3, 2020, $90.9 million as of September 28, 2019, and $77.6 million as of September 29, 2018. As of January 2, 2021, October 3, 2020, September 28, 2019, and September 29, 2018, we did not have any outstanding borrowings under our ABL Credit Facility. On August 13, 2020, we entered into an agreement to amend our ABL Credit Facility to extend the final maturity to August 13, 2025 and increase our borrowing capacity to $200 million, subject to certain restrictions.
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 availability under our ABL Credit Facility will be adequate to finance our working capital requirements, planned capital expenditures, and debt service over the next 12 months. In the future, we may also allocate capital toward additional strategic acquisitions. 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 will be required to obtain additional equity or debt financing in the future. There can be no assurance equity or debt financing will be available to us if we need it or, if available, the terms will be satisfactory to us.
As of January 2, 2021, outstanding standby letters of credit totaled $11.6 million and, after considering borrowing base restrictions, we had $142.7 million of available borrowing capacity under the terms of the ABL Credit Facility. As of January 2, 2021, we were in compliance with the covenants under the ABL Credit Facility and the Term Loan.
Three Months Ended January 2, 2021 Compared to Three Months Ended December 28, 2019
A summary of our cash flows from operating, investing, and financing activities is presented in the following table (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
$ |
(119,294 |
) |
|
$ |
(81,256 |
) |
Net cash used in investing activities |
|
|
(302 |
) |
|
|
(11,920 |
) |
Net cash provided by financing activities |
|
|
66,601 |
|
|
|
4,215 |
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
$ |
(52,995 |
) |
|
$ |
(88,961 |
) |
|
|
|
|
|
|
|
|
|
Cash Used in Operating Activities
Net cash used in operating activities increased to $119.3 million in the three months ended January 2, 2021 from $81.3 million in the prior year period, an increase of $38.0 million. The increase was primarily driven by changes in working capital related to accounts payable and accrued expenses.
Cash Used in Investing Activities
Net cash used in investing activities decreased to $0.3 million in the three months ended January 2, 2021 from $11.9 million in the prior year period, a decrease of $11.6 million. The decrease in net cash used in investing activities was primarily driven by a $6.2 million decrease related to acquisitions, a $3.0 million decrease related to the timing of investments in property and equipment, and $2.4 million related to the sale of fixed assets.
Cash Provided by Financing Activities
Net cash provided by financing activities increased to $66.6 million in the three months ended January 2, 2021 from $4.2 million in the prior year period, an increase of $62.4 million. The increase in net cash provided by financing activities was primarily related to net proceeds raised during our initial public offering of $458.7 million and was offset by the repayment of the Senior Unsecured Notes of $390.0 million and a decrease in borrowings on our ABL Credit Facility of $6.3 million.
Fiscal Year 2020 Compared to Fiscal Year 2019
A summary of our cash flows from operating, investing, and financing activities is presented in the following table (in thousands):
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
103,409 |
|
|
$ |
57,821 |
|
|
$ |
43,280 |
|
Net cash used in investing activities |
|
|
(26,811 |
) |
|
|
(36,996 |
) |
|
|
(40,219 |
) |
Net cash used in financing activities |
|
|
(10,425 |
) |
|
|
(7,495 |
) |
|
|
(24,386 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
$ |
66,173 |
|
|
$ |
13,330 |
|
|
$ |
(21,325 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Provided by Operating Activities
Net cash provided by operating activities increased to $103.4 million in fiscal year 2020 from $57.8 million in fiscal year 2019, an increase of $45.6 million or 78.8%. The increase was primarily driven by a $57.9 million increase in net income, a $2.8 million decrease related to changes in operating assets and liabilities, and a decrease in
non-cash
adjustments of $9.5 million. The changes in operating assets and liabilities was driven by changes in working capital, including an increase in accounts payable and accrued expenses primarily related to compensation expense accruals and payment timing for other expenses, lower inventories resulting from higher sales volume in the current year period, lower accounts receivable related to reduced commercial account activity and improved collection of vendor receivables. The increase in cash flows related to working capital was partially offset by an increase in prepaid expenses related to our capitalized cloud computing arrangements with certain vendors, and an increase in income tax payable. The increase in
non-cash
adjustments primarily related to a change in deferred income taxes.
Net cash provided by operating activities increased to $57.8 million in fiscal year 2019 from $43.3 million in fiscal year 2018, an increase of $14.5 million or 33.6%. The increase was primarily
driven by a $33.3 million increase related to changes in operating assets and liabilities and partially offset by a $16.4 million decrease in net income. The changes in operating assets and liabilities were driven by changes in by working capital, including an increase in accounts payable and accrued expenses primarily related to compensation expense accruals and payment timing of rent and other expenses, and an increase in income tax payable.
Cash Used in Investing Activities