lesl-10q_20210102.htm

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended January 2, 2021

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

For the transition period from to

Commission File Number: 001-39667

LESLIE’S, INC.

(Exact Name of Registrant as Specified in its Charter)

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

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

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common stock, par value $0.001 per share

LESL

The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of February 5, 2021, the registrant had 186,873,341 shares of common stock, $0.001 par value per share, outstanding.

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	2
	Condensed Consolidated Balance Sheets	2
	Condensed Consolidated Statements of Operations	3
	Condensed Consolidated Statements of Stockholders’ Deficit	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 4.	Controls and Procedures	22
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Mine Safety Disclosures	24
Item 5.	Other Information	24
Item 6.	Exhibits	25
Signatures		26

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations or financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” or “would” or the negative of these words or other similar terms or expressions. Our actual results could differ materially from those indicated in these forward-looking statements for a variety of reasons, including, among others:

•

our ability to execute on our growth strategies;

•

our ability to maintain favorable relationships with suppliers and manufacturers;

•

competition from mass merchants and specialty retailers;

•

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

•

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

•

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

•

regulatory changes and development affecting our current and future products;

•

our ability to obtain additional capital to finance operations;

•

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” in our filings with the U.S. Securities and Exchange Commission

You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, and operating results. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended October 3, 2020, Part II, Item 1A, “Risk Factors” of this Quarterly Report on Form 10-Q, and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. The results, events, and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q. And while we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.

The forward-looking statements made in this Quarterly Report on Form 10-Q are based on events or circumstances as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

LESLIE’S, INC.

Condensed Consolidated Balance Sheets

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

(Unaudited)

As of	January 2, 2021			October 3, 2020			December 28, 2019
Assets
Current assets
Cash and cash equivalents	$	104,077		$	157,072		$	1,938
Accounts and other receivables, net		37,116			31,481			49,657
Inventories		174,535			148,966			185,130
Prepaid expenses and other current assets		39,899			34,614			6,201
Total current assets		355,627			372,133			242,926
Property and equipment, net		62,628			66,391			71,805
Operating lease right-of-use assets		191,125			177,655			212,492
Goodwill and other intangibles, net		120,636			121,186			122,718
Deferred tax assets		14,729			6,583			—
Other assets		2,363			2,490			1,345
Total assets	$	747,108		$	746,438		$	651,286
Liabilities and stockholders’ deficit
Current liabilities
Accounts payable	$	69,046		$	92,372		$	75,265
Accrued expenses		59,086			101,167			54,381
Operating lease liabilities		56,398			54,459			60,502
Income taxes payable		—			1,857			—
Current portion of long-term debt		8,341			8,341			8,341
Total current liabilities		192,871			258,196			198,489
Revolving commitment		—			—			6,300
Deferred tax liabilities		—			—			3,911
Operating lease liabilities, noncurrent		139,796			130,234			162,329
Long-term debt, net		795,394			1,179,550			1,185,256
Other long-term liabilities		5,457			5,457			7,936
Total liabilities		1,133,518			1,573,437			1,564,221
Commitments and contingencies
Stockholders’ deficit
Common stock, $0.001 par value, 205,150,000 shares authorized and 186,618,446 issued and outstanding at January 2, 2021 and 156,500,000 shares authorized, issued, and outstanding at October 3, 2020 and December 28, 2019		187			157			157
Additional paid in capital (deficit)		192,753			(278,063	)		(279,251	)
Retained deficit		(579,350	)		(549,093	)		(633,841	)
Total stockholders’ deficit		(386,410	)		(826,999	)		(912,935	)
Total liabilities and stockholders’ deficit	$	747,108		$	746,438		$	651,286

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

LESLIE’S, INC.

Condensed Consolidated Statements of Operations

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

(Unaudited)

	Three months ended
	January 2, 2021			December 28, 2019
Sales	$	145,006		$	122,978
Cost of merchandise and services sold		93,291			81,900
Gross profit		51,715			41,078
Selling, general and administrative expenses		77,489			59,721
Operating loss		(25,774	)		(18,643	)
Other expense:
Interest expense		11,516			22,417
Loss on debt extinguishment		7,281			—
Other expenses, net		—			137
Total other expense		18,797			22,554
Loss before taxes		(44,571	)		(41,197	)
Income tax benefit		(14,314	)		(15,010	)
Net loss	$	(30,257	)	$	(26,187	)
Net loss per share
Basic and diluted	$	(0.17	)	$	(0.17	)
Weighted average shares outstanding
Basic and diluted		176,989,755			156,500,000

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

LESLIE’S, INC.

Condensed Consolidated Statements of Stockholders’ Deficit

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

(Unaudited)

	Common Stock				Additional Paid in Capital			Retained			Total Stockholders’
	Shares		Amount		(Deficit)			Deficit			Deficit
Balance, September 28, 2019		156,500,000	$	157	$	(279,848	)	$	(607,666	)	$	(887,357	)
Impact of adoption of new accounting pronouncements		—		—		—			12			12
Equity-based compensation		—		—		597			—			597
Net loss		—		—		—			(26,187	)		(26,187	)
Balance, December 28, 2019		156,500,000	$	157	$	(279,251	)	$	(633,841	)	$	(912,935	)

Balance, October 3, 2020		156,500,000	$	157	$	(278,063	)	$	(549,093	)	$	(826,999	)
Issuance of shares under stock incentive plans		118,446		—		—			—			—
Issuance of common stock upon initial public offering, net of offering costs		30,000,000		30		458,656			—			458,686
Equity-based compensation		—		—		12,160			—			12,160
Net loss		—		—		—			(30,257	)		(30,257	)
Balance, January 2, 2021		186,618,446	$	187	$	192,753		$	(579,350	)	$	(386,410	)

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

LESLIE’S, INC.

Condensed Consolidated Statements of Cash Flows

(Amounts in Thousands)

(Unaudited)

	Three months ended
	January 2, 2021			December 28, 2019
Operating Activities
Net loss	$	(30,257	)	$	(26,187	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		6,595			7,276
Equity-based compensation		12,160			597
Amortization of deferred financing costs and debt discounts		648			848
Provision for doubtful accounts		59			58
Deferred income taxes		(8,146	)		2,672
(Gain) loss on disposition of assets		(1,758	)		443
Loss on debt extinguishment		7,281			—
Changes in operating assets and liabilities:
Accounts and other receivables		(5,694	)		(15,842	)
Inventories		(25,569	)		(34,402	)
Prepaid expenses and other current assets		(5,285	)		1,502
Other assets		127			75
Accounts payable and accrued expenses		(65,629	)		(21,922	)
Income taxes payable		(1,857	)		(6,713	)
Operating lease assets and liabilities, net		(1,969	)		10,339
Net cash used in operating activities		(119,294	)		(81,256	)
Investing Activities
Purchases of property and equipment		(2,706	)		(5,738	)
Acquisitions, net of cash acquired		—			(6,188	)
Proceeds from disposition of fixed assets		2,404			6
Net cash used in investing activities		(302	)		(11,920	)
Financing Activities
Revolving commitment borrowings		—			6,300
Repayment of senior notes		(390,000	)		—
Principal payments on term loan		(2,085	)		(2,085	)
Proceeds from issuance of common stock upon initial public offering, net		458,686			—
Net cash provided by financing activities		66,601			4,215
Net decrease in cash and cash equivalents		(52,995	)		(88,961	)
Cash and cash equivalents, beginning of period		157,072			90,899
Cash and cash equivalents, end of period	$	104,077		$	1,938
Supplemental Disclosure of Cash Payments for:
Interest	$	19,635		$	26,473
Income taxes		920			2,875

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

LESLIE’S, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1—Business and Operations

Leslie’s, Inc. (“Leslie’s,” “we,” “our,” “us,” “its,” or the “Company”) is the leading direct-to-consumer pool and spa care brand. We market and sell pool and spa supplies and related products and services, which primarily consist of maintenance items such as chemicals, equipment and parts, cleaning accessories, as well as safety, recreational, and fitness-related products. We currently market our products through 936 company-operated locations in 37 states and e-commerce websites.

Note 2—Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

We prepared the accompanying interim condensed consolidated financial statements following U.S. generally accepted accounting principles (“GAAP”). The financial statements include all normal and recurring adjustments that are necessary for a fair presentation of our financial position and operating results. The condensed consolidated financial statements include the accounts of Leslie’s, Inc. and our subsidiaries. All significant intercompany accounts and transactions have been eliminated. These interim condensed consolidated financial statements and the related notes should be read in conjunction with the audited condensed consolidated financial statements and notes for the years ended October 3, 2020 and September 28, 2019.

Initial Public Offering

In November 2020, the Company completed an initial public offering (“IPO”) of 30,000,000 shares of common stock at a public offering price of $17.00 per share for net proceeds of $458.7 million, after deducting underwriting discounts and commissions of $45.0 million and offering costs of $6.3 million. The shares of common stock sold in the IPO and the net proceeds from the IPO included the full exercise of the underwriters’ option to purchase additional shares.

In November 2020, the Company used the net proceeds from the IPO to repay the entire outstanding amount related to its $390.0 million Senior Unsecured Notes. The remaining proceeds will be used for working capital and general corporate purposes.

Stock Split

All share and per share information included in the accompanying condensed consolidated financial statements has been adjusted to reflect a 156,500-for-1 stock split which was effected on October 23, 2020. The par value of the common stock was not adjusted as the result of the stock split.

Fiscal Periods

We operate on a fiscal calendar that results in a fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to September 30th. In a 52-week fiscal year, each quarter contains 13 weeks of operations; in a 53-week fiscal year, each of the first, second and third quarters includes 13 weeks of operations and the fourth quarter includes 14 weeks of operations. References to fiscal 2020 refer to the fiscal year ended October 3, 2020 which contained 53 weeks. References to the three months ended January 2, 2021 and the three months ended December 28, 2019 refer to the 13 weeks ended January 2, 2021 and December 28, 2019, respectively.

Use of Estimates in the Preparation of Financial Statements

To prepare financial statements that conform to GAAP, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Our most significant estimates relate to the allowance for doubtful accounts, inventory obsolescence reserves, vendor programs, income taxes, self-insurance, and goodwill impairment evaluations. We continually review our estimates and make adjustments as necessary, but actual results could be significantly different from what we expected when we made these estimates.

Fair Value Measurements

As of January 2, 2021 and October 3, 2020, we held no assets that are required to be measured at fair value on a recurring basis.

Fair Value of Financial Instruments

We evaluate our financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level of classification for each reporting period.

The fair value of the Term Loan due in 2023 (see Note 7) was determined to be $806.6 million at January 2, 2021. These fair value estimates, determined to be Level 2, are subjective in nature and involve uncertainties and matters of judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect these estimates.

The fair value of the interest rate cap agreements (see Note 7) was determined to be Level 2 and is included in other assets on the condensed consolidated balance sheets as of January 2, 2021 and October 3, 2020. Changes in fair value of the interest rate cap are recorded in other expenses in the condensed consolidated statement of operations.

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value due to the short-term maturity of these instruments.

There were no transfers between levels in the fair value hierarchy during the three months ended January 2, 2021 or during fiscal year 2020, respectively.

Seasonality

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

Prior Period Reclassifications

Reclassifications of certain immaterial prior period amounts have been made to conform to current period presentation.

Note 3—Business Combinations

Fiscal 2020 Acquisition

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.

Note 4 —Goodwill and Other Intangibles, Net

Goodwill

The carrying amount of goodwill for the periods ended January 2, 2021, October 3, 2020, and December 28, 2019 were as follows (in thousands):

Balance, January 2, 2021	$	93,295
Balance, October 3, 2020	$	93,295
Balance, December 28, 2019	$	92,821

Other Intangible Assets

Our other intangible assets are as follows as of January 2, 2021:

	Weighted Average Remaining Useful Life		Gross Carrying Value		Accumulated Amortization			Net Carrying Amount
	(In years)		(In thousands)
Trade name and trademarks (finite life)		2.4	$	5,540	$	(5,167	)	$	373
Trade name and trademarks (indefinite life)	Indefinite			17,750		—			17,750
Non-compete agreements		4.5		8,633		(6,958	)		1,675
Consumer relationships		3.6		17,200		(10,485	)		6,715
Internally developed software		2.6		4,000		(3,482	)		518
Other		1.3		1,000		(967	)		33
Total			$	54,123	$	(27,059	)	$	27,064

Our other intangible assets are as follows as of October 3, 2020:

	Weighted Average Remaining Useful Life		Gross Carrying Value		Accumulated Amortization			Net Carrying Amount
	(In years)		(In thousands)
Trade name and trademarks (finite life)		2.6	$	5,540	$	(5,139	)	$	401
Trade name and trademarks (indefinite life)	Indefinite			17,750		—			17,750
Non-compete agreements		4.9		8,633		(6,872	)		1,761
Consumer relationships		3.8		17,200		(10,118	)		7,082
Internally developed software		2.9		4,000		(3,434	)		566
Other		1.6		1,000		(958	)		42
Total			$	54,123	$	(26,521	)	$	27,602

Our other intangible assets are as follows as of December 28, 2019:

	Weighted Average Remaining Useful Life		Gross Carrying Value		Accumulated Amortization			Net Carrying Amount
	(In years)		(In thousands)
Trade name and trademarks (finite life)		2.3	$	5,540	$	(5,054	)	$	486
Trade name and trademarks (indefinite life)	Indefinite			17,750		—			17,750
Non-compete agreements		4.0		8,633		(6,317	)		2,316
Consumer relationships		3.4		17,200		(8,998	)		8,202
Internally developed software		2.3		4,000		(3,244	)		756
Other		1.3		1,000		(933	)		67
Total			$	54,123	$	(24,546	)	$	29,577

Amortization expense for the three months ended January 2, 2021, October 3, 2020, and December 28, 2019 were $0.5 million, $0.6 million, and $0.6 million, respectively. No impairment of goodwill or other intangible assets were recorded in the three months ended January 2, 2021, October 3, 2020, or December 28, 2019.

The estimated future amortization expense related to finite-lived intangible assets on our balance sheet as of January 2, 2021 is as follows (in thousands):

Remainder of fiscal 2021	$	1,520
2022		1,936
2023		1,703
2024		1,065
2025		968
Thereafter		2,122
Total	$	9,314

Intangible assets also include costs associated with acquiring mailing lists for our proprietary database. As of each of January 2, 2021, October 3, 2020, and December 28, 2019, the gross amounts capitalized on the condensed consolidated balance sheets for mailing lists were $1.6 million with a net carrying value of $0.3 million.

Note 5—Inventories

	(In thousands)
As of	January 2, 2021		October 3, 2020		December 28, 2019
Raw materials	$	2,577	$	1,967	$	1,237
Finished goods		171,958		146,999		183,893
Inventories	$	174,535	$	148,966	$	185,130

Note 6—Accrued Expenses

Accrued expenses consist of the following:

	(In thousands)
As of	January 2, 2021		October 3, 2020		December 28, 2019
Accrued payroll and employee benefits	$	19,394	$	32,420	$	12,529
Occupancy expenses		3,150		3,573		5,992
Interest		489		9,377		12,887
Sales taxes		7,970		11,164		5,540
Self-insurance reserves		5,993		6,518		6,607
Customer deposits		9,304		13,286		3,317
All other current liabilities		12,786		24,829		7,509
Total	$	59,086	$	101,167	$	54,381

Note 7—Long-Term Debt

The table below presents our debt obligations as of the periods presented (in thousands):

	Effective Interest Rate ⁽¹⁾		January 2, 2021		October 3, 2020		December 28, 2019
Term Loan—due on August 16, 2023	3.65%	⁽²⁾	$	809,093	$	811,178	$	819,520
Senior Unsecured Notes—due on August 16, 2024				—		390,000		390,000