lesl-10q_20210403.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 April 3, 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 May 7, 2021, the registrant had 187,918,474 shares of common stock, $0.001 par value per share, outstanding.

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		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements	2
	Condensed Consolidated Balance Sheets	2
	Condensed Consolidated Statements of Operations	3
	Condensed Consolidated Statements of Stockholders’ Deficit	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	24

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	25
Item 1A.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3.	Defaults Upon Senior Securities	25
Item 4.	Mine Safety Disclosures	25
Item 5.	Other Information	25
Item 6.	Exhibits	26

Signatures		27

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical 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;

•

regulatory changes and development affecting our current and future products;

•

our ability to obtain additional capital to finance operations;

•

commodity price inflation and deflation;

•

impacts on our business from the COVID-19 pandemic; and

•

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

You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, and operating results. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended October 3, 2020, Part II, Item 1A, “Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended January 2, 2021, 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.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

LESLIE’S, INC.

Condensed Consolidated Balance Sheets

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

	April 3, 2021			October 3, 2020			March 28, 2020
Assets	(Unaudited)			(Audited)			(Unaudited)
Current assets
Cash and cash equivalents	$	90,328		$	157,072		$	11,934
Accounts and other receivables, net		41,733			31,481			30,924
Inventories		277,860			148,966			244,662
Prepaid expenses and other current assets		58,331			34,614			41,609
Total current assets		468,252			372,133			329,129
Property and equipment, net		63,632			66,391			72,169
Operating lease right-of-use assets		181,581			177,655			200,746
Goodwill and other intangibles, net		127,851			121,186			122,213
Deferred tax assets		15,293			6,583			—
Other assets		2,302			2,490			1,270
Total assets	$	858,911		$	746,438		$	725,527
Liabilities and stockholders’ deficit
Current liabilities
Accounts payable	$	181,524		$	92,372		$	143,197
Accrued expenses		82,338			101,167			67,091
Operating lease liabilities		55,395			54,459			59,721
Income taxes payable		—			1,857			—
Current portion of long-term debt		8,100			8,341			8,341
Total current liabilities		327,357			258,196			278,350
Deferred tax liabilities		—			—			4,273
Operating lease liabilities, noncurrent		130,496			130,234			151,059
Long-term debt, net		789,339			1,179,550			1,234,003
Other long-term liabilities		2,729			5,457			5
Total liabilities		1,249,921			1,573,437			1,667,690
Commitments and contingencies
Stockholders’ deficit
Common stock, $0.001 par value, 1,000,000,000 shares authorized and 186,884,621 issued and outstanding as of April 3, 2021 and 156,500,000 shares authorized, issued and outstanding as of October 3, 2020 and March 28, 2020, respectively.		187			157			157
Additional paid in capital (deficit)		194,605			(278,063	)		(278,653	)
Retained deficit		(585,802	)		(549,093	)		(663,667	)
Total stockholders’ deficit		(391,010	)		(826,999	)		(942,163	)
Total liabilities and stockholders’ deficit	$	858,911		$	746,438		$	725,527

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

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LESLIE’S, INC.

Condensed Consolidated Statements of Operations

(Amounts in Thousands, Except Per Share Amounts)

(Unaudited)

	Three Months Ended						Six Months Ended
	April 3, 2021			March 28, 2020			April 3, 2021			March 28, 2020
Sales	$	192,441		$	126,377		$	337,447		$	249,355
Cost of merchandise and services sold		120,758			86,464			214,049			168,364
Gross profit		71,683			39,913			123,398			80,991
Selling, general and administrative expenses		70,374			56,048			147,863			115,769
Operating income (loss)		1,309			(16,135	)		(24,465	)		(34,778	)
Other expense:
Interest expense		8,126			22,709			19,642			45,126
Loss on debt extinguishment		1,888			—			9,169			—
Other expenses, net		1,057			187			1,057			324
Total other expense		11,071			22,896			29,868			45,450
Loss before taxes		(9,762	)		(39,031	)		(54,333	)		(80,228	)
Income tax benefit		(3,310	)		(9,205	)		(17,624	)		(24,215	)
Net loss	$	(6,452	)	$	(29,826	)	$	(36,709	)	$	(56,013	)
Net loss per share
Basic and diluted	$	(0.03	)	$	(0.19	)	$	(0.20	)	$	(0.36	)
Weighted average shares outstanding
Basic and diluted		186,810			156,500			181,900			156,500

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

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LESLIE’S, INC.

Condensed Consolidated Statements of Stockholders’ Deficit

(Amounts in Thousands)

(Unaudited)

	Common Stock				Additional Paid in Capital			Retained			Total Stockholders’
	Shares		Amount		(Deficit)			Deficit			Deficit
Balance, December 28, 2019		156,500	$	157	$	(279,251	)	$	(633,841	)	$	(912,935	)
Equity-based compensation		—		—		598			—			598
Net loss		—		—		—			(29,826	)		(29,826	)
Balance, March 28, 2020		156,500	$	157	$	(278,653	)	$	(663,667	)	$	(942,163	)

Balance, January 2, 2021		186,619	$	187	$	192,753		$	(579,350	)	$	(386,410	)
Issuance of shares under stock incentive plans		266		—		—			—			—
Issuance of common stock upon initial public offering, net of offering costs		—		—		(99	)		—			(99	)
Equity-based compensation		—		—		1,951			—			1,951
Net loss		—		—		—			(6,452	)		(6,452	)
Balance, April 3, 2021		186,885	$	187	$	194,605		$	(585,802	)	$	(391,010	)

	Common Stock				Additional Paid in Capital			Retained			Total Stockholders’
	Shares		Amount		(Deficit)			Deficit			Deficit
Balance, September 28, 2019		156,500	$	157	$	(279,848	)	$	(607,666	)	$	(887,357	)
Impact of adoption of new accounting pronouncements		—		—		—			12			12
Equity-based compensation		—		—		1,195			—			1,195
Net loss		—		—		—			(56,013	)		(56,013	)
Balance, March 28, 2020		156,500	$	157	$	(278,653	)	$	(663,667	)	$	(942,163	)

Balance, October 3, 2020		156,500	$	157	$	(278,063	)	$	(549,093	)	$	(826,999	)
Issuance of shares under stock incentive plans		385		—		—			—			—
Issuance of common stock upon initial public offering, net of offering costs		30,000		30		458,557			—			458,587
Equity-based compensation		—		—		14,111			—			14,111
Net loss		—		—		—			(36,709	)		(36,709	)
Balance, April 3, 2021		186,885	$	187	$	194,605		$	(585,802	)	$	(391,010	)

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

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LESLIE’S, INC.

Condensed Consolidated Statements of Cash Flows

(Amounts in Thousands)

(Unaudited)

	Six Months Ended
	April 3, 2021			March 28, 2020
Operating Activities
Net loss	$	(36,709	)	$	(56,013	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		12,858			14,088
Equity-based compensation		14,111			1,195
Amortization of deferred financing costs and debt discounts		1,134			1,685
Provision for doubtful accounts		64			149
Deferred income taxes		(8,711	)		3,033
(Gain) loss on disposition of assets		(1,753	)		470
Loss on debt extinguishment		9,169			—
Changes in operating assets and liabilities:
Accounts and other receivables		(10,316	)		(11,046	)
Inventories		(127,814	)		(93,933	)
Prepaid expenses and other current assets		(23,473	)		(20,063	)
Other assets		228			150
Accounts payable and accrued expenses		64,332			50,829
Income taxes payable		(1,857	)		(6,713	)
Operating lease assets and liabilities, net		(2,728	)		10,034
Net cash used in operating activities		(111,465	)		(106,135	)
Investing Activities
Purchases of property and equipment		(9,490	)		(12,478	)
Acquisitions, net of cash acquired		(6,040	)		(6,188	)
Proceeds from disposition of fixed assets		2,404			6
Net cash used in investing activities		(13,126	)		(18,660	)
Financing Activities
Borrowings on revolving commitment		—			181,750
Payments on revolving commitment		—			(131,750	)
Repayment of long term debt		(392,085	)		(4,170	)
Issuance of long term debt		907			—
Payment of deferred financing costs		(9,562	)		—
Proceeds from issuance of common stock upon initial public offering, net		458,587			—
Net cash provided by financing activities		57,847			45,830
Net decrease in cash and cash equivalents		(66,744	)		(78,965	)
Cash and cash equivalents, beginning of period		157,072			90,899
Cash and cash equivalents, end of period	$	90,328		$	11,934
Supplemental Disclosure of Cash Payments for:
Interest	$	27,081		$	44,762
Income taxes		3,078			2,882

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

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LESLIE’S, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1—Business and Operations

Leslie’s, Inc. (“Leslie’s,” “we,” “our,” “us,” “its,” or the “Company”) is the leading direct-to-consumer pool and spa care brand. We market and sell pool and spa supplies and related products and services, which primarily consist of maintenance items such as chemicals, equipment and parts, cleaning accessories, as well as safety, recreational, and fitness-related products. We currently market our products through 940 company-operated locations in 38 states and e-commerce websites.

Note 2—Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

We prepared the accompanying interim condensed consolidated financial statements following United States generally accepted accounting principles (“GAAP”). The financial statements include all normal and recurring adjustments that are necessary for a fair presentation of our financial position and operating results. The 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 and Subsequent Public Offering

In November 2020, the Company completed an initial public offering (“IPO”) of 30.0 million 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. 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.

In February 2021, certain of the Company’s stockholders, completed a subsequent public offering of 29.0 million shares of common stock, with a 30-day option for the underwriters to purchase up to 4.4 million additional shares of common stock, at a public offering price of $26.00 per share for net proceeds of $731.4 million, after deducting underwriting discounts and commissions of $22.6 million. All proceeds from the sale of shares of common stock in this offering were received by the selling stockholders.

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 year 2021 refer to the fiscal year ending October 2, 2021, which contains 52 weeks, and references to fiscal year 2020 refer to the fiscal year ended October 3, 2020, which contained 53 weeks. References to the three months ended April 3, 2021 and the three months ended March 28, 2020 refer to the 13 weeks ended April 3, 2021 and March 28, 2020, respectively. References to the six months ended April 3, 2021 and the six months ended March 28, 2020 refer to the 26 weeks ended April 3, 2021 and March 28, 2020, respectively.

Use of Estimates

To prepare financial statements that conform to GAAP, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Our most significant estimates relate to 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.

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Fair Value Measurements

As of April 3, 2021 and October 3, 2020, we held no assets that were 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 2028 (see Note 7) was determined to be $804.7 million as of April 3, 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 October 3, 2020. Our interest rate cap agreements expired in March 2021; consequently, we had no interest rate cap agreements as of April 3, 2021. Changes in fair value of the interest rate cap are recorded in other expenses, net on our condensed consolidated statements 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 and six months ended April 3, 2021 and March 28, 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

The following acquisitions did not have a material impact on our financial position or results of operations. Our condensed consolidated financial statements include the results of operations of these acquisitions from the date of acquisition. The total purchase consideration was allocated to the assets acquired and the liabilities assumed at their estimated fair values as of the date of acquisition, as determined by management. The excess of the purchase price over the amounts allocated to assets acquired and liabilities assumed has been recorded as goodwill. The goodwill resulting from these acquisitions are deductible for income tax purposes.

Fiscal 2021 Acquisition

In March 2021, we acquired the assets of a retailer of supplies and services for hot tubs, swim spas and fireplaces. The acquisition included four store locations in the Denver, Colorado area and expanded our physical presence to 38 states. Our estimates and assumptions are subject to change as we gather additional information throughout the measurement period, which is up to 12 months after the acquisition date, and if we make changes to the amounts recorded, such amounts are recorded in the period in which they are identified.

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 purchase accounting for this acquisition is complete.

Note 4 —Goodwill and Other Intangibles, Net

Goodwill

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

	Carrying Value
Balance, April 3, 2021	$	97,692
Balance, October 3, 2020		93,295
Balance, March 28, 2020		92,821

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Other Intangible Assets

Other intangible assets consisted of the following as of April 3, 2021 (in thousands, except weighted average remaining useful life):

	Weighted Average Remaining Useful Life (in Years)		Gross Carrying Value		Accumulated Amortization			Net Carrying Amount
Trade name and trademarks (finite life)		1.6	$	5,540	$	(5,195	)	$	345
Trade name and trademarks (indefinite life)	Indefinite			18,550		—			18,550
Non-compete agreements		4.4		9,833		(7,014	)		2,819
Consumer relationships		3.2		18,500		(10,853	)		7,647
Internally developed software		2.0		4,000		(3,530	)		470
Other		0.7		1,000		(975	)		25
Total			$	57,423	$	(27,567	)	$	29,856

Other intangible assets are as follows as of October 3, 2020 (in thousands, except weighted average remaining useful life):

	Weighted Average Remaining Useful Life (in Years)		Gross Carrying Value		Accumulated Amortization			Net Carrying Amount
Trade name and trademarks (finite life)		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