lesl-10q_20210703.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 July 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 August 2, 2021, the registrant had 189,323,108 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	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
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

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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;

•

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

•

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

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

	July 3, 2021			October 3, 2020			June 27, 2020
Assets	(Unaudited)			(Audited)			(Unaudited)
Current assets
Cash and cash equivalents	$	309,077		$	157,072		$	148,901
Accounts and other receivables, net		47,848			31,481			35,854
Inventories		224,526			148,966			181,108
Prepaid expenses and other current assets		28,615			34,614			24,539
Total current assets		610,066			372,133			390,402
Property and equipment, net		66,363			66,391			69,254
Operating lease right-of-use assets		169,001			177,655			191,343
Goodwill and other intangibles, net		127,740			121,186			121,711
Deferred tax assets		6,386			6,583			—
Other assets		18,238			2,490			1,193
Total assets	$	997,794		$	746,438		$	773,903
Liabilities and stockholders’ deficit
Current liabilities
Accounts payable	$	155,525		$	92,372		$	133,090
Accrued expenses		117,888			101,167			112,628
Operating lease liabilities		53,700			54,459			63,606
Income taxes payable		18,906			1,857			—
Current portion of long-term debt		8,100			8,341			8,341
Total current liabilities		354,119			258,196			317,665
Deferred tax liabilities		—			—			782
Operating lease liabilities, noncurrent		118,941			130,234			142,307
Long-term debt, net		787,731			1,179,550			1,182,780
Other long-term liabilities		2,729			5,457			1
Total liabilities		1,263,520			1,573,437			1,643,535
Commitments and contingencies
Stockholders’ deficit
Common stock, $0.001 par value, 1,000,000,000 shares authorized and 189,284,566 issued and outstanding as of July 3, 2021 and 156,500,000 shares authorized, issued and outstanding as of October 3, 2020 and June 27, 2020, respectively.		189			157			157
Additional paid in capital (deficit)		201,085			(278,063	)		(278,056	)
Retained deficit		(467,000	)		(549,093	)		(591,733	)
Total stockholders’ deficit		(265,726	)		(826,999	)		(869,632	)
Total liabilities and stockholders’ deficit	$	997,794		$	746,438		$	773,903

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				Nine Months Ended
	July 3, 2021		June 27, 2020		July 3, 2021		June 27, 2020
Sales	$	596,543	$	479,929	$	933,991	$	729,285
Cost of merchandise and services sold		312,845		269,160		526,895		437,526
Gross profit		283,698		210,769		407,096		291,759
Selling, general and administrative expenses		117,264		99,165		265,127		214,933
Operating income		166,434		111,604		141,969		76,826
Other expense:
Interest expense		7,399		19,472		27,041		64,597
Loss on debt extinguishment		—		—		9,169		—
Other expenses, net		861		585		1,917		910
Total other expense		8,260		20,057		38,127		65,507
Income before taxes		158,174		91,547		103,842		11,319
Income tax expense (benefit)		39,372		19,613		21,749		(4,602	)
Net income	$	118,802	$	71,934	$	82,093	$	15,921
Net income per share:
Basic	$	0.63	$	0.46	$	0.45	$	0.10
Diluted	$	0.61	$	0.46	$	0.43	$	0.10
Weighted average shares outstanding:
Basic		188,264		156,500		184,021		156,500
Diluted		194,200		156,500		189,603		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, March 28, 2019		156,500	$	157	$	(278,653	)	$	(663,667	)	$	(942,163	)
Equity-based compensation		—		—		597			—			597
Net income		—		—		—			71,934			71,934
Balance, June 27, 2020		156,500	$	157	$	(278,056	)	$	(591,733	)	$	(869,632	)

Balance, April 3, 2021		186,885	$	187	$	194,605		$	(585,802	)	$	(391,010	)
Issuance of shares under stock incentive plans		2,400		2		—			—			2
Equity-based compensation		—		—		6,480			—			6,480
Net income		—		—		—			118,802			118,802
Balance, July 3, 2021		189,285	$	189	$	201,085		$	(467,000	)	$	(265,726	)

	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		—		—		1,792			—			1,792
Net income		—		—		—			15,921			15,921
Balance, June 27, 2020		156,500	$	157	$	(278,056	)	$	(591,733	)	$	(869,632	)

Balance, October 3, 2020		156,500	$	157	$	(278,063	)	$	(549,093	)	$	(826,999	)
Issuance of shares under stock incentive plans		2,785		2		—			—			2
Issuance of common stock upon initial public offering, net of offering costs		30,000		30		458,557			—			458,587
Equity-based compensation		—		—		20,591			—			20,591
Net income		—		—		—			82,093			82,093
Balance, July 3, 2021		189,285	$	189	$	201,085		$	(467,000	)	$	(265,726	)

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)

	Nine Months Ended
	July 3, 2021			June 27, 2020
Operating Activities
Net income	$	82,093		$	15,921
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		19,205			20,462
Equity-based compensation		20,591			1,792
Amortization of deferred financing costs and debt discounts		1,551			2,548
Provision for doubtful accounts		134			368
Deferred income taxes		197			(457	)
(Gain) loss on disposition of assets		(1,668	)		486
Loss on debt extinguishment		9,169			—
Changes in operating assets and liabilities:
Accounts and other receivables		(16,501	)		(16,194	)
Inventories		(74,401	)		(30,380	)
Prepaid expenses and other current assets		6,289			(2,993	)
Other assets		(15,696	)		227
Accounts payable and accrued expenses		73,761			86,283
Income taxes payable		17,049			(6,713	)
Operating lease assets and liabilities, net		(3,397	)		14,571
Net cash provided by operating activities		118,376			85,921
Investing Activities
Purchases of property and equipment		(17,799	)		(15,483	)
Business acquisitions, net of cash acquired		(6,806	)		(6,188	)
Proceeds from disposition of fixed assets		2,429			7
Net cash used in investing activities		(22,176	)		(21,664	)
Financing Activities
Borrowings on revolving commitment		—			238,750
Payments on revolving commitment		—			(238,750	)
Repayment of long term debt		(394,110	)		(6,255	)
Issuance of long term debt		907			—
Payment of deferred financing costs		(9,579	)		—
Proceeds from issuance of common stock upon initial public offering, net		458,587			—
Net cash provided by (used in) financing activities		55,805			(6,255	)
Net increase in cash and cash equivalents		152,005			58,002
Cash and cash equivalents, beginning of period		157,072			90,899
Cash and cash equivalents, end of period	$	309,077		$	148,901
Supplemental Disclosure of Cash Payments for:
Interest	$	29,549		$	68,599
Income taxes	$	4,503		$	2,832

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 946 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 $458.6 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.

In June 2021, certain of the Company’s stockholders, completed an additional subsequent public offering of 24.5 million shares of common stock, with a 30-day option for the underwriters to purchase up to 3.7 million additional shares of common stock, at a public offering price of $27.64 per share for net proceeds of $656.9 million, after deducting underwriting discounts and commissions of $20.3 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 effective 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 July 3, 2021 and the three months ended June 27, 2020 refer to the 13 weeks ended July 3, 2021 and June 27, 2020, respectively. References to the nine months ended July 3, 2021 and the nine months ended June 27, 2020 refer to the 39 weeks ended July 3, 2021 and June 27, 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 July 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 $804.4 million as of July 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 July 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 nine months ended July 3, 2021 and June 27, 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 expected to be deductible for income tax purposes.

Fiscal 2021 Acquisitions

In March 2021, we acquired the assets of a retailer of supplies and services for hot tubs, swim spas and fireplaces with four locations in the Denver, Colorado area, expanding our physical presence to 38 states. In May 2021, we acquired the assets of a similar retailer with one location in the Medford, Oregon area. Our estimates and assumptions are subject to change as we gather additional information throughout the measurement period, which is up to 12 months after the acquisition date, 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, July 3, 2021	$	98,669
Balance, October 3, 2020		93,295
Balance, June 27, 2020		92,821

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Changes in the carrying value of goodwill relate to acquisition activity.

Other Intangible Assets

Other intangible assets consisted of the following as of July 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)		2.9	$	5,940	$	(5,236	)	$	704
Trade name and trademarks (indefinite life)	Indefinite			17,750		—			17,750
Non-compete agreements		7.4		9,333		(7,174	)		2,159
Consumer relationships		6.5		19,000		(11,276	)		7,724
Internally developed software		7.4		4,000		(3,577	)		423
Other intangibles		0.5		2,620		(2,309	)		311
Total			$	58,643	$	(29,572	)	$	29,071

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)

3.6

5,540

(5,139

)

401

Trade name and trademarks (indefinite life)

Indefinite