Leslie's(LESL) - 2023 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION This section provides the unaudited condensed consolidated financial statements for the quarterly period ended July 1, 2023, along with management's discussion and analysis, market risk disclosures, and controls and procedures Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for the quarterly period ended July 1, 2023, including balance sheets, statements of operations, stockholders' deficit, cash flows, and accompanying notes Condensed Consolidated Balance Sheets As of July 1, 2023, total assets increased slightly to $1.137 billion, driven by higher inventories offset by a sharp decrease in cash, while total liabilities marginally increased and stockholders' deficit improved Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | July 1, 2023 (Unaudited) | October 1, 2022 (Audited) | July 2, 2022 (Unaudited) | | :--- | :--- | :--- | :--- | | Assets | | | | | Cash and cash equivalents | $19,430 | $112,293 | $193,130 | | Inventories | $436,557 | $361,686 | $361,391 | | Total current assets | $536,704 | $542,378 | $632,329 | | Total assets | $1,137,425 | $1,109,631 | $1,116,991 | | Liabilities & Stockholders' Deficit | | | | | Total current liabilities | $315,297 | $347,956 | $432,895 | | Long-term debt, net | $774,884 | $779,726 | $781,322 | | Total liabilities | $1,317,235 | $1,307,582 | $1,375,760 | | Total stockholders' deficit | $(179,810) | $(197,951) | $(258,769) | Condensed Consolidated Statements of Operations For Q3 fiscal 2023, sales decreased 9.3% year-over-year to $610.9 million, and net income fell 41.0% to $72.5 million, with diluted EPS at $0.39 Consolidated Statements of Operations Summary (in thousands, except per share amounts) | Metric | Three Months Ended July 1, 2023 | Three Months Ended July 2, 2022 | Nine Months Ended July 1, 2023 | Nine Months Ended July 2, 2022 | | :--- | :--- | :--- | :--- | :--- | | Sales | $610,891 | $673,633 | $1,018,839 | $1,086,529 | | Gross Profit | $251,596 | $303,607 | $388,062 | $456,552 | | Operating Income | $115,807 | $172,138 | $63,635 | $155,680 | | Net Income | $72,547 | $122,986 | $10,761 | $101,095 | | Diluted EPS | $0.39 | $0.67 | $0.06 | $0.54 | Condensed Consolidated Statements of Stockholders' Deficit The total stockholders' deficit improved to $(179.8) million as of July 1, 2023, primarily due to net income and equity-based compensation - The total stockholders' deficit decreased to $(179.8) million as of July 1, 2023, from $(198.0) million at the beginning of the fiscal year (October 1, 2022) This improvement was primarily due to the recognition of $10.8 million in net income and $9.2 million in equity-based compensation during the nine-month period[19] Condensed Consolidated Statements of Cash Flows For the nine months ended July 1, 2023, net cash used in operating activities was $(74.8) million, a significant negative swing from the prior year, primarily due to lower net income and increased inventories Summary of Cash Flows (in thousands) | Activity | Nine Months Ended July 1, 2023 | Nine Months Ended July 2, 2022 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(74,813) | $72,658 | | Net cash used in investing activities | $(40,898) | $(66,183) | | Net cash provided by (used in) financing activities | $22,848 | $(156,843) | | Net decrease in cash and cash equivalents | $(92,863) | $(150,368) | Notes to the Unaudited Condensed Consolidated Financial Statements These notes detail accounting policies, including the acquisition of five businesses for $15.5 million, the transition of debt facilities to Term SOFR, an increased effective tax rate, and remaining share repurchase availability - During the first nine months of fiscal 2023, the company acquired five businesses for an aggregate purchase price of $15.5 million, net of cash acquired, adding 12 new locations[32] - In March 2023, the Revolving Credit Facility was increased by $50.0 million to an aggregate of $250.0 million and transitioned from a LIBOR-based rate to a Term SOFR-based rate The Term Loan also transitioned to a Term SOFR benchmark in June 2023[47][49] - The effective income tax rate for the nine months ended July 1, 2023, was 29.9%, compared to 24.9% for the prior-year period The increase was primarily due to state taxes and tax expenses related to equity-based compensation[53] - As of July 1, 2023, approximately $147.7 million remained available for future purchases under the company's $300 million share repurchase program, which expires in December 2024[60] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 9.3% Q3 sales decrease to traffic declines and an 11.8% drop in comparable sales, leading to gross margin contraction and significant declines in net income and Adjusted EBITDA Key Financial and Operational Data | Metric | Three Months Ended July 1, 2023 | Three Months Ended July 2, 2022 | Nine Months Ended July 1, 2023 | Nine Months Ended July 2, 2022 | | :--- | :--- | :--- | :--- | :--- | | Sales | $610,891K | $673,633K | $1,018,839K | $1,086,529K | | Comparable sales growth | (11.8)% | 7.4% | (10.9)% | 10.7% | | Gross Margin | 41.2% | 45.1% | 38.1% | 42.0% | | Net Income | $72,547K | $122,986K | $10,761K | $101,095K | | Adjusted EBITDA | $129,038K | $182,942K | $108,683K | $192,734K | - Q3 sales decreased 9.3% YoY to $610.9 million, with comparable sales down 11.8%, primarily driven by traffic declines For the nine-month period, sales decreased 6.2% with comparable sales down 10.9%[101][102] - Gross margin for both the three and nine-month periods decreased by 390 basis points year-over-year This was primarily driven by product margin rate declines from increased product costs that could not be passed to consumers, higher distribution expenses, and occupancy deleverage[103] - The company's business is highly seasonal, with sales and earnings peaking in the third and fourth fiscal quarters (April-September) Unseasonable weather can significantly impact sales[114][116] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company reports no material changes in market risk exposures since its last Annual Report, noting the transition of its debt facilities from LIBOR to Term SOFR-based rates - There have been no material changes in the company's primary risk exposures, including interest rate risk and inflation, from those disclosed in the fiscal 2022 Annual Report on Form 10-K[140][141] - Due to the discontinuation of LIBOR, the company has transitioned the interest rate benchmarks for its Revolving Credit Facility and Term Loan to Term SOFR-based rates[140] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were ineffective as of July 1, 2023, due to an un-remediated material weakness in internal control over financial reporting - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were ineffective as of July 1, 2023[142] - The ineffectiveness stems from a material weakness in internal control over financial reporting, disclosed in the fiscal 2022 Form 10-K, which was not yet remediated[142] - The company is in the process of remediating the material weakness and anticipates that the remediation will be completed during fiscal year 2023[144] PART II - OTHER INFORMATION This section covers legal proceedings, risk factors, equity security sales, defaults, mine safety disclosures, other information, and a list of exhibits Item 1. Legal Proceedings The company is involved in routine litigations and claims, which management does not expect to have a material adverse effect on its financial position or results - The company is subject to various legal proceedings from the ordinary course of business, which are not expected to have a material adverse effect on its financials[147] Item 1A. Risk Factors There have been no material changes to the company's risk factors since its fiscal 2022 Annual Report on Form 10-K, except as previously disclosed in its Q1 2023 Form 10-Q - There have been no material changes from the risk factors disclosed in the Annual Report on Form 10-K for the year ended October 1, 2022, except as disclosed in the Q1 2023 Form 10-Q[148] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reports no issuer purchases of its equity securities and no sales of unregistered securities during the reporting period - There were no issuer purchases of equity securities or sales of unregistered securities in the reported quarter[149] Item 3. Defaults Upon Senior Securities The company reports that there have been no defaults upon its senior securities - No defaults upon senior securities occurred[150] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[151] Item 5. Other Information On August 1, 2023, the company's board adopted Amended and Restated Bylaws to enhance procedural mechanics for stockholder proposals and director nominations, aligning with universal proxy rules - On August 1, 2023, the company's board of directors approved and adopted Amended and Restated Bylaws[152] - Key amendments include enhancing procedural and disclosure requirements for stockholder proposals and director nominations, aligning with SEC's universal proxy rules, and updating procedures for stockholder meetings and board conduct[152] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including Amended and Restated Bylaws, an amendment to the Term Loan Credit Agreement, and various officer certifications - Key exhibits filed with this report include the Amended and Restated Bylaws (Exhibit 3.1), Amendment No 1 to the Term Loan Credit Agreement (Exhibit 10.1), and officer certifications (Exhibits 31.1, 31.2, 32.1, 32.2)[155]