Leslie's, Inc. (LESL)·Q1 2025 Earnings Summary

Executive Summary

• Q1 FY25 delivered sales at the top end of guidance ($175.2M, +0.7% YoY) and the first positive comp in two years (+0.2%), but profitability was pressured by inventory adjustments and fixed-cost deleverage; Adjusted EBITDA of $(29.3)M landed at the low end of the prior guide, and Adjusted EPS of $(0.22) was modestly below the Q1 guide range.
• Mix and margin dynamics: gross margin fell 180 bps YoY to 27.2% on inventory optimization adjustments (~95 bps) and occupancy/DC deleverage (~75 bps). Management expects margin improvement in 2H from rebate timing tailwinds and lower transformational costs.
• Strategic execution advanced: in-stock levels improved >300 bps; “Never-Outs” precision inventory and 26 Local Fulfillment Centers (LFCs) rolled out ahead of pool season; Pro growth accelerated (+9% YoY), while core chemicals grew ~4% on positive unit volumes.
• Outlook reinstated: Q2 FY25 and FY25 guidance introduced (Sales: Q2 $179–$189M; FY $1.304–$1.370B; FY Adj. EBITDA: $96–$116M; FY Adj. EPS: $(0.01)–$0.07). Prior guidance was not provided for Q2/FY; comparisons are vs new baselines. Potential stock catalysts: execution of LFC/Pro initiatives into peak season and visible gross margin inflection in 2H as timing headwinds flip to tailwinds.

What Went Well and What Went Wrong

• What Went Well

  • First comp gain in two years (+0.2%); sales at top-end of Q1 guide ($175.2M). CEO: “We met our revenue expectations…reporting our first comparable store sales gain in two years.”
  • Pro momentum and core chemistry strength: Pro +9% YoY (transaction-led), core chemicals +~4% with positive units; in-stocks improved >300 bps supporting conversion (+160 bps).
  • Strategic initiatives: precision inventory (“Never-Outs”), 26 LFCs to tighten availability and asset utilization; mobile app upgrades (voice search, faster load, loyalty barcode) to build DIY omnichannel loyalty.

• What Went Wrong

  • Margin pressure: gross margin −180 bps YoY to 27.2% on higher inventory adjustments (~95 bps) and occupancy/DC deleverage (~75 bps).
  • Earnings below Q1 EPS guide: Adjusted EBITDA at low end and Adjusted EPS $(0.22) vs guided $(0.21)–$(0.20), reflecting transformational costs (inventory adjustments, professional fees).
  • Traffic still a watch item: DIY traffic remains the opportunity; management cited the need for marketing activation into pool season to drive traffic despite better conversion.

Financial Results

Consensus vs Actuals (Q1 FY25)

• Revenue Consensus Mean: N/A*; Primary EPS Consensus Mean: N/A* (S&P Global consensus unavailable due to request limits; see disclaimer)

Segment/Consumer Group YoY growth

Key KPIs

Notes:

• Q1 gross margin rate decline: ~95 bps from inventory adjustments; ~75 bps from occupancy/DC deleverage.
• Q1 cash from operations: $(105.1)M (seasonal build); Capex $4.7M.

Guidance Changes

Context vs prior quarter guide:

• Q1 FY25 guidance (given in Nov-2024) was Sales $169–$176M; Adj. EBITDA $(29)–$(27)M; Adj. EPS $(0.21)–$(0.20). Actual Q1: Sales at top-end ($175.2M), Adj. EBITDA near low end (−$29.3M), Adj. EPS slightly below (−$0.22).

Earnings Call Themes & Trends

Management Commentary

• “We met our revenue expectations…reporting our first comparable store sales gain in two years…profitability…impacted by…inventory adjustments and professional fees to facilitate our transformation journey.” — CEO Jason McDonell.
• “We are establishing Local Fulfillment Centers…enhancing 12 commercial service centers and 14 stores…to be LFCs…not adding new locations…little capital expenditure required.”
• “We have shifted our mindset from our previously defined 100-plus Pro stores to now leveraging our entire 1,000-store footprint to serve Pros.”
• “Our latest update on our mobile app has…new voice search…recommendation engine…easier access to Pool Perks rewards…and…technology upgrades to…reduce load times.”
• CFO: “Adjusted EBITDA [was] a loss of $29 million…due to higher occupancy cost, payroll and benefits, and…higher transformational cost that included inventory adjustments and professional fees.”

Q&A Highlights

• In-stocks and LFCs: In-stocks improved ~300 bps; LFCs already helping prevent lost sales and will backstop ~20 stores each, enabling lower store-level depth on high-ticket items and better working capital.
• Gross margin cadence: Q1/Q2 pressured by rebate timing, DC costs, and more frequent inventory adjustments; tailwinds expected in 2H as rebates flip and DC costs normalize; FY gross margin +~70 bps YoY at midpoint.
• Pro growth drivers: Predominantly transactions; focus on availability, assortment (Never-Out Pro SKUs), competitive pricing, and hours of operation; initiative impact expected to skew to Q3–Q4.
• Tariffs/wages: Minimal direct tariff exposure (domestically sourced chemicals); wage growth embedded at mid-single digits or slightly below.
• Capital allocation/store base: Priority remains debt reduction; capex guided to $35–$40M; continuous portfolio review (no closures announced).

Estimates Context

• We attempted to retrieve S&P Global consensus for Q1 FY25 (revenue and EPS) and forward periods but hit the provider’s daily request limit; as a result, we cannot determine beats/misses vs consensus at this time. We benchmarked results vs company guidance instead. [GetEstimates error]
• S&P Global disclaimer: Consensus values were unavailable due to provider limits; we will update once accessible.*

Key Takeaways for Investors

• Q1 showed early demand stabilization: first positive comp in two years and sales at top-end of guide, aided by Pro strength and core chemical units; however, gross margin headwinds persisted from inventory optimization and fixed-cost deleverage.
• Margin setup skews to 2H: rebate timing, DC cost normalization, and lower transformational costs are expected to lift 2H margins; watch Q2 margin mix as the “trough” before sequential improvement.
• Execution levers into pool season: LFC rollout and “Never-Outs” should improve availability and conversion, while mobile app/DIY loyalty enhancements aim to address the traffic opportunity.
• Pro is the growth engine: broadening Pro service across the full fleet (not just labeled Pro stores) and transaction-led growth (+9% YoY) suggests scope for sustained share gains in the segment.
• Balance sheet: inventory remains substantially lower YoY (−18.8%), revolver draw of $40M reflects seasonal build; debt paydown remains the #1 capital allocation priority.
• FY25 guidance reinstatement restores visibility: Sales $1.304–$1.370B, Adj. EBITDA $96–$116M, Adj. EPS $(0.01)–$0.07; delivery hinges on seasonal 2H volumes and successful operational execution.
• Near-term trading setup: stock likely sensitive to Q2 margin cadence and any early-season read-throughs (traffic, Pro transactions, chemicals units); medium-term thesis rests on durable availability gains (LFCs), Pro penetration, and margin recapture as transformation costs fade.

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* S&P Global consensus values were unavailable at time of writing due to provider rate limits. We will refresh when access is restored.