Leslie’s Ramps Up M&A As Opportunities Increase In Challenged Industry (NASDAQ:LESL)

A Quick Take On Leslie’s

Leslie’s (NASDAQ:LESL) reported its FQ1 2023 financial results on February 2, 2023, beating revenue but missing EPS consensus estimates.

The firm provides pool and spa care products and services in the United States.

Given the prospect of a macroeconomic downturn ahead and management’s cautious statements, I don’t see a compelling case for bullishness in the near term.

Accordingly, I’m on Hold for LESL for the time being.

Leslie’s Overview

Phoenix, Arizona-based Leslie’s was founded in 1963 to create a network of retail locations providing pool and spa products and services.

Management is headed by Chief Executive Officer Michael Egeck, who has been with the firm since February 2020 and was previously CEO of PSEB Group, a company comprising the Eddie Bauer brand and PACSUN teen retailer.

The company’s primary offerings include:

• In-store testing

• On-site installation and repair

• Equipment, parts and accessories

• Chemicals

Leslie’s Market & Competition

According to a 2020 market research report by IBISWorld, the U.S. market for swimming pool equipment has contracted by an average of 1.1% from 2015 to 2020.

In 2019, revenue was expected to decline by 4.3%.

Another report expects the global pool equipment and maintenance market to grow at a CAGR of 10.8% from 2016 to 2022, reaching $17 billion in total value.

Also, the North American region will likely continue to account for the highest demand by region, with the residential segment representing the largest contributor by market segment.

Major competitive or other industry participants include:

• Mass market retailers

• Manufacturers

• Distributors

• Service providers

Leslie’s Recent Financial Performance

• Total revenue by quarter has followed the trajectory below:

• Gross profit margin by quarter has produced the following results:

• Selling, G&A expenses as a percentage of total revenue by quarter have varied due to seasonality:

• Operating income by quarter has also fluctuated accordingly:

• Earnings per share (Diluted) have also varied per season:

(All data in the above charts is GAAP)

In the past 12 months, LESL’s stock price has dropped 34.6% vs. that of the Nasdaq 100 Index’s drop of 13%, as the chart indicates below:

Valuation And Other Metrics For Leslie’s

Below is a table of relevant capitalization and valuation figures for the company:

Click to enlarge

(Source – Seeking Alpha)

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:

Assuming generous DCF parameters, the firm’s shares would be valued at approximately $12.35 versus the current price of $12.88, indicating they are potentially currently fully valued, with the given earnings, growth, and discount rate assumptions of the DCF.

Commentary On Leslie’s

In its last earnings call (Source – Seeking Alpha), covering FQ1 2023’s results, management highlighted the drop in demand for the pool and hot tub industry as a whole due to weather impacts and a drop in consumer confidence.

The firm’s plan to ‘convert 15 PRO locations and build three new PRO locations in 2023 remains on track,’ with all new locations scheduled to begin operating before the pool season starts.

Management has been active on the M&A front, closing on two deals and adding five more acquisitions under LOI that would represent an additional 13 locations.

The company plans to accelerate its M&A plans as the challenging economic conditions in the pool and hot tub industry have created more opportunities at attractive prices.

As to its financial results, revenue rose 6% year-over-year, to a record amount of $195 million, while average order size increased by 7%.

Gross profit dropped by 3% as did gross margin, impacted primarily by a change in business mix, M&A deals and higher input costs.

SG&A costs grew by 16%, due to inflation and the impact of acquisitions.

For the balance sheet, the firm finished the quarter with $2.7 million in cash and equivalents and $877.2 million in total debt.

Over the trailing twelve months, free cash used was $24.2 million, of which capital expenditures accounted for $32.0 million. The company paid $11.6 million in stock-based compensation in the last four quarters.

The firm has an ‘elevated inventory position’, which management defends as necessary to meet consumer demand given the ‘uncertainty of supply.’

Looking ahead, management reaffirmed its previous guidance despite ‘expecting a more uncertain macroeconomic environment in fiscal 2023, up to and including a recession that will pressure industry sales, margins, and earnings growth.

80% of the firm’s sales come from non-discretionary items, so management believes its business has a durable basis in all economic environments.

As for valuation, my discounted cash flow calculation indicates the stock may be fully valued at around $12.90 per share.

Given the prospect of a macroeconomic downturn ahead, I don’t see a compelling case for bullishness in the near term.

Accordingly, I’m on Hold for LESL for the time being.