Leslie's (LESL)

Pool products retailer Leslie’s (NASDAQ:LESL) fell short of the market’s revenue expectations in Q1 CY2025, with sales falling 6.1% year on year to $177.1 million. On the other hand, the company’s outlook for the full year was close to analysts’ estimates with revenue guided to $1.34 billion at the midpoint. Its non-GAAP loss of $0.25 per share was 4.2% below analysts’ consensus estimates.

Company Overview

Named after founder Philip Leslie, who established the company in 1963, Leslie’s (NASDAQ:LESL) is a retailer that sells pool and spa supplies, equipment, and maintenance services.

Some retailers try to sell everything under the sun, while others—appropriately called Specialty Retailers—focus on selling a narrow category and aiming to be exceptional at it. Whether it’s eyeglasses, sporting goods, or beauty and cosmetics, these stores win with depth of product in their category as well as in-store expertise and guidance for shoppers who need it. E-commerce competition exists and waning retail foot traffic impacts these retailers, but the magnitude of the headwinds depends on what they sell and what extra value they provide in their stores.

Competitors that sell pool and spa supplies include Pool Corporation (NASDAQ:POOL) and Hayward Holdings (NYSE:HAYW), although these companies sell more to professionals than DIY homeowners.

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but many enduring ones grow for years.

With $1.32 billion in revenue over the past 12 months, Leslie's is a small retailer, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and negotiating leverage with suppliers.

As you can see below, Leslie's grew its sales at a tepid 6.8% compounded annual growth rate over the last six years (we compare to 2019 to normalize for COVID-19 impacts).

This quarter, Leslie's missed Wall Street’s estimates and reported a rather uninspiring 6.1% year-on-year revenue decline, generating $177.1 million of revenue.

Looking ahead, sell-side analysts expect revenue to grow 2.3% over the next 12 months, a deceleration versus the last six years. This projection is underwhelming and implies its products will face some demand challenges.

Number of Stores

A retailer’s store count influences how much it can sell and how quickly revenue can grow.

Leslie's sported 1,000 locations in the latest quarter. Over the last two years, it has generally opened new stores, averaging 1.3% annual growth. This was faster than the broader consumer retail sector.

When a retailer opens new stores, it usually means it’s investing for growth because demand is greater than supply, especially in areas where consumers may not have a store within reasonable driving distance.

Same-Store Sales

The change in a company's store base only tells one side of the story. The other is the performance of its existing locations and e-commerce sales, which informs management teams whether they should expand or downsize their physical footprints. Same-store sales is an industry measure of whether revenue is growing at those existing stores and is driven by customer visits (often called traffic) and the average spending per customer (ticket).

Leslie’s demand has been shrinking over the last two years as its same-store sales have averaged 6.9% annual declines. This performance is concerning - it shows Leslie's artificially boosts its revenue by building new stores. We’d like to see a company’s same-store sales rise before it takes on the costly, capital-intensive endeavor of expanding its store base.

In the latest quarter, Leslie’s same-store sales rose 6.7% year on year. This growth was a well-appreciated turnaround from its historical levels, showing the business is regaining momentum.

At StockStory, we prefer high gross margin businesses because they indicate pricing power or differentiated products, giving the company a chance to generate higher operating profits.

Leslie’s unit economics are higher than the typical retailer, giving it the flexibility to invest in areas such as marketing and talent to reach more consumers. As you can see below, it averaged a decent 36% gross margin over the last two years. Said differently, Leslie's paid its suppliers $64.04 for every $100 in revenue.

Leslie’s gross profit margin came in at 24.8% this quarter, down 4 percentage points year on year and missing analysts’ estimates by 0.6%. Leslie’s full-year margin has also been trending down over the past 12 months, decreasing by 1.6 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to discount products and higher input costs (such as labor and freight expenses to transport goods).

Leslie's was profitable over the last two years but held back by its large cost base. Its average operating margin of 4.5% was weak for a consumer retail business.

Looking at the trend in its profitability, Leslie’s operating margin decreased by 3.5 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Leslie’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

This quarter, Leslie's generated an operating profit margin of negative 27.3%, down 11.1 percentage points year on year. Since Leslie’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, and administrative overhead increased.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Leslie's has shown impressive cash profitability, giving it the option to reinvest or return capital to investors. The company’s free cash flow margin averaged 4.5% over the last two years, better than the broader consumer retail sector. The divergence from its underwhelming operating margin stems from the add-back of non-cash charges like depreciation and stock-based compensation. GAAP operating profit expenses these line items, but free cash flow does not.

Taking a step back, we can see that Leslie’s margin dropped by 3.8 percentage points over the last year. This decrease came from the higher costs associated with opening more stores.

Leslie's burned through $55.76 million of cash in Q1, equivalent to a negative 31.5% margin. The company’s cash burn was in line with the same quarter last year and is a deviation from its longer-term margin, indicating it is a seasonal business that must build up inventory during certain quarters.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although Leslie's hasn’t been the highest-quality company lately because of its poor bottom-line (EPS) performance, it historically found a few growth initiatives that worked. Its five-year average ROIC was 20.3%, higher than most consumer retail businesses.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Leslie’s $1.00 billion of debt exceeds the $17.25 million of cash on its balance sheet. Furthermore, its 11× net-debt-to-EBITDA ratio (based on its EBITDA of $87.06 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Leslie's could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Leslie's can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

It was good to see Leslie's provide full-year EPS and EBITDA guidance that beat analysts’ expectations. On the other hand, its revenue, EPS, and EBITDA fell short of Wall Street’s estimates. Overall, this quarter could have been better. The stock traded down 9.2% to $0.64 immediately after reporting.

Updated: May 15, 2025 at 10:32 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Leslie's.

We cheer for all companies serving everyday consumers, but in the case of Leslie's, we’ll be cheering from the sidelines. To kick things off, its revenue growth was a little slower over the last six years, and analysts expect its demand to deteriorate over the next 12 months. And while its projected EPS for the next year implies the company’s fundamentals will improve, the downside is its declining EPS over the last six years makes it a less attractive asset to the public markets. On top of that, its shrinking same-store sales tell us it will need to change its strategy to succeed.

Leslie’s P/E ratio based on the next 12 months is 12x. While this valuation is reasonable, we don’t see a big opportunity at the moment. There are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $1.37 on the company (compared to the current share price of $0.81).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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