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Operator
Greetings and welcome to the Lesley's Inc Q2 2023 earnings conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference please press star and then zero on your telephone keypad. As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Caitlin Churchill of Investor Relations. Thank you, and you may proceed, ma'am.
Caitlin Churchill
Thank you, and good afternoon. I would like to remind everyone that comments made today may include forward-looking statements, which are subject to significant risks and uncertainties that could cause the company's actual results to differ materially from management's current expectations. These statements speak as of today and will not be updated in the future if circumstances change. Please review the cautionary statements and risk factors contained in the company's earnings press release and recent filings with the SEC. During the call today, management may refer to certain non-GAAP financial measures. A reconciliation between the GAAP and non-GAAP financial measures can be found in the company's earnings press release which was furnished to the SEC today and posted to the investor relations section of Leslie's website at ir.leslieschool.com. On the call today from Leslie's is Mike Ejek, Chief Executive Officer, and Steve Waddell, Chief Financial Officer. With that, I will turn the call over to Mike.
Leslie
Thanks, Caitlin, and good afternoon, everyone. Thank you for joining us today. Please note that we have posted a Q2 2023 earnings deck to the Leslie's IR site. and that we will be referring to certain pages in that deck during our call. I'd like to start by saying that Q2 came in at the low end of our expectations for the top and bottom line, as the performance of our non-comp business only partially offset a return to more normalized pre-pandemic seasonal consumer purchase patterns, as well as unexpected weather headwind. With regard to consumer purchase patterns, the seasonal normalization was anticipated, but not to the degree we saw in the quarter. As a result, it had a more significant impact on comp sales and gross margin. Prior to the pandemic, Q2 historically contributed about 12 to 12.5% of our total year sales, and the first half contributed about 25% of total year sales. However, last year, Q2 2022 represented an outsized contribution of 14.6% of total year sales as pandemic-driven supply chain disruptions and product shortages resulted in consumers buying earlier than normal. We estimate this 210 basis point shift in contribution increased last year's Q2 sales by about 33 million and created a corresponding 14% comp headwind in this year's Q2. With supply chain issues largely behind us and inventory for most products in the pool industry now readily available, We believe we are seeing a return to a more normalized pre-pandemic revenue contribution breakdown with 25% in the first half of the year and 75% in the second half. To be clear, we believe this change in seasonal consumer purchasing behavior is a timing shift and not a reduction in underlying demand for the year. With regard to weather, in Q2 we saw the continuation of challenging weather conditions across the west and southwest. which includes the important California, Arizona, and Nevada markets. As you will recall from our Q1 call, our weather reporting service calculated that weather was a 5% headwind to comps in the first quarter. At the time, we also shared that we were projecting more normalized weather for our fiscal Q2. That prediction proved to be incorrect, and the impact of weather to our Q2 comps was negative 3% or $7 million in the quarter. We are encouraged that in Texas and Florida, where weather followed more normal seasonal patterns, we had double-digit positive comps. Moving to our Q2 results, sales for the quarter decreased 7% to $213 million. First half sales of $408 million decreased 1%. Transactions for the quarter grew 1%, and average order value was down 8%. Our customer file was flat, and average revenue per customer was down 7% in the quarter. By consumer group, pro pool grew 3%, residential hot tub sales decreased 8%, and residential pool sales decreased 9%. Comp sales decreased 14% for the quarter, resulting in a flat two-year stack comp and a three-year stack comp of 35%. The comp for the first half was minus 9%, inclusive of a 4% weather headwind. The two-year comp sales stack was 7%, and the three-year stack was 38%. Gross profit for the quarter was $71 million, and gross margin rate was down 410 basis points. In total, 210 basis points of our gross margin decline was related to deleverage of fixed costs resulting from our comp sales decline. Adjusted EBITDA for the quarter was negative $8 million, and adjusted diluted earnings per share were negative 14 cents. As we noted our investor day in November and during our Q1 earnings call, we expected Q2 and the first half to generate negative comps, reduce gross margin rates, and negative EBITDA. Given that our second quarter and first half results were in line with the low end of the range contemplated by our initial four-year guidance, and that we expect that 75% of our annual performance is in front of us. Our outlook for the full year remains unchanged. Moving to the chart on page nine of the deck. For the quarter, total comp sales were down 31 million, or 14%, due to weather and the shift back to normalized seasonal consumer purchase patterns. Sales for non-discretionary products, xTricor, were down 3 million, or 2% in the quarter. Tricolor sales were down 10 million or 29% in the quarter. As a reminder, tricolor sales were comping against plus 96% in Q2 2022 as customers bought early in anticipation of end-season shortages. Tricolor retail pricing remained stable. Discretionary product sales were down 18 million or 38%. The decrease in discretionary product sales was driven by hot tubs and above-ground pools. as consumer confidence, weather, tax refunds, and interest rates all impacted demand for these high-ticket items. And non-com sales contributed plus $16 million, or 7% to the quarter, driven by the performance of our programmatic M&A initiative and new store builds as we continue to invest in our opportunity for increased location count. Page 10 has the same bridge for the first half. Total comp sales were down 39 million, or 9%, due to a 4% weather headwind, and the normalization of seasonal purchase patterns we believe we are seeing. Non-discretionary product sales, ex-tricolor, were down 8 million, or 3%. Tricolor sales were down 9 million, or 17%. Discretionary product sales were down 22 million, or 25%. And non-comp sales contributed plus 34 million, or 8% of sales in the half. Moving to the industry backdrop, sales across the pool and hot tub industry were down in a quarter. As you can see on page 11 of the deck, third-party aggregated credit card data indicates especially pool retailers experienced a sales decline of 11% in the quarter. This was due to three primary drivers. First, as we discussed concerning our own results, weather was a significant negative factor year over year for key markets. Second, we believe the specialty pool retail industry is experiencing the same shift to normalize seasonal consumer purchase patterns that we are seeing in our business. Third, consumers were less confident based on the challenging macroeconomic backdrop, which included higher interest rates, materially reduced tax refunds, and concerns around the stability of the banking system. Against this backdrop of lower demand, we grew market share again. The competitive advantages derived from our integrated system of physical and digital assets and our associates' strong execution of our diversified growth initiatives drove nearly 500 basis points of sales outperformance in the quarter. Turning now to the performance of our strategic growth initiatives. First, despite the macroeconomic and weather challenges in the quarter, our customer file was flat versus the prior year's quarter. Average revenue per customer was down 7% in the quarter, driven primarily by decreases in big ticket items, specifically hot tubs and above ground pools. The number of loyalty members increased 14% over the prior year's quarter as consumers continue to react favorably to the benefits of our pool perks loyalty program. With regard to our pro initiative, We ended the quarter with more than 3,300 pro contracts in place and completed the conversion of 15 residential stores to our pro format. In addition, we opened two new pro locations in the quarter and remain on track to open a third. We are currently operating 98 pro locations. Pro consumer group sales grew 3% in the quarter with comp sales down 10%. Our pro comps were impacted by the same factors we discussed for our overall business. We also saw some softening in trichlor wholesale prices from certain distributors. Given the 2023 trichlor cost structure and the industry history of rational pro pricing, we expect prices to firm up as we move into pool season. M&A was a strong contributor to the quarter, accounting for 14 million in non-comp sales. Year to date, we have closed on four acquisitions that added 10 locations, and we have another two acquisitions under LOI. Our deal pipeline is robust, and we plan to continue to accelerate this initiative. Regarding residential white space, in the quarter, we opened four new stores, and in April, we were pleased to announce the opening of our 1,000th store, an important and gratifying milestone for our business and team members. For AccuBuild Home, we have received our first production shipments of the version 2.0 device and look forward to launching this initiative later this month. Now, I'll turn it over to Steve to share more detail on our Q2 financial results.
Caitlin
Thank you, Mike, and good afternoon, everyone. For the second quarter, we reported sales of $213 million, a decrease of 7% or $15 million when compared to the second quarter of fiscal 2022. Our comparable sales decreased 14%, or 31 million. Our comparable sales growth on a two-year stack basis was flat, and on a three-year stack basis was positive 35%. Our non-comparable sales totaled 16 million in the second quarter of fiscal 2023, which was driven by eight completed acquisitions that added 27 stores, as well as 11 net new store openings since the end of the first quarter of fiscal 2022. Our comparable sales decreased by 11% for residential pool, 10% for pro pool, and 35% for residential hot tub. On a two year stack basis, we generated comparable sales growth of positive 2% for residential pool, positive 7% for pro pool, and negative 18% for residential hot tub. Mike discussed the impact of unfavorable weather and more normalized seasonal customer purchasing patterns. With products more available across the industry this year, We believe consumers are more closely aligning their purchases with their need for product during the primary pull season, which runs from May to September. This behavior would be more consistent with seasonal purchasing patterns prior to supply chain challenges created by the pandemic. It's important to note that we believe this behavior impacts the timing of sales, not the absolute dollars expected to be generated this year. Gross profit decreased 17% or 14 million when compared to the second quarter of fiscal 2022. and gross margin rate was down 410 basis points to 33.4% from 37.5% in the prior year period. Page 12 of our supplemental deck illustrates our Q2 gross margin rate bridge in more detail. During the quarter, gross margins were impacted by the following. First, business mix lowered gross margins by 45 basis points, primarily related to M&A completed during the last 12 months. Lower product margins due to higher input costs had a 60 basis point impact. During the quarter, promotional activity was stable and did not materially impact gross margins. Third, incremental distribution expenses lowered gross margin by 75 basis points, of which 55 basis points was due to the decline in comparable sales. Similar to the first quarter, distribution expenses were elevated as we executed on our plans to receive in and distribute more product to our store network earlier than last year. And finally, occupancy and other costs be leveraged by 230 basis points, of which 155 basis points was due to the decline in comparable sales. Now we'll turn to SG&A. SG&A increased 8% or $7 million when compared to the second quarter of fiscal 2022. We have been focused on maximizing efficiencies in the business and driving ongoing organizational optimizations. As a result, in Q2, we reduced core SG&A costs by $4 million, which was offset by $5 million of non-comparable costs associated with acquired businesses, higher inflationary costs of $4 million, primarily related to increased investments in our associates, and $2 million of costs associated with the organizational optimization. Adjusted EBITDA was negative $8 million for the second quarter of fiscal 2023. Adjusted net loss was $26 million in the second quarter of fiscal 2023, compared to an adjusted net loss of $3 million in the second quarter of fiscal 2022. Interest expense increased to $17 million during the quarter from $7 million in the second quarter of fiscal 2022. And our effective tax rate decreased to 25.7% compared to 33.0% in the second quarter of fiscal 2022. Adjusted diluted loss per share was 14 cents in the second quarter of fiscal 2023 compared to an adjusted net loss of one cent in the prior year. And basic and diluted weighted average shares outstanding were 184 million in the second quarter of fiscal 2023 compared to 183 million shares in the second quarter of fiscal 2022. Now I'll turn to year-to-date results. Total sales for the 26 week period decreased $5 million or 1% to 408 million from 413 million in the prior year. Our comparable sales decreased 9% or 39 million. Our first half comparable sales growth was positive 7% and positive 38% on a two and three year stack basis respectively. Gross profit decreased 11% or $16 million to $136 million from $152 million in the first half of fiscal 2022. Gross margin rate decreased by 360 basis points to 33.5% from 37.0% in the prior year of which 145 basis points was due to negative comparable sales growth in the first half of fiscal 2023. Adjusted EBITDA was negative $20 million for the first half of fiscal 2023. Adjusted net loss was $51 million in the first half of fiscal 2023 compared to an adjusted net loss of $14 million in the prior year. Interest expense increased to $31 million during the first half of 2023 from $14 million in the prior year. And adjusted diluted loss per share was $0.28 in the first half of fiscal 2023 compared to an adjusted net loss of $0.07 in the prior year. Moving to the balance sheet. We finished the second quarter of fiscal 2023 with cash of $9 million and we had $172 million outstanding on our revolver compared to cash of $52 million and $45 million outstanding on our revolver at the end of the second quarter of fiscal 2022. The reduction in net cash was primarily due to investments in inventory and higher M&A activity during the past 12 months. We ended the second quarter of fiscal 2023 with $492 million of inventory an increase of $147 million as compared to the second quarter of fiscal 2022. This is a lower increase in inventory in both dollars and percentage terms on a sequential and on a year-over-year basis. Similar to prior quarters, the increase in inventory was primarily related to chemicals, equipment, M&A, and inflation. Both the chemical and equipment product categories are nondiscretionary in nature and are not subject to technology or fashion risk. As previously stated, Our first priority has been to put the company in a position to meet consumer demand for the upcoming pool season and the decision whether to invest in inventory ahead of the season or as the season progresses was a question of timing. We continue to view our current inventory position as appropriate to deliver on our full year plan and believe that inventory levels have peaked for fiscal 2023. At the end of the second quarter of fiscal 2023, We had 794 million outstanding on our secured term loan facility compared to 802 million at the end of Q2 last year. The applicable rate on our term loan for the second quarter was LIBOR plus 250 basis points, and our effective interest rate was 7.2% compared to an effective interest rate of 3.0% for the prior year quarter. In March 2023, we amended our ABL credit facility to replace the existing LIBOR-based rate with a termed SOFR-based rate as an interest rate benchmark and to increase our revolving credit commitments to $250 million from $200 million to account for our growth over the last few years. Other material terms of the facility remain substantially unchanged, including the maturity date of August of 2025. At the end of the second quarter, we had availability of $67 million on our revolver. We believe borrowings on our revolver have peaked, and we expect to fully repay all ABL borrowings during the third quarter. Before I wrap up on our year-to-date performance, I'd like to share a final preseason update on our supply chain readiness. In November, we discussed specific actions we were taking to improve our supply chain across three key areas. First, expanding capacity by implementing a two-shift, seven-day-a-week model during pool season for our distribution centers, and by adding additional 3PLs to our network. Second, stocking more inventory across our network. And third, diversifying our supplier base. Based on the efforts of our associates and in collaboration with our vendor partners, we've significantly improved our preparedness for pull season by executing these initiatives and our team is focused on and well prepared to meet consumer demand across our entire network. Before I turn to our outlook, I want to put our first half performance in context and speak to the natural seasonality within our business. Our primary selling season occurs during our fiscal third and fourth quarters, which span April through September. We invest in our business throughout the year, including in operating expenses, working capital, and capital expenditures related to our initiatives. While investments made during the first half of the fiscal year impact reported earnings and cash flow, they are critical for driving performance and share gains during our primary selling season in the third and fourth quarter. Based on performance for the first half of the year, which is in line with historical seasonal trends prior to the pandemic, we are reforming our outlook. And while we are tracking within the dollar ranges on the line items included in our outlook, the early read from first half gross margins suggests we could experience some incremental pressure on the range of gross margin rates for the year. With 75% of our annual sales and all of our profit ahead of us, our teams remain steadfastly focused on superior execution for pool season 2023. We're excited to kick off pool season, and we're grateful for our team who continues to tirelessly execute against our initiatives and focus on serving our customers. And with that, I'll hand it back over to Mike. Thank you.
Leslie
Thank you, Steve. The pool and spa industry has proven over time to be one of the most durable and advantaged consumer products categories. and the fundamental drivers of the aftermarket pool business remain intact. Pool care is complex. Pools require routine, ongoing, needs-based maintenance, and the installed base of pools in the U.S. has grown every year for 51 years and continues to grow. Also, importantly, there are secular tailwinds that will continue to drive industry growth. Consumers are investing in their homes and backyards, moving to the Sunbelt and Xherbs, pursuing outdoor lifestyles, working from home, increasing attention to safety and sanitization, and adopting new technologies. Despite the fundamental long-term advantages of our industry and the ongoing secular tailwinds, Q2 and the first half performance for Lesley's and the industry were influenced by unfavorable weather and the greater than anticipated normalization of consumer purchase behavior. the latter which we believe is simply a timing factor. These dynamics notwithstanding, we are encouraged that applying a normalized pre-pandemic first half, second half contribution split to our first half results indicates our full year sales and earnings guidance is still appropriate. We feel good about our first half execution and the continued market share gains we have delivered in the face of an unpredictable backdrop for our industry. Our results are a testament to our teams continuing to perform at a high level, the competitive advantages of our integrated ecosystem, and to the ability of our diversified strategic initiatives to drive market share gains even against a very dynamic backdrop. Importantly, we feel very good about the investments we have made in preparation for the 2023 pool season. Specifically, investments in inventory. After three years of intermittent out-of-stocks, our teams are thrilled to have their stores full and to know that we have replenishment stock ready to go. Investments in our supply chain, new leadership, new talent, new processes, such as two-ship, seven-day-a-week operation at our distribution centers. New infrastructure, a 3PL partner for the Northeast region, and additional chemical warehousing in Texas. and investments in our marketing initiatives that have given us more customers, more pro partners, and more loyalty members to serve. With these investments and the return to more normalized industry conditions, our store and digital teams are confident about winning this pool season, and the leadership team and I share that confidence. With that, I will hand it back to the operator for Q&A.
Operator
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star and then one on your telephone keypad. A confirmation tone will indicate your question is in the question queue. Please limit your questions to one question and one follow-up question. You may press star and then two if you would like to remove your question from the queue For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. One moment, please, while we . The first question comes from Stephen Forbes from Guggenheim Partners. Please proceed with your question, Stephen.
Stephen Forbes
Good afternoon, Steve, Mike. I wanted to start with customer file trends. So curious if you could sort of talk about the file performance during the quarter, because I think flat was better than the internal expectation. Maybe confirm that. And then, Steve, if you can, and Mike, just comment on what gives you confidence, right, to reiterate the sales guidance, because I also believe the expectation for file growth or the expectation was file growth returning was in the back half of the year. So just any comments on file growth and the trajectory of it.
Leslie
Yeah, sure, Stephen. Thanks. Thanks for the question. Yeah, we're pleased with the customer file being flat for the quarter. You know, weather was a headwind, but not as significant a headwind as was the shift in consumer purchase patterns. So to be flat, we feel good about. I think what we're seeing is that people continue to come into the stores and onto the sites. Traffic is down slightly, but not anything significant. And what we're seeing instead is smaller purchases, and you can see that reflected in the average order value. The bigger question, and I think the question for the quarter is your second one, on why do we feel confident in maintaining our outlook? Frame it up this way. We expected some return to a more normalized purchase behavior once the supply chain issues were handled in the industry. And for sure, pool owners have said pandemic supply chain issues are over. They see that the stores have plenty of inventory. Online has plenty of inventory from us and from our competitive set. So given that return, I think the best proxy to how we're thinking about our year and what gives us confidence in delivering it is to go back and look at 2019, the last year pre-pandemic. It's public information in our S-1. And what you'll see there is a first half, second half split on sales, 25% to 75%. And you'll see a first half, second half split to EBITDA of minus 7 and 107. And if you apply those splits to our first half results, you'll see that we're solidly in the range of our outlook. Steve, I don't know if you want to add anything more to that explanation.
Caitlin
Yeah, that's well said. I think it put a finer point on it when you think about the shift that we saw in the second quarter last year. It was about 14.6% of the population. of the year, and you compare that to pre-pandemic, probably closer to 12 to 12 and a half. So we look at it being about a 200 basis point shift on a $1.6 billion rounded number for the year. That gets you about $33 million. So those are purchases we expect to get. But as Mike said, that purchases are likely going to occur closer to pool season. And what we've seen year to date is folks buying some of the smaller sizes as they buy to the need.
Stephen Forbes
And then just a quick follow-up, Steve, the caveat on gross margin, right, is potential for some incremental pressure. Can you provide some additional context on what sort of pressure points that would be? It seems like it may be occupancy and merge margin, but any color on what you're trying to call out there?
Caitlin
Sure. Thanks for the question. So fairly consistent with how we talked about the second half back in February. As we look in, I'll go through the four main components we always talk about. Business mix, we expect that to continue to moderate as we get into the second half, given the acquisitions become a much smaller part of the overall business in the second half. DC expense in the second half of last year was elevated due to the challenges we had in the New Jersey distribution center and the vendor delivery cadence overall. This year we brought in a lot of that inventory early and positioned it across the network, so not going to have the same cadence of spend from a distribution perspective. Occupancy normalizes as well. As we get into the back half of the year, larger sales, improved comps will help that moderate. And then the final piece is really around product rate, and this is the area that we kind of highlighted as potentially driving some of the exposure. Our expectation is that we'll continue to see some pressure related to the industry cost increases based on current retail pricing levels. Expectation is that we will see some retail price increases prior to season, but we've not seen it occur. And so it's too early to update the formal guide given we're not to Memorial Day yet and we haven't kicked off season. But that's where we would see potential pressure in the back half of the year.
Stephen Forbes
Thank you.
Operator
Thank you. The next question comes from Simeon Gutman from Morgan Stanley. Please proceed with your question, Simeon.
Simeon Gutman
Hi. Thanks for taking the question. And this is Hannah Pittock on for Simeon. If you had to kind of quantify the relative impact of unfavorable weather versus a shift back to a more historically normal seasonal cadence, kind of independent of weather, how would you parse those out? you know, one, if it's primarily one or the other, how does that impact your expectations to recapture those sales? And if there's any historical context of a similar kind of weather push, you know, should we think about that demand getting pushed into next quarter versus, you know, poor weather leading to some destruction of demand?
Leslie
Yeah, thank you for the question, Hannah. The best way to look at it is on half, I would say. And for the half, Weather impact, and we use Planalytics as our weather service provider, calculated a 4% headwind due to weather for the half. And then in terms of the change in consumer purchase patterns for the half, that's about an 8% headwind. And in our range of outcomes for the quarter, we had expected that return to normalize purchase behavior. We weren't sure if we'd get all of it. in the corridor or not, looks like it all moved, which is fine in our estimation, and that we do expect to recover in the second half. The weather to date, we should also be able to recover from, whether this early season pushes out things like pool openings. I think pool openings are probably a good example of what we're seeing in terms of a change in patterns from the consumer. Our pool openings in the first half were down 36% versus the prior year. But our pool opening schedule, and this is one of the few areas of the business where we actually have a forward order book, are plus 48% in the second half. So it's a good indicator of that shift. We'll recover. We'll be up in our pool opening business for the year. We feel quite confident about that. In terms of the weather, if weather continues to be poor into the pool season, then we do run the risk of losing some pool days, if you will. But the best historical context for this, I'd say, would also be 2018, 2019, a somewhat similar dynamic. And we expect to recover most of that in the second half.
Simeon Gutman
Understood. That's helpful. And maybe as a quick follow-up, you mentioned some softness in those high ticket durables, which we're kind of seeing across a lot of sectors. Would you think that's being driven by consumer weakness, maybe high inflation, and that that demand is maybe being pushed out? Or is this kind of a continued digestion of demand that was pulled forward during kind of peak pandemic time?
Leslie
Yeah, I think our comp for hot tubs and above ground pools in the first half last year was plus 46%, which is outside of the seasonal norm. First half this year, we're down 11%. So didn't give all of it back, but gave some of it back. And what's driving the decreases in the half for a big-ticket item like this, a good portion of our hot tubs, which have an average price point of over $8,000, are actually financed. And with interest rates where they are, we have seen that be a headwind to the business.
Simeon Gutman
Understood. Thank you. Yep.
Operator
Thank you. The next question comes from Dana Telsey from Telsey Advisory Group. Please proceed with your question, Dana. Dana, you may proceed with your question. If your line is muted, please unmute your line so that we can hear your question.
Dana Telsey
unfortunately we cannot hear anything from dana's line we will move on to the next question which comes from garrick schmois from loop capital markets please proceed with your question garrick oh hi thanks uh for taking my question um i wanted to ask on the some of the stronger markets that you cited uh texas and florida i think if i heard you correctly those were not weather impacted markets and you had double digit comps there um i was wondering What was driving some of the growth in some of these stronger markets and if there was any reads that you could provide from the markets that might have been up to the overall maybe underlying health of the business?
Leslie
Yeah, Gary, great question. Like I said in our prepared remarks, we're very encouraged by what we saw in Texas and in Florida where weather was what I would call normal. You know, those are significant markets for us. And we saw sales in those markets, given some of our M&A, actually up in the low teens on a comp basis, they were double digit. And I think what it's telling us is, and what we're seeing as the season progresses is, where we get normalized weather, we're seeing nice reaction from our consumers and nice, healthy growth.
Dana Telsey
Okay, thanks for that. The follow-up question is just, I don't know if you could provide an update on how April has progressed and if there's any recent data points that could support your sales outlook.
Leslie
Yeah, I would say April is responding like Florida and Texas did in the second quarter. Where there's been good weather, the results have been good. But to be clear, April weather, the first three weeks in particular, was not favorable. It got better in the last week, but we saw some turnarounds. California had been very challenged. It was down 21% in the second quarter. We saw that turnaround, some in April, but then the weather in Texas got more challenging with the storms. So I think the conclusion that we're drawing is that weather's definitely been a headwind, but where we've had good weather, we have seen good results. Got it. Thanks for the help.
Operator
Thank you. The next question comes from Jonathan Matuszewski from Jefferies. Please proceed with your question, Jonathan.
Jonathan Matuszewski
Hey, good afternoon. Thanks for taking my question. First one was on inventory, just related to the end-of-quarter balance there. It sounds like pro-customers seem still resolute in believing trichlor prices will come down. Presumably they've been maybe relying more on safety stock until that happens. Do you have a sense of how much safety stock your pro customers have to run through before they need to purchase in greater quantities? And I guess similar question for the homeowner, although I presume safety stock is less of a relevant concept here. Just trying to get a sense of kind of, you know, it sounds like this is going to be the peak for inventory and you're going to kind of, you know, focus on working down that inventory and convert to cash flow. So just trying to get some sense around that dynamic. Thanks.
Leslie
Yeah, Steve, why don't you take inventory, then I'll address the pro-trichlor situation.
Caitlin
Sure. So yeah, so inventory settled at $492 million for the quarter, up $147 million over last year. That's actually a smaller decline than we saw, or sorry, smaller increase than we saw in the first quarter. And if you look at the sequencing of inventory increases in the back half of last year, we saw positive increases in inventory in both Q3 and Q4, highly unusual. And if you go back in the years I've been here, we have never increased inventory in the back half of the year. Because of the supply chain challenges and the shortages, we accepted that inventory and began to build up for the season. Feel very good with where we're at going into season. If you look at the year-on-year change in Q2, primarily around chemicals. So if we go back the last couple quarters, a lot of the discussions we were having was around the increase in inventory related to equipment. So at this point, going into season, heaviest use from a chemical perspective, we feel very good with our current inventory balances. The top two contributors to inventory increase were still the chemical and equipment categories, which we've talked a lot about being non-discretionary in nature. So feel good with where we're at. And as you stated, I absolutely believe that we're at peak and we have an opportunity to materially decrease our inventory levels into year-end and beyond.
Leslie
And Jonathan, for the second part of your question, the cost structure for trichlor in 2023 is definitely up. There is, I would say, some probable carryover inventory from the prior year. Very hard for us to tell how much that would be. But I think the dynamic we see is with higher costs, we actually expect pro trichlor pricing to go up as we get into season. The pros themselves are expecting trichlor prices to go down. So we have a little bit of a stare off going, I think, in the industry there. And it'll work itself out as we get into season. But for right now, it is meeting results, I would say.
Jonathan Matuszewski
Gotcha. That's helpful. And I guess just a quick follow-up on that last point. You know, the midpoint of your guide assumes trichlor pricing down, I think, around 12.5%. Looks like a 50-pound bucket of 3-inch tabs is still sitting around $250 today. So not far off from all time, you know, peak prices. So, you know, I guess should we anticipate a revision to guidance maybe, you know, going into next quarter just given, you know, expectations for trichlor deflation across all three scenarios?
Leslie
Yeah, the answer, Jonathan, is we're really not going to have great insight into pricing until we get into Memorial Day weekend. You know, that's true of every season. I'd say particularly true of this season. However, year to date, we've seen very stable pricing in trichlor in the residential markets. And we haven't seen any reason for that not to continue. As I said, in the pro markets, we would actually expect now trichlor to potentially go up some. It hasn't. So we'll have to wait to see how the season plays out. But right now, we're feeling very positive. about the direction of trichloro pricing, both residential and we believe pro as we get into season.
Jonathan Matuszewski
That's helpful. Best of luck.
Leslie
Thank you.
Operator
Thank you. The next question comes from Kate McShane from Goldman Sachs. Please proceed with your question, Kate.
Kate McShane
Hi, good afternoon. Thanks for taking our question. We wanted to ask a question around market share gains. I think you had mentioned in the prepared comments you had gained around 500 basis points of market share during the quarter. We wondered if you could help us understand what the assumption is in your guidance for market share gains, if you've seen any kind of acceleration, and is this a like-for-like comparison, meaning you're not incorporating M&A when accounting for the market share gains?
Leslie
Yeah, thanks, Kate. This is Mike. Thanks for the question. I'll answer the second part of the question first. We do count M&A as market share gains, and we've been consistent since the IPO that part of our growth strategy is and will be programmatic M&A, and we do see it as a way to gain market share. So it's included in the numbers. And just for a slight correction, the 500 basis points is sales outperformance versus industry. It doesn't exactly correlate to market share gains, but it does definitively say that we are gaining share. So we look at it a little bit differently, and that's based on aggregated credit card data that we receive for the industry, and specifically for specialty pooled retailers. So I think I think that answers questions on how we look at it, sales versus sales outperformance that leads to market share gains, and then also the inclusion of M&A. And in terms of our outlook, we don't intrinsically assume market share gains in our outlook, but clearly our intent is to grow faster than the market each year.
Kate McShane
Thank you.
Operator
Thank you. The next question comes from Peter Keith from Piper Sandlow. Please proceed with your question, Peter.
Peter Keith
Hi. Thanks. Good afternoon, everyone. I wanted to ask about inflation. So, obviously, there's always a lot of focus on tricolor, but I guess I was curious around other pockets of your business, other areas of chemicals or equipment, if you're seeing inflation. And maybe, Steve, it sounds like maybe you are, and that's contributing to what could be gross margin pressure. Just wondering if you can frame up some of those other categories for us and what you're seeing with the pricing and the magnitude.
Leslie
Yeah, Peter, maybe I'll start on just overall inflation and we can talk about inflation on the cost side, which Steve mentioned around margins. We had put in our outlook about 5% inflation over the course of the year. We expected to come out a little higher than that and moderate during the year. That's what we're seeing. In the first half, we had inflation, I would say, in the high single digits. It's coming down, and we do expect our 5% inflation factor in our outlook to still be a reasonable assumption for the full year.
Caitlin
From a product category perspective, Peter, it primarily centers around chemicals this year. There were some, I think, more routine price increases on the equipment side, but the large increases from a product perspective were really around trichlor and calhypo. On the cost side, fairly consistent themes. You've seen increases from a labor perspective or payroll perspective. I've seen increases from a marketing perspective, as you think about digital marketing costs. And again, when we look at the last 12 months, we recall that most of the costs below the line, SG&A increases from an inflation perspective, really started in the third and fourth quarter. And so we're going up against, in the first half here, kind of lower compares. So while we saw some increased inflation in the second quarter on the SG&A side, I would expect that to moderate as we get into the back half.
Peter Keith
Okay, that's helpful. I wanted to pivot back to inflation. I'm sorry, not inflation, the other I word, inventory. A little bit on the heels of what Jonathan was asking. So supply chains have normalized, you've maintained elevated inventory on the risk of supply chain. So can you give us a sense of where you think inventory lands by year end and maybe even longer term? Is there a way to think about targeted inventory levels on like an inventory turn or inventory days basis?
Caitlin
Yeah, great question, and I'll take a shot at that, and then, Mike, you can add to it. When you think about where we're at from an inventory position today versus pre-pandemic, it's certainly elevated and very intentional. As we typically think about buying in the season, we typically would buy into early June, enough supply, I should say, when we kick off season to get us through early June and then work on replenishment. This year we've effectively bought through June into early July. We still have a substantial amount of replenishment required to get through the end of the year. So when we think about the $492 million relative to call it 900 plus million of cost of goods for the full year, we have plenty to go from a procurement perspective. But we have brought inventory in earlier, so we control our own destiny and we control the replenishment cycle, particularly early in the season. which is where we saw some challenges last year. As we think about what our targets are going forward, we've just implemented a new inventory system, as well as a merchandise financial planning system, and so we expect to get significant dividends out of that investment, which will help with the procurement and purchasing, as well as the analytics at a category and SKU level, ultimately down to kind of a gross margin return on investment. For today, what I would tell you is that we see opportunity to get below, materially below where we finished last year. The cadence of purchases for inventory will look very different than they did last year. And I made the comment earlier that in the second half of last year, we increased inventory, which is just not typical from a seasonal perspective in our business. So the team is reviewing on a weekly and monthly basis and very focused on recouping some of the investment that we've made now that we're on the doorstep of season.
Peter Keith
Thank you very much. Oh, go ahead.
Leslie
No, Peter, I was going to say I didn't have anything to add, so thank you.
Peter Keith
Okay. Thank you both. Appreciate it.
Operator
Thank you. The next question comes from Andrew Carter from Stifel. Please proceed with your question, Andrew.
Andrew Carter
Hey, thanks. I wanted to ask about the product margin. I know that it's early in the season, but if I'm not mistaken, product margin actually deteriorated from 1Q to 2Q. Was that mix-driven or a greater imbalance between price and inflation? And I know that you've stated Tricor has been steady, but the other side of it is there's a lot of inflation on other chemicals. I know your plans are to get pricing in that, but you're also very market by market. So are there a lot of markets out there where you're just not seeing the pricing and not taking it? Are there select? Anything you can help us with with that kind of key point in your gross margin guidance for the year?
Caitlin
Sequentially, Q1 versus Q2, it is related to increased product costs. We saw some product cost increases in late Q1, early part of Q2, and so that absolutely is having an impact on the quarter-over-quarter impact for the year or for the first half. We would expect that trend to continue as we get into Q3 and Q4 as well, which is why we've talked about some of the potential pressure in the back half of the year. As you think about pricing across the country and as you talk about from a market-by-market perspective, that's generally more from a pro perspective. From an overall company perspective on the residential side, based on the omnichannel approach, we've got more consistent pricing. Pricing will deviate when we go on promotion, but it's typically more consistent across the country. We've been very proactive, raising prices, testing into prices, but one of the comments we made back in November as well was that our expectation was that prices would increase, but if they don't, we've got the ability to compete, and that's what we're doing. So taking a very tactical approach, as you say, market by market, to ensure that we're price leaders on the way up, not on the way down, but making sure that we remain competitive in the markets in which we operate. So I'll pass it on.
Leslie
Yeah, Andrew, just for a little more color on that, our chemical business in the first half was up 2%. And that was pretty evenly balanced between increases in price and decreases in volume. So we are getting some price, more specifically on the residential side. And on the pro side, as you pointed out, it tends to be very localized pricing. We're being competitive. But as I said earlier, we do expect, based on cost structures, for pricing to get a little firmer as we get into the meat of the pool season.
Andrew Carter
Thank you, guys. I'll pass it on.
Operator
Thank you. The next question comes from David Billinger from MKM Roth. Please proceed with your question, David.
David Billinger
Thanks for the question. Going back to your guidance, You mentioned the normalization back to 2020 levels, expectations for 75% of sales still left ahead of you this year. If that's the case, I mean, full year revenues could be tracking towards the upper end of your guidance range. I know that's a sensitive calculation to make and maybe oversimplifying things, but why could that be the case given the slower first half and just some of that weather comments for April? It seems like trends improved somewhat to date, but kind of clear acceleration into Q3. Can you just help us square all that away and just what it means in terms of the guide for the balance of the year?
Leslie
Yeah, David, the first thing I'd like to clarify is I was quoting 2019. So the last of the pre-pandemic years, if you would, and the last year that was, unlike the last three, you know, really impacted in terms of purchase timing. due to supply chain challenges and product shortages. I mean, 21 and 22 consumers were very concerned about scarcity of product during pool season, as were we. And we at one point last year in the first quarter actually sent a letter to our loyalty file saying, you know, we couldn't guarantee product availability in the second half and encouraged them to purchase early prior to the pool season. And whether on their own or because of that letter, we saw a lot of that. And that was that, you know, 210 to 260 basis point increase in last year's Q2 in terms of the total year's contribution. So when we're thinking about this year, we really need to go back to 2019. Products readily available now and pool owners are buying to need. And that is historically, and we have multi-multi-years, decades of a very similar contribution pattern on sales of 2575. And as we've talked about before, last year was the first year in Q1 that the company had positive EBITDA. That's also not the norm. The first half historically has been a minus 7% range, and the second half has been plus 107%. So as I said to the first question of this afternoon, was that if you apply our first half results to those ratios for a normalized pre-pandemic year, yeah, that does give us quite a bit of confidence in our current outlook, despite some of the challenges we're seeing early in the season with regard to weather.
David Billinger
helpful clarification. And I want to follow up on the smaller purchase sizes, the smaller AOVs. So what's missing in the basket now? Is it simply some of those splurgy discretionary items you saw over the last couple of years? Or are you seeing some kind of pullback to the lower priced items, maybe delaying some maintenance or buying closer to need like you've been talking about? Anything of that nature starting to play out as Q2 progresses?
Leslie
Yeah, I think the way to think about Q2 and the AOV being down 8% is about half of it is the decrease we saw in the quarter, which was about 30%, in above-ground pools and hot tubs. Those carry an $8,000-plus average selling price. So when those go down in that magnitude, it impacts the AOV for the entire assortment. That's about half of it. The other half of it, is purchases of smaller sizes of chemicals. And a good example of that is trichlor. The penetration of 35-pound buckets of TABS versus 20-pound buckets of TABS has changed about 1,000 basis points over the last few years. And now we're seeing that back to the same type of contribution level that we saw again in 2019. Now think about it last year, you're going into season, you know what you probably need for the full season. You're assuming there's going to be some shortages. You're seeing shortages. So you're buying the bigger bucket. You're buying a 35 pound bucket or maybe even a 50 pound. And all you needed to buy at that time to need was a 20 pound. Then you'd come in later in the year and get another 20 pounder. So it's that type of thinking and that type of purchase behavior that that is driving that, you know, 200-plus basis point shift out of Q2 into Q3 and getting us back to that, again, the 2019 pre-pandemic, pre-product shortage, what I'm going to call a normalized purchase cycle from the pool owner.
David Billinger
The detail, best of all.
Operator
Thank you very much. At this time, there are no further questions. I'd like to turn the call back to Mr. Mike Ejig for closing remarks. Thank you, sir.
Leslie
Yes, thank you, Claudia, and thank you all for joining us. We look forward to getting back in front of you in August. We can report on the pool season, which will be in full swing at that time. Thank you very much.
Operator
Thank you very much, sir. Ladies and gentlemen, that does conclude today's teleconference. Thank you very much for joining us. You may now disconnect your lines.
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