Leslie's, Inc.

Good afternoon and welcome to the third quarter of fiscal 2023 conference call for Lally's Inc. At this time, all participants are in a listen-only mode. Following the prepared remarks, management will conduct a question and answer session. If you should require any operator assistance during the conference call, please press star zero on your telephone keypad. As a reminder, this conference call is being recorded. and will be available for replay later today on the company's website. I will now turn the call over to Kathleen Churchill, Investor Relations. Please go ahead.

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.lesliespool.com. On the call today from Leslie's are Mike Ejek, Chief Executive Officer, Steve Waddell, Chief Financial Officer, and Scott Bowman, Chief Financial Officer Designate. With that, I will turn the call over to Mike. Mike?

Thanks, Kaylin, and good afternoon, everyone. Thank you for joining us. Please note that we have posted a Q3 2023 earnings deck to the Leslie's IR site. and that we will be referring to certain pages in that deck during our call. As we shared in our pre-release three weeks ago, it was a difficult quarter. Low double-digit traffic declines resulted in a 12% comparable sales decline and a 9% total sales decline. In addition to fixed-cost deleverage associated with these sales, we faced unexpected in-season product cost increases and higher distribution expenses that significantly impacted gross margins for the quarter. Our ongoing analysis points to three primary drivers of our Q3 traffic and sales results. The first is weather. Our Weather Reporting Service Planalytics calculated that weather was a 5% year-over-year headwind to sales in the quarter. Weather headwinds were felt across most of our store base, and most significantly in California, Texas, and Arizona. The weather in Florida was relatively normal in the quarter, as it has been all year, and our business in Florida significantly outperformed in the quarter and year to date. Sales in Florida were plus high single digits in the quarter and are plus mid-teens year to date. The second driver was increased consumer price sensitivity. After three years of significant price inflation, consumers were not willing to absorb price increases during the quarter. This prevented us from taking the pricing actions required to maintain margins as product costs increased and also prevented us from maintaining our pre-June 1st pricing on core chemicals. As we have discussed before, we generally aim to maintain a relative price point that is above mass and just below specialty. That relative price position was out of balance for some weeks in the third quarter, which we addressed with our June 1st price actions. Those actions resulted in essentially flat year-over-year chemical pricing despite higher costs. And the third driver was that a portion of our customers had a greater than normal amount of chemicals left over from last year. This driver was validated by two separate consumer surveys, one conducted on our behalf and another that was conducted on behalf of one of our chemical partners. This consumer behavior is not something we have seen before and was surprising given the hazardous nature and useful life of these chemicals. Transactions were down 12% in the quarter, reflecting double-digit traffic declines that offset solid conversion rates. Average order value increased 3%. The traffic decline was broad-based and impacted both non-discretionary and discretionary product sales. For the quarter, non-discretionary sales were down 6%, and discretionary sales were down 24%. Global chemical sales for the quarter were down 6%, as increases in CalHypo and select specialty chemicals partially offset a 16% decrease in tricorps sales. Equipment sales were down 8% in the quarter, driven primarily by volume. The decrease in discretionary product sales was driven by hot tubs and above ground pools, as macro factors continue to impact demand for these highly discretionary, high ticket items. Non-comp sales contributed plus 3% to the quarter, driven by acquisitions and new store builds. The data we analyzed suggests that the top-line trends we are seeing are an industry-wide issue. Aggregated credit card data for the pool supplies retail category on slide 7 indicates that the industry sales ex-Leslie's were down 7.1% for the quarter. Based on total company sales, our declines were 220 basis points more than the category for Q3. That said, aggregated credit card data for the pool supplies retail category does not include hot tubs or marketplaces. And when we adjust out those two categories from our sales for a more comparable review, Leslie's performs slightly better than the industry. We are clearly experiencing a highly unusual pool season following three years of strong growth. However, the long-term fundamental advantages of the pool industry remain the same. New pools continue to be built, and the growing installed base of pools need to be maintained. As you can see on slide 8, the industry has a long track record of consistent growth, and Leslie's has consistently grown faster than the industry. We remain the leading direct-to-consumer pool and spa retailer with scale, capabilities, and brand awareness that our competitors do not have. So while our team navigates the current industry headwinds, we also remain focused on executing the key strategic initiatives that underpin our competitive advantages and that will continue to drive our long-term success as industry conditions normalize. Turning to our strategic growth initiatives. First, given the traffic challenges in the quarter, our customer files is down 8% versus the prior year's quarters. Second, average revenue per customer was down 1% in the quarter, driven primarily by decreases in big ticket items, specifically hot tubs and above ground pools. Our pool perks loyalty members continue to outperform. Loyalty member sales were down 3% in the quarter. With regard to our pro initiatives, we ended the quarter with more than 3,700 pro contracts in place and completed the conversion of 15 residential stores to our pro format prior to the start of the season. We currently operate 98 pro locations. Pro consumer group sales declined 3% in the quarter with comp sales down 13% as our pro comps were impacted by the same factors as our overall business. In addition, tricor pricing has been more pressured on the pro side as compared to the residential channel and contributed an outsized headwind to our overall gross margin performance. Our guidance for the remainder of the year assumes no change from current pricing levels. M&A and new store growth remain an important initiative for Leslie's, though we will be prudent with the pace of this initiative in the near term as we balance it against our other capital allocation priorities. M&A and new stores drew up $16 million in non-comp sales in the quarter. We also completed two acquisitions in the quarter that added five locations in the Sunbelt. Year-to-date, we have closed five acquisitions that added 12 locations, and we have another acquisition under LOI. In the quarter, we opened seven new stores, bringing the year-to-date total to 12. We remain confident in the total store expansion opportunity available to Lesley's over the long term and have identified over 800 opportunities for store densification. We will continue to address each of these opportunities with a buy or build analysis. For AccuBu Home, we were pleased to launch the program in May and have been very pleased with the consumer response and demand we have seen to date, all despite nominal marketing. While demand has been strong, we are facing supply chain constraints as we ramp up, and we are working with our vendor to increase production in order to meet consumer demand. With regards to our outlook, our guidance for Q4 assumes no improvement to the top-line trends we experienced in Q3. For a gross margin, we expect Q4 to have a full quarter impact from the chemical price actions we took on June 1st, which will be partially offset by the wind down of distribution costs associated with our peak inventory levels. We have also aggressively initiated cost management actions that, coupled with some unique SG&A comparisons, should result in Q4 SG&A being approximately $15 to $20 million lower versus the prior year quarter. In summary, we continue to have confidence in the long-term outlook for the industry, and we remain focused on prudently executing our strategic initiatives to capture the opportunities in front of us and further our industry leadership. At the same time, we are focused on taking immediate actions to improve our performance. Let me reiterate the actions we are taking. Number one, we have adjusted pricing to reflect current market conditions and are now at our relative historical price position, which is slightly above mass and home improvement and at or slightly below specialty retailers. Number two, we are aggressively managing inventory through receipt reductions. Number three, we are focused on cost management throughout the P&L, including being disciplined on our marketing investments utilizing strict ROI criteria. Number four, We continue to evaluate, develop, and elevate our processes and people. And number five, we are enhancing our consumer insight efforts to further improve our understanding of evolving consumer behavior. Before Steve discusses our results and outlook, I want to acknowledge our CFO transition. I'm very pleased to welcome Scott Bowman as our new CFO, effective August 7th. Scott's depth and breadth of public company experience spans both financial and operational areas and will be a huge asset as we return the business to growth. I would also like to thank Steve for his leadership and partnership, as well as his commitment to ensuring a smooth transition. I'll turn it over to Scott to say a few words.