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spk11: 24 conference call for Leslie's. 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 Matt Skelly, Vice President of Investor Relations.
spk12: 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 will 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. We have also posted our Q2 2024 earnings presentation to our IR website, and we'll be making references to it in our prepared remarks. On the call today is Mike Ejek, Chief Executive Officer, and Scott Bowman, Chief Financial Officer. With that, I will turn the call over to Mike.
spk08: Thanks, Matt, and thank you all for joining us this afternoon. Our bottom-line financial performance in the second quarter was largely in line with our expectations. Top-line sales were impacted by cool and wet weather in our seasonal and non-seasonal markets, as well as a pool and spa consumer that continues to normalize their post-pandemic spending patterns. I am pleased with the team's performance in the quarter as we executed well against the factors within our control. We saw improved conversion from healthy in-stock levels and competitive price positioning across our channels, and we delivered on our inventory goals while providing superior customer service and disciplined expense management. Since it's been nearly six months since we provided our planning assumptions for the year, I want to remind everyone how we are thinking about our annual guidance. At the midpoint, we planned the following for the year. Discretionary product sales down 10%. Equipment sales down 10%. Non-discretionary product sales up 1.5%. AOV down 4% driven by mix and the cycling of our June 2023 chemical price adjustments. and transactions up 3%, driven by normal weather. You will hear from us today that the majority of these factors are performing in line with expectations, with the exception of weather and the associated impact on traffic and transactions. During the quarter, the weather was much cooler across key non-seasonal markets, including Texas, Southern California, Arizona, and Florida. This resulted in significantly fewer consecutive days above the critical 70 degree threshold versus the same period in the prior year and or the 10 year averages for these markets. Weather was also a factor in our seasonal markets with pool openings down 19% year over year driven by a cool and wet spring. Turning to our financial results for the quarter. Total second quarter sales were 189 million down 11% year over year. This includes an approximately 440 basis point impact from our June 2023 chemical price actions and the Q2 calendar shift that Scott will detail later in the call. Residential pool was down 12%, pro pool was down 9%, and residential hot tub was down 14%. Comp sales were down 12%. Given the weather I just discussed, traffic was down 10% in the quarter. Total transactions were down 6% year over year. Our focus on customer service, product availability, competitive pricing, compelling assortments, and value messaging drove increases in customer conversion that offset a significant portion of the traffic decline. Average order value was down 5% year over year. Average order value continues to be affected by sales of high-ticket discretionary products, including hot tubs, above-ground pools, and heaters, as well as our June 2023 chemical price changes. Non-discretionary product sales were down 11% versus a year ago. Total chemical sales decreased 11%, inclusive of a negative 575 basis point impact from our June 2023 price adjustments. However, volume of CalHypo and Trichlor was down only 1%, and we were encouraged by the sequential improvement in key chemical volumes each month during the quarter. Sales of equipment were down 10%, an improvement of 800 basis points from Q1, and consistent with our expectations at the midpoint of our full-year guide. Discretionary product sales were down 13%, an improvement of 600 basis points from Q1, and contributed about 24% of the quarter's total sales decline. Of note, rain and or snow across many of our seasonal markets prevented installation crews from delivering and installing hot tubs and swim spas, cancellation rates remain very low, and our order book at the end of the quarter is supportive of the midpoint of our full-year guide. As you can see on page 11 of our earnings presentation, our regular analysis of select credit card data indicates that our sales underperformed the industry by approximately 850 basis points in the quarter, of which approximately 380 basis points is attributable to our June 2023 chemical price changes and the calendar shift. However, our vendor discussions, district and store manager discussions, customer exit interviews, and data from similar web for our digital businesses all indicate our Q2 performance is broadly in line with the industry, X the chemical price change. Looking across a longer time horizon, the credit card data indicates that specialty pool sales were down in eight of the last ten quarters. Over those 10 quarters, we have grown sales faster than the industry by an average of approximately 380 basis points. With respect to profitability, gross margin decreased 464 basis points, driven primarily by the impact of the chemical price reductions we implemented in June 2023 and occupancy deleverage. Gross margin was largely in line with our expectations with the exception of the incremental occupancy deleverage associated with lower than expected sales. Adjusted EBITDA for the quarter was negative 19 million and adjusted diluted earnings per share was negative 17 cents. As a reminder, our fiscal second quarter, like our first fiscal quarter, is historically a relatively small sales quarter during which we make investments and incur costs to position the company for the peak pool season in our fiscal second half. As such, we expect no profit contribution in these quarters and our performance this year was consistent with these expectations. With regard to the industry backdrop, certain categories and channels have seen some instances of deflation year to date. but overall industry retail pricing is largely stable, and we remain competitively priced across our omnichannel platform. Industry promotional activity continues to be consistent with historic seasonality, and we are using advanced analytics to be more surgical on when and where to promote most effectively. Supply chains are operating normally, and inventory levels are seasonally appropriate. The slow start to this year's pool season notwithstanding We believe that the long-term pool industry fundamentals and secular tailwinds that drive industry demand remain intact, and we expect both of these factors to continue to underpin our long-term growth opportunity. Leslie's remains the leading direct-to-consumer pool and spa retailer with unmatched scale, capabilities, and brand awareness. As we have positioned ourselves to win during pool season, we also remain focused on executing our strategic growth initiatives. which we expect to drive long-term sustainable top-line growth and profitability, share gains, and operational efficiency. Turning to those initiatives, first, our customer file improved from down 8% in fiscal Q1 to down 3% in fiscal Q2. We believe that our customer file continues to normalize from the pandemic spike, and we expect to return to growth in the second half of the year. Second, average revenue per customer was down 8% in the quarter, driven primarily by decreases in big ticket items such as hot tubs, swim spas, above ground pools, and automatic pool cleaners. Average revenue per customer for our loyalty customers outperformed at down 4% in the quarter. Third, with regard to our pro initiative, we ended the quarter with 4,088 pro contracts in place and 102 pro locations. This compares to 3,300 pro contracts and 98 pro locations at the end of the second quarter of last year. Pro sales were down 9% for the quarter. Pro partner sales were down 7%, offset by non-partner pro sales, which declined 26%, highlighting the importance and effectiveness of our partner program. Fourth, M&A and new store growth continue to be important initiatives for Leslie's and we are confident in our long-term store expansion opportunities. For fiscal 2024, we remain on track to open 15 new stores. Finally, our AccuBlue Home Smart Tech water testing device and membership program continues to gain momentum and is resonating strongly with customers. Our manufacturing partner is delivering product on time, and we are on track to meet our inventory targets for pool season. Our members continue to give us feedback that our proprietary software is a game changer and continue to respond with very positive online reviews. As you will recall, our AccuBlue home membership consists of a free device and a $50 per month membership subscription, which is offset by $50 per month of purchase credits that can be used online or in-store. Our members have been spending at a rate of more than $1,000 per year. We remain focused on executing our strategic initiatives to capture the long-term opportunities and extend our industry leadership. In addition, we continue to take actions to improve the trajectory of the balance of the year. Number one, we are using our analytical tools and insights to drive efficiency in pricing and promotions with a focus on growing gross margin dollars. Number two, we achieved our goal of reducing our peak inventory by more than 100 million and remain on track to reduce year-end inventory by more than 50 million, while maintaining strong in-stock levels and service metrics and high NPS scores. We will keep a laser focus on SG&A efficiency. Scott will address this later in the call, but SG&A in the second quarter was down 12% versus the same period a year ago. Number four, we continue investing in our people, fostering and promoting top talent within the organization while adding outside talent with deep experience and fresh eyes to continuously improve how we operate. Five, we are leveraging our omnichannel platform to connect with consumers more frequently, including through surveys, exit interviews, research, and other feedback to give us a detailed view into the specialty pool and spa consumer. And six, we continue to invest in marketing to drive long-term brand awareness, customer file growth, Pool Perks members and sales. I will now hand it over to Scott to discuss our results and outlook in more detail. Scott?
spk04: Good afternoon, everyone, and thank you, Mike. Our results for the quarter were largely in line with our expectations, while unfavorable weather contributed to lower traffic and a late start to the pool season in our main markets. For the second quarter, we reported total sales of 189 million a decrease of 11% compared to the second quarter of fiscal 2023. The second quarter this year ended on March 30th versus April 1st last year. Due to this calendar shift, we lost two early spring higher volume selling days and gained two lower volume winter selling days. The negative impact of this shift was approximately 4 million or 180 basis points in the quarter. Comparable sales decreased 12%, driven primarily by transaction count, and spending on larger ticket items. Comparable sales decreased 26% on a two-year stack basis. Non-comparable sales contributed $1.5 million in the quarter, driven by acquisitions and new store growth. With respect to trends by consumer group, comparable sales for residential pool declined 12%, pro pool declined 9%, and residential hot tub declined 14% compared to the prior year period. Sales declines are driven by unfavorable weather, softer sales and discretionary items, and the June 2023 price actions. In these shoulder seasons, weather and the timing of pool openings can cause significant sales variances due to the smaller sales base. Gross profit was $54 million compared to $71 million in the second quarter of fiscal 2023, and gross margin rate declined 464 basis points to 28.8%. which was slightly below expectations, mainly due to incremental occupancy deleverage from lower than expected sales. We continue to expect meaningful back half margin expansion versus the first half of the fiscal year, most notably in the fourth quarter as we cycle the June 2023 chemical price decreases and higher inventory adjustments and distribution costs that pressured second half 2023 profitability. Page 9 of our earnings presentation illustrates our Q2 gross margin rate bridge in more detail. During the quarter, gross margin was affected mainly by lower selling prices and deleverage in occupancy costs due to lower sales. SG&A was $85 million, a reduction of 12% or $11.5 million compared to the second quarter of fiscal 2023. The reduction was primarily due to declines in merchant fees, lower payroll and executive transition costs, and lower store expenses. Adjusted EBITDA was negative 19 million compared to negative 8 million in the second quarter of fiscal 2023, and adjusted net loss was 32 million compared to a loss of 26 million in the second quarter of fiscal 2023. Interest expense increased to 18 million during the quarter from 17 million in the same period last year due primarily to higher interest rates and our effective tax rate increased to 29% compared to 25.7% in the second quarter of fiscal 2023. Adjusted diluted earnings per share was negative 17 cents compared to negative 14 cents in the second quarter of fiscal 2023. Diluted weighted average shares outstanding were 185 million. Moving to the balance sheet, we ended the quarter with 786 million outstanding on our secured term loan facility and $97 million on our revolving credit facility. This compares to $794 million and $172 million respectively in the prior year quarter. Our debt levels were lowered by $83 million versus a year ago, and our leverage ratio was 6.0 times. Availability on the revolver was $142 million at the end of the quarter. As a reminder, this is our peak debt quarter before we generate all of our profitability and free cash flow in the seasonally important second half of our fiscal year. The applicable rate on our term loan was SOFR plus 275 basis points in the second quarter and our effective interest rate was 8.2% compared to 7.3% in the prior year quarter. Our total cost of debt for the quarter was 8.1% compared to 7.2% in the second quarter of last year. Additionally, last month we successfully extended the maturity date of our revolving credit facility to April 2029. Cash and cash equivalents were $8 million at the end of the quarter compared to $9 million for the same period last year. Inventory ended the quarter at $379 million, a decrease of $113 million, or 23% compared to the prior year quarter, while our in-stock position, service metrics, and net promoter scores remained very strong. Our stores are well stocked with the full assortment for the pool owner and pro as we gear up for the peak pool season. And now turning to our fiscal 2024 outlook. After a first quarter that was consistent with expectations, our second quarter was below our top line expectations mainly due to unfavorable weather that resulted in a slower start to the pool season. We are now five weeks into our third quarter. During the first three weeks, weather continued to be a challenge. However, over the last two weeks, we've seen improved trends with improved weather. Ultimately, our biggest volume weeks lie ahead, and with our consistent seasonable weather, we believe we are on track to deliver a year within our outlook ranges. Moving to capital allocation, our first priority continues to be the pay down of debt with the goal of achieving a leverage ratio of 3.5 to 3.7 times in fiscal 2024 and a longer-term goal of reaching a leverage ratio of three times or less. Regarding our footprint, we are planning 15 new store openings in fiscal 2024, with the majority of these stores expected to open prior to Memorial Day, ahead of the peak pool season. We also plan to convert six residential stores to our pro format this year. At this time, we are not including any sales or EBITDA contribution from M&A activity in our full-year guidance. And with that, I'll hand it back over to Mike for closing remarks.
spk08: Thank you, Scott. To conclude, results this quarter continue the recent trend of softer sales for Leslie's and the industry from persistent unfavorable weather and normalizing pool and spa consumer behavior from a period of significant growth. In light of that, we continue to aggressively manage SG&A and inventory while focusing on customer service. We believe we are set up to win in pool season. Our employees are excited and engaged. Our stores and DCs are well stocked and ready to go. Our omnichannel presence has this position to service residential and pro customers in the way that they choose, and our pro partner and Pool Perks Loyalty program are leaders in the industry. We have an unmatched set of capabilities to serve our customers, and with AccuBlue Home, a clean, safe, and beautiful pool has never been easier to achieve. With the majority of our sales and all of our profitability still to be achieved in the back half of the year, we are focused on superior execution and we remain confident in our long-term prospects for growth and profitability. With that, I will hand it back to the operator for Q&A.
spk11: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. First question comes from Justin Cleaver with Barrett. Please go ahead.
spk15: Yeah, good afternoon, everyone. Thanks for taking the questions. Just to follow up. on near-term trends? I mean, can you give us a sense just how you're tracking, you know, five weeks into the quarter relative to the comp that you put up within fiscal 2Q? That's just my first question.
spk08: Yeah, Justin, I think the best way to characterize the last couple weeks of the quarter is a material improvement in the trend.
spk06: Okay. Okay. Got it.
spk15: And that's just as weather has normalized.
spk08: Yeah, exactly. We finally are seeing some consistently warm weather in our major markets, and that's making a material difference.
spk15: Got it. Good to hear. Secondly, maybe on the SG&A front, Scott, you were previously talking about a slight decline in dollars year on year. It seems like you're tracking well ahead of that target, at least through the fiscal first half. So just wondering if your guidance implicitly is applying a lower SG&A dollar figure, you know, maybe relative to when you gave the initial outlook.
spk05: Yeah, Justin, I think the whole team is doing a really good job, and I would say that, you know, we're probably, you know, ahead of, you know, kind of the progress that we thought we'd be making at this point in time. You know, as the back half goes on, you know, we'll see if I don't expect major changes in the back half, but what I do see is that we've improved a little bit faster than I thought, and that's on many different fronts. Naturally, merchant fees and things like that come down with sales, but just really good control on labor, but still having a high level of service. lot of that is store labor and what we're doing is we're just taking advantage of this shoulder season where the traffic is very low and so we've you know just um adjusted you know our hours you know according to kind of the customer traffic now as we get into busy season we'll be more fully staffed okay and so you may not see you know as big of a decline there because um you know we fully intend to be fully staffed um but just other store expenses um you know everybody in the stores and corporate, you know, just watching expenses and controlling those very well. And then we just have less at-backs, you know, executive transition costs and, you know, strategic projects, things like that that we had last year. You know, some of those are more favorable this year as well.
spk15: All right. That's good, Aaron. If I could just sneak one more in. Just as we enter the pool season, do you guys have a sense as to, I guess, the magnitude of chemical, you know, carryover? That still needs to be worked through, or is that not really part of the story this year as we enter pool season? Thank you so much.
spk08: Yeah, Justin, good question. We put out another pool owner survey in February, so pretty recent information. And based off the results from that survey, we don't think there's any challenges around consumer stockpiling this season.
spk11: Next question, Jonathan with Jefferies. Please go ahead.
spk02: Great. Good afternoon, and thanks for taking my questions. The first one was on equipment. I wanted to kind of dig in on that category a little bit. So, you know, down 10% this quarter. But can you provide any color on some of the moving pieces there? I think, you know, historically, or at least last quarter, heaters and automatic pool cleaners were underperforming. I think variable speed pumps were relatively more healthy. Has there been any change there that, you know, would lead you to believe that, you know, maybe the higher end or the lower end of that, you know, midpoint you shared for the year could be realized? Thanks.
spk08: Yeah, thanks for the question, Jonathan. Look, first thing I'll do is point out, like I did in the prepared remarks, we were really pleased to see the 800 basis improvement from down 18 to down 10. And we saw improvement across most all the categories. I would say heaters has actually improved materially. And we think that's a really good sign. And more in line with what I would call pre-pandemic seasonality. As the pool season starts to approach, people start thinking about heating their pools. They turn on their pool heater for the first time and it doesn't work. They either replace it or or fix it. So we consider that a good sign. APCs are still a little challenged, though robotics have been performing better. And salt systems are a little challenged for us. So a little bit of change in the mix. Heaters a little better, robotics a little better, variable speed pumps continue to be a nice stable business.
spk02: that's helpful and then you know my second question is on pricing i think heading into this year the the plan was for chemical pricing to be down low single digits year over year um equipment pricing i think was planned to be in maybe that three to five percent range that some of the vendors were talking about um you know recognizing the first six months are uh you know light in terms of contribution for the year are the midpoint of those ranges still relevant and you know as we're tracking pricing going into pool season, is there anything, you know, we should be aware of in terms of the pricing strategy and any volatility, or are the prices we're seeing from a consumer perspective generally where, you know, we would expect the pool season to play out? Thanks so much.
spk08: Yeah, Jonathan, I think the – I mean, I'm pleased to see retail, particularly especially retail pricing for chemicals to be quite stable. And I'm going to say stable from when we made our price action adjustments in June of 23. Since that time, it's been quite stable. And even with a slow start to the season and what I'm going to call very unfavorable weather, we haven't seen people breaking price in the residential market. I will say there's been a little bit more pressure on the pro side of the business, but we're still within that low single-digit range. range for chemicals overall. So we think we're well within our guide on chemical pricing to be at our midpoint. And similar with equipment, I think you quoted three to five, I think we quoted maybe two to five, but yeah, midpoint of that is well within range. The softness we're seeing in chemicals and equipment is really based on volume. And right now, we're tying that volume very much to traffic, and we're tying traffic very much to weather. We just, in the second quarter, hadn't really seen the season kick off. And I tell you, it's gratifying to see the last couple weeks, with some consistent warm weather, start to move like we would expect it to.
spk02: Very helpful. Best of luck.
spk06: Thank you.
spk11: Next question, Sean Calnan with Bank of America. Please go ahead.
spk16: Hi, guys. Thank you for taking my question. Just first, following up on the chemical pricing, so last quarter you were able to offset the pressure in gross margin, and then this quarter was ahead under about 130 basis points. So are you seeing higher promotional activity? Is this what you were just talking about on the pro side, kind of what's driving it? the downside year over year in the second quarter versus the first quarter?
spk06: Yeah, I'll take that one.
spk05: Basically, what we're seeing is we did have some chemical price impact in the first quarter. The difference was we were able to offset that with pricing actions in other categories. And so for Q2, we didn't have those additional price actions that we were able to offset. I think the other thing to think about is that our mix has changed as well. And so, you know, with equipment, you know, getting better and, you know, chemicals, you know, off a little bit more than Q1, there's a mix effect there that's a bit unfavorable.
spk16: Okay, got it. And then the second one, just on the order book comments you made last quarter, I believe you guys said the orders were flat year over year on hot tubs and then The hot tub sales came down 14% year over year. Can you just talk about how the orders flow through over time?
spk08: Yeah, Sean. The average price of the hot tub we sell is about $10,000. And they are predominantly custom ordered. So customer places an order, the tub is built, and then it is scheduled for delivery. And the challenge we ran into in second quarter and in first quarter as well is particularly wet weather in our hot tub markets was just keeping people from keeping us from being able to, you know, pour pads, install the hot tub, hook up the electricity. We had people pushing out their appointments for reasons, rain and even snow. So what we consider good news is, is very low cancellation rates. People still want their tubs. And now that we've seen the weather break, and particularly like we own Valley Pool and Spa in the Pittsburgh area, and we were in Pittsburgh last month, a group of executives, and it was hailstorms, tornado warning, 52 degrees, rain, and it was pretty clear why we weren't delivering tubs Now that we've seen the weather break there, and we've been rather consistently in the 70s or low 80s, we're starting to see that order book come to fruition with deliveries. So we consider that a positive sign. And I would say that our order book is very supportive of the discretionary business being down no more than 10%.
spk16: Okay, got it. So would you say that there's potential for hot tub sales to be up year over year in the second half? Yeah, I don't.
spk08: Look, we have a very good trend. We have a order book that is in better shape than our mid-year guidance, but there's still a lot of volume to be done, so it's too early to speak to upside.
spk06: Okay, thank you. Yep.
spk11: Next question, Kate McShane with Goldman Sachs. Please go ahead.
spk10: Hi, good afternoon. Thanks for taking our question. We wanted to ask about market share. It still seems that you're underperforming the industry based on what you put in the slides for today, and it might be widening. Can you speak to that at all in terms of what happened during the second quarter?
spk08: Yeah, Kate, thanks for the question. You know, we said in the first quarter we were surprised by what the credit card information was saying. I'm going to say we're a little bit surprised this time as well. And, look, we think that's good and it's important data, and we certainly pay attention to it. You know, last time, on the last call, we had talked about some of the changes in our assortment and value messaging that we had done in the stores. to try to drive greater conversion. And we were really pleased this quarter to see that conversion increase materially. But the traffic was really the challenge this quarter. And traffic, we really connect to weather. And it's surprising to us that our performance would be under that of the industry, given the weather impact. And then the second thing is, you know, I said in the prepared remarks, we've talked to our vendors regularly, we talked to our store managers, we talked to our district managers. This last quarter, we did comprehensive exit interviews for non-purchasers to see if we were missing something. And all of that data, in addition to similar web data, which tracks, you know, our proprietary online businesses, That data actually showed that our market share increased 200 basis points online in the quarter. So it seems to be a disconnect between the two. We're taking it seriously. And, you know, if we have given back some share, you know, we'll be focused on winning it back in pool season proper.
spk10: Okay. Thank you.
spk11: Next question, David Bellinger with Mizzou Health Security. Please go ahead.
spk13: Hey, guys. Thanks for the question. Another one on this material improvement in trend over the last couple weeks. Has that been broad-based across geographies? And just recognizing this is an incredibly short period of time, just two weeks. If that trend were to continue through the balance of the quarter, could you potentially see a positive overall comp within the Q3 period?
spk08: Yeah, look, we're not going to give Q3 guidance like that. I will say this. It was mostly broad-based in its recovery. One of the things we find positive is we've got material improvement despite, what is it, 50 million people in the U.S. being under severe weather alerts right now and the flooding in Houston. And Houston is our single largest metro market. So despite those two very adverse weather conditions, we saw really nice improvement, and we saw the business respond as we would expect it to with appropriate weather. And that's as much as we're going to say about that.
spk13: Fair enough. And this is my second one on the inventory being down more than 20% year over year. Maybe just help us unpack that a little. Could you talk about units versus price Are there certain categories that are down more than others in terms of units?
spk06: Yeah, I can take one.
spk05: I can take that one. There is always a bit of a mixed effect, but units are actually down a little bit more than dollars, and I think it's the effort that the the planning team has put forth using our Blue Yonder tool to really start off on the right foot, you know, on the front end with a much better plan and, you know, executing that plan very well. And also, you know, from our suppliers as well. I mean, the lead times are fairly short on most of our items. And so that, you know, that helps, you know, as well. And so, you know, as you kind of look across the categories, I mean, you're showing some, you know, fairly large, you know, decreases in, you know, in some of our chemical categories and, you know, equipment, cleaning and maintenance categories. And so, which, you know, if you look at the terms, you know, profile, there was definitely room to do that. And so, we continue, you know, to find more efficiencies, but also we're really concerned also with in-stocks and service level. And, you know, fortunately for us, you know, we've executed to the point where the service levels and in-stocks are much better than they were last year. So, we're really pleased with the performance overall.
spk06: Very good. Thank you both. Sure.
spk11: Next question, Steve, for . Good afternoon, Mike, Scott.
spk09: Mike, I was curious maybe if you could take a step back and Maybe just talk about the customer file, if there's any green shoots that you're seeing, whether it's your most loyal customers. I think you mentioned loyalty members trends, right, better than the file as a whole. But what are you seeing within the file that gives you confidence to reiterate the guide for the back half today? Are there any green shoots? And can you help us better understand what you're referencing in terms of file growth expectations for the back half? and what you're sort of implying in terms of improvement in spending trends within the file as well?
spk08: Yeah, a few questions in there. I think what we're, well, not I think, what's going on with the file is we added a lot of, I'm going to call them one-and-done customers during the height of the pandemic, 21 particularly, also into 22. And we identified this cohort of customers that came in and basically bought tabs and that was it. And we threw a lot of retention and reactivation tactics at those customers, but not nearly the results we would typically see. And the file degradation that we've seen kind of since midpoint of 22, is just those customers kind of working their way out of the file. And with the file down, you know, 3% quarter over quarter, again, Q2, we feel we're basically through with that cleansing, if you will, of one-and-done customers, which outside of that, the green shoot that we see is outside of those customers peeling off, adjusted, then yes, we're seeing the file stabilize and starting to show some growth. And we're not going to go into what kind of growth we expect in the second half, but we expect the business to be positive in the second half, and we expect positive customer file to support that.
spk09: Thanks, Mike. And maybe just a follow-up on, I think, Sean's comment or question from before on on sort of the chemical pricing, right, net of the offsets that occurred in the first quarter, because it does seem like there was a more challenging second quarter dynamic here. Any help on framing like what you sort of expect the product margin to be in the back half, right? I think in the reiterated gross margin guidance, are we still looking at stability to expansion in product margin, or is there something within the bridge that's changing?
spk05: Yeah, I can take that one. I think there's potential for margin expansion in the back half. And the main reason for that is when the June pricing action, once we overlap that in June, then that basically eliminates the biggest end with that we have on our project margins. I think that'll be a big benefit for us. Also, rebates should help us more in the back half. We are kind of getting past some timing differences that we had in the first half, but the back half, specifically the fourth quarter, should give us better margin lift from rebates and return margin. Thank you.
spk08: Steven, I'll add one point to that. On the earnings deck on page nine, we've got the gross margin bridge. We'll give a little color on it. There's 91 basis points in there of other product rate. More than half of that is some promotional dollars that we invested in the quarter trying to drive increased traffic. We just didn't sit here and let led to weak traffic numbers impact the business without trying some different tactics. But I think what we discovered there is very clearly you can't promote your way through tough weather. You can't promote your way through a pool that's not open yet. So we learned a lot. We're going to implement those learnings in the second half, but that's more than half of what you see there on the other product rate lines.
spk15: Thank you.
spk11: Next question, Ryan Merkle with William Blair. Please go ahead.
spk14: Hey, everyone. Thanks. Hey, Mike, I wanted to ask on the non-discretionary sales down 11% in the quarter. Is that all weather and chemical price deflation? I just ask because the consumer, there's some weakness there. Is that showing up at all?
spk08: Yeah, we don't think it's consumer weakness per se, Ryan. Look, chemicals, volume overall in chemicals was down 4%. You know, trichlor and calhypel were down one. We had some softness in other chemicals. So pricing was down seven. And of that down seven, 575 basis points of that, most of it is tied to the June 23 price actions. The balance I would characterize as a combination of mix and a little bit more
spk06: price pressure on the pro side in chemicals. Got it.
spk08: Okay, that's helpful. Yeah, we're not a weak consumer per se. We're not seeing a consumer. You know, with the weather we saw, it was a matter of footsteps through the doors and eyeballs on the sites.
spk14: Got it. Okay. Yeah, that makes sense. And then I had a question on gross margin, too. You sort of answered it with the last one. But should we be expecting gross margins to be higher in the fourth quarter than in the third quarter? That's what I had in my notes. Just wanted to clarify that.
spk08: Yeah, Scott, you want to take that?
spk05: Yeah, I have that one. So, yeah, it's a good question. And the answer is yes. And the main reason for that is we'll have kind of a full quarter's worth of being beyond the June pricing actions. That will help. rebates will help a little bit as well as those normalized. But also of note is the inventory adjustments in DC costs that were really heavy last year because of all the outside warehouses and all the movement of goods. We should show significant favorability against those two lines as well.
spk06: Got it. Thanks for that. Thanks, Ryan.
spk11: Next question. Simeon Gutman with Morgan Stanley. Please go ahead.
spk03: Hi, guys. Mike, I wanted to ask about pent-up demand and the history of this business when we have tough weather in the beginning. Are there parts of the season we don't catch up? And this goes back to that order book that you mentioned because I would think you'd be well ahead of where you should be tracking now given pent-up demand. And all the companies in our space that have had weather impacts are recovering normally. So I think it's very valid. But you do sell a higher priced item or a lot of higher priced items, maintenance and repair and even some of the discretionary. So how do you think about that pent up demand? How do you think about in the context of where the consumer is? And then, you know, I'm trying to get at, you know, is there any way this is a head fake in your industry? How are you contemplating that? Just trying to look at both sides.
spk08: Yeah, in terms of pent-up demand for hot tubs specifically, where we've got a forward order book, yeah, I would say definitively we have pent-up demand there, and we feel good about the direction of that part of the business. In terms of equipment and – well, let me answer it this way, because it differs between seasonal and non-seasonal markets. In the seasonal markets – You know, I mentioned that pool openings were down 19%. Now, pool openings themselves generate volume, but what they really are is an indicator of the start to the season. And, you know, by our estimation, we're several weeks behind the start of the season. Now, historically, and as we've looked at weather this year, I think we're closer maybe to 2018. And originally we thought we were closer to 2022. But as we look at weather, yes, when the pools open in the northeast, Long Island in particular, it's a really significant ramp. However, you potentially have fewer pool days. It's all going to depend now on how the pool season ends in the shoulder season. You know, if it ends on its normal cadence and we started late, yet we'll lose some days in the seasonal markets just from the pools not being open. In the non-seasonal markets, I think it is more about pent-up demand. You know, people want to use their pools when the weather is correct, and they'll tend to use the pool more when the weather encourages them to do so.
spk03: Okay, and then can I ask a follow-up back on the share, which market share, and I know you provide a lot of data here, which there's not a lot of information, so you're going to get a lot of questions. When you lowered price, the chemical prices a year ago, remind us it was the industry had lowered it before you, meaning why shouldn't that lowered price lead to more share gain at this point, and are you seeing that share gain come back in chemicals?
spk08: Yeah, it's a good question. You know, there was two things that spurred us on the chemical price adjustments in June. One was we had gotten outside of our historical price positioning, which is above mass and at or below specialty. We had gotten ourselves up and over specialty. The second thing and just important to us was, you know, our regular consumer insight work, we were starting to get, you know, feedback that we weren't representing a good value. And it was showing up in our NPS scores. So just our prices down to where we thought they should be. We, you know, the third quarter of last year and in the fourth quarter of last year, we feel we did pull back some share versus leaving the prices where they were at. And the last two quarters, you know, like we said, we're surprised by the credit card data. But we take it seriously, and we're working to make sure we make the most of the traffic that we're getting. I don't know what to make of the credit card data, actually. It's a little concerning, for sure. More importantly to us, it's not really aligning with all of our other channel checks. So not something we're ignoring, but it doesn't change how we operate. We think we're very competitively priced right now. And this idea of value and, you know, our consumers seeing the value not only in our product, but our capabilities, like the AccuBlue water testing in the stores, we think all that's showing up through, you know, what was a really nice conversion lift. That's one of the things we feel most positive about the business. When the traffic's there, we're converting at higher levels than we had in the past. And that's a good sign for the pool season.
spk06: Thank you. Good luck. Thanks.
spk11: Next question, Garrick Schmoys with Loose Capital Markets. Please go ahead.
spk07: Oh, hi. Thanks. Just a follow-up on that point. Just kind of wanted to see if you could provide a little bit more context on how traffic was in the quarter and non-weather hit markets and if there was anything to read into trends in places where weather hasn't been an issue.
spk08: Yes, Jimmy, and that's one of the challenges with this quarter. Typically, we have some regions where we've got normal weather that we can point to as a control group, if you would, and we just didn't have that. We didn't have that anywhere. The seasonal markets, as I talked about and evidenced by the pool openings, you know, just very combination of cooler and wet, and when the weather got a little warmer, it was still very wet. And The number of consecutive days over 70 degrees, which we found is highly correlated with traffic in our business, in our major markets, Texas, Florida, Arizona, that was down anywhere from 18% to 64%. And in California, which was our best performing market, there was zero consecutive days over 70 degrees. But there was also 69% more rainy days than a 10-year average. So we actually couldn't point to any of our major markets and say we had, based on data, a normal quarter.
spk07: Okay. No, that's helpful. Just my follow-up questions on gross margins, just to put a bit of a finer point on the guide. I think coming into the year, you're expecting about 100 basis points in gross margin improvement. this year? Correct me if I'm wrong on that and if that was the case, do you think that's still reasonable given we're heading into the peak season now? Do you think there's enough opportunities in front of you to reach that prior guide?
spk05: I think there is just because as we gain volume, you get a direct impact on leverage with occupancy and In our margin miss for this past quarter, that was the biggest contributor, was just the deleverage on occupancy. So as we add volume, as we get past the chemical price actions, and with some of the promos that we've run, we have learned some things of what's working really well and some things that are not working so well. So I think we'll be a little bit more efficient on the use of promos and discounting. both on the types of promos we run, the magnitude of the discounts. And so I think we've gotten a little sharper there, you know, which would help us out, you know, as we get into peak pool season.
spk06: Okay. Sounds good. Thank you.
spk11: Next question, Andrew Carter with Sequel. Please go ahead.
spk01: Hey, thank you very much. First question I wanted to ask, and just to put a fine tune on pricing, first one just kind of a housekeeping. How much of a headwind is it in the comp because you don't anniversary it until June 1st? And then the second point about your ability to potentially take further pricing, how fast can you see it? Last year was a little bit of a waiting game, waiting for people to take pricing. This year you'd actually be looking for direct action. And then I'd also ask to that question – and I'll finish this one off – how much autonomy do kind of local managers have to do their own pricing and move, or do they have to follow kind of the national? Thanks.
spk08: Yeah, Andrew, so a couple questions in there. I'll start, and I may need you to remind me of a couple of them. But first of all, on the impact of the price actions on total sales is 260 basis points. And There's only a million and a half of non-comp in the quarter, so it's basically a 260 basis point per comp headwind as well. I think the second question was on when would we decide to do price actions? We look at our competitive pricing report every week. It's a combination of third-party services, and regular checking of local competitors by our district managers. We also do web scraping, so we will react quickly if we see ourselves getting out of our historical and what is also our current price positioning. And in terms of price actions from individual stores, we have national pricing We also have and have had for a number of years a price match guarantee. And the price match guarantee, you know, you go on our website, you can see kind of what the guidelines are around it. But our store managers and store associates have the authority to price match if a consumer can show us a competitive price that's lower for a comparable product.
spk01: Thank you for that. Second question, just kind of bigger picture. Home Depot obviously signed an agreement to acquire SRS, which owns Heritage, the number two pool distributor in the category. Could you give any perspective on whether you kind of see that as a threat, particularly Home Depot's ability for kind of a deeper integration between the two to go after DIY or cash carry pro business, as well as just kind of what that can mean? putting those together with online and remind us how much the home centers really kind of compete in the category as it stands today against you specifically.
spk08: Yeah. Yeah. Thanks for this question. You know, in our view, we think Home Depot has made it pretty clear that the acquisition of SRS Heritage, you know, it's really about growing their pro builder business as opposed to a new focus on pool. You know, they said those businesses would run as separate businesses, current management, Heritage is only about 15% of the SRS business. So that seems clear to us. And we haven't seen any evidence to suggest that Home Depot would increase aisle space to pool SKUs at the expense of existing SKUs. That's a pretty high opportunity cost. So, you know, given those two dynamics, we don't really think it changes the competitive landscape for Leslie's. We've competed against You know, the home centers, they do, Andrew, about 15% or 16% of the pool business, have for a number of years. I think that share is held pretty steady. So current competitors, we definitely keep an eye on them. We don't think this particular acquisition really changes the competitive landscape for us.
spk01: Thanks. I'll pass it on.
spk11: Thank you. I would like to turn the floor over to Mike Ejec for closing remarks.
spk08: Thanks, Stacey, and thank you all for joining us this afternoon and for your continued interest in Leslie's.
spk11: This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.
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