Leslie's, Inc.

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.

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.

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?