Leslie's, Inc.

Good afternoon, everyone, and welcome to the fiscal third quarter 2025 earnings 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 do require any operator assistance during the conference call today, please press star zero on your telephone. And as a reminder, this conference call is being recorded and will be available for replay later today on the company's investor relations website. I would now like to turn the call over to Elizabeth Eisleben, Senior Vice President, Investor and Public Relations. Please go ahead, ma'am.

Elizabeth Eisleben Good afternoon, and thank you for joining us to discuss our fiscal third quarter ended June 28th. I'm joined today by Jason McDonald, our Chief Executive Officer, and Tony Iskander, our Interim Chief Financial Officer and Treasurer. Following their prepared remarks, we will open the call to address your questions. As a reminder, our comments today may include forward-looking statements, which are subject to risks and uncertainties. Actual results may differ materially from those discussed. Please refer to our most recent 10 , 10 , and other SEC filings for more information. Additionally, we will reference certain non-GAAP financial measures. A reconciliation of these measures to the most directly comparable gap measures can be found in our earnings press release and on our investor relations website. Now, I will turn the call over to Jason.

Thanks, Elizabeth. I want to begin by thanking our entire team for their hard work and resilience during what proved to be a challenging third quarter. As we faced persistent macro pressures, unusual weather patterns across key markets, and an increasingly competitive landscape, the team responded with urgency, focus, and a relentless commitment to transform Leslie's. Before we discuss our third quarter performance and actions we're taking to accelerate our transformation, I want to welcome Amy College, who joined Leslie last month, as our Chief Merchandising and Supply Chain Officer. In addition to her significant retail, merchandising, and general management experience, Amy brings a unique blend of strategic vision and operational expertise that I am confident will help us accelerate our progress and position Lesley's for long-term profitable growth. As you saw from our preliminary results from the fiscal third quarter, we faced significant challenges in both our top and bottom line that were below our expectations. The much cooler temperatures and significant precipitation across our top geographies disrupted the peak pool season, resulting in quarterly sales down 12% compared to the prior year quarter. In addition, later in the quarter, we saw heightened competitive pressure in certain categories. I will discuss these in more detail shortly. As customers delayed pool openings, we saw a meaningful reduction in our residential traffic in stores of nearly 11% in the quarter. Moving to our third quarter results, As mentioned in prior quarters, we are aiming to perform while we transform. During this quarter, our team acted with urgency to offset headwinds we faced as a result of the softer top line and mitigate the bottom line impacts where possible, including making tough but necessary decisions. around cost control and strategically deferring select investments to protect our financial performance. As I mentioned briefly at the start of this call, we had significant headwinds to retail traffic and residential sales in the quarter. With that said, Through the expertise of our store team and improvement in reliability, we continue to deliver growth on conversion rate, which improved approximately 70 basis points versus the prior year period. In addition, utilizing our AccuBlue water test technology, after a water test is performed in store, conversion rate increased by more than 550 basis points versus the prior year period. While sales were challenged through targeted efforts on growth and expansion, we are improving our customer proposition with the pro segment. I'm confident that our team's disciplined approach to enhancing relationships with existing pro customers, while also expanding to new customers, can help us return to growth in this business. Importantly, the team has already surpassed their full year goal for new pro partner contracts. increasing our total pro partner contracts by 12% in the first three quarters compared to the prior year period. As we look at our top line in more detail, it is important to look at both category and regional performance to fully understand the impact that weather had in the quarter. Specific to category performance, chemical sales, including both core and specialty chemicals, were down nearly 15% as a direct result of the cooler temperatures experienced across much of the United States. For instance, with pool water temperatures below 70 degrees, this has a direct impact on the chemical needs of a pool. Specifically, the demand for specialty chemicals such as algaecide is significantly reduced. In the quarter, Algaecide and water clarifiers were down 22 percent and 19 percent, respectively. Moving to regional performance, the impact of cooler temperatures was most evident in the non-sunbelt markets, predominantly in our north region. Historically, the north represents a large portion of our third quarter sales due to the concentration of peak demand in this region. Of note, during the two weeks surrounding Memorial Day weekend, which is historically the height of the season for this region, sales were down approximately 30% as temperatures were below average. With the start of what is historically peak season being disrupted in most areas of the country, the pricing dynamics in our industry changed late in our third quarter. We believe the aggressive pricing action on key SKUs late in the quarter was a result of competitors working to reduce excess inventories on hand throughout the industry. This had a direct impact on our residential sales as we closed the quarter and we believe led to residential share loss. With all that said, the unique industry dynamics at play this season related to weather and the inventory levels in the market clearly highlighted price value opportunities in some of our categories. Therefore, we are acting with urgency and conducting deep customer research to thoughtfully address these opportunities while working to recapture and grow Lez's share. Now shifting to transform. and our strategic initiatives underway. As we have said before, we are acting with urgency to transform our business. We remain centered on four strategic pillars, customer centricity, convenience, asset utilization, and cost optimization. Despite top-line challenges in the quarter, we are beginning to see encouraging signs that the foundational changes we are making are beginning to take hold. Let me walk you through some of our early progress under each pillar, as well as additional opportunities we have identified to help accelerate profitable growth in our business. Starting with our pillars of customer centricity and convenience. As we introduced last quarter, we are moving forward with the launch of same-day delivery service with our Uber partnership. Our team has been working diligently on the technology integration and are excited for our test market to go live, furthering our transformation as an omnichannel retailer. With a firm commitment to improve customer experience and Lesley's overall value proposition, we successfully launched our enhanced pool perks loyalty program in the third quarter. Through the program enhancements, we are improving our targeted marketing efforts, as well as personalized communications to build deeper relationships with our customers. We expect this tiered program to help increase share of wallet with existing customers, while attracting new pool owners to Leslie's. Importantly, the introduction of tiers provides a cost savings while allowing us to reinvest in marketing initiatives to drive traffic and incentivize customers to increase their loyalty with Lesley's. In addition to our longer term customer centricity pillar, we recognize the urgency with which we must act and improve traffic trends at Leslie's. As the experts in pool care, coupled with our focus on personalization, we are providing custom offers on our quality products while highlighting our free water testing capabilities through our AccuBlue technology. This includes leveraging the expertise of our store team members, as well as our zero party data capability. to connect directly with customers to increase traffic. Further, through our detailed customer work, which includes a mix of qualitative and quantitative research on a localized level, we have identified and began implementing regional offers to meet the needs of their specific pool market. I'm pleased with the team's work in this critical area and look forward to sharing more on the improvement of our traffic trajectory. Moving to the next pillar of asset utilization. We have seen continued benefits from our local fulfillment centers. We believe they are improving in stock rates and accelerating fulfillment speed, especially in high volume markets. Importantly, they also provide us the flexibility to better manage inventory and reduce working capital. Our team remains committed to optimizing inventory across our asset base, including the continued focus on our never-end SKUs that are most critical for serving both residential and professional customers. In stores in the third quarter, we achieved more than 99% in stock levels in our top selling never-end SKUs. This is a 140 basis point improvement compared with the prior year period. It is a key factor in our ability to improve conversion rates. Importantly, while improving in-stock rates, we continued to reduce inventory by 9.6% versus the prior year period. Through further progress in the third quarter, we are increasing our previous estimate for inventory reduction this year by $5 million and now expect to end the year at least $20 million lower than the prior year end. We are confident this will help improve cash flow and support our top capital priority of reducing debt. Finally, as we look to optimize all assets and drive efficiency, In the third quarter, we began the process of closing our warehouse in Denver, which we expect to be completed in the coming weeks. Once this is closed, we believe we can seamlessly transfer shipping demand to other distribution centers and reduce annual costs by approximately $800,000. As mentioned in our pre-release, Our comprehensive operational and strategic review includes the productivity assessment of all assets across Lesley's footprint. Looking forward, we expect to share more on the optimization of all assets to help improve our omni-channel efficiency, including plans to reduce our fixed cost base, which is a primary driver of our deleverage. In addition, This review includes the evaluation of other core and non-core assets to help optimize productivity, drive efficiency, and maximize profitability. We look forward to sharing more on the optimization of assets to position Leslie's for long-term growth. Now, on our fourth pillar of cost optimization, I'm pleased with the early progress. We have already identified savings in indirect procurement and are continuing to evaluate our entire asset base for further efficiency opportunities. We brought on additional external resources in the quarter that are helping us supplement internal talent and accelerate this critical initiative to identify and remove excess direct, and indirect costs from the business. While the quarter presented challenges, we are taking action swiftly and decisively. We remain focused on executing our strategy with discipline, continuing to improve conversion, optimizing inventory, and leaning into digital capabilities. In addition, our robust strategic and operational review is focused on assessing the performance across our business. Our direct and indirect cost structure, as well as other initiatives, we believe helps deliver improvements in working capital and profitability. We are committed to the acceleration of this review and plan to share details on additional actions we're taking following the completion of the review in the coming months. Most importantly, We remain committed to maximizing cash flow, reducing debt, and building a stronger Lesley's for long-term profitable growth. We expect to share more on each of these areas discussed today, including the corrective actions and expected financial benefits for the business in our November earnings call. There is significant opportunity ahead for Leslie's and we look forward to sharing the path forward with enhanced transparency. Now I will turn the call over to Tony.