Q4 2020 Leslie's Inc Earnings Call
Good morning, and welcome to the fourth quarter fiscal year 2020 conference call for Leslie.
At this time all participants are in a listen only mode. Following their prepared remarks management will conduct a question and answer session.
For sure acquire any other operator assistance during the conference. Please press Star Zero on your telephone keypad. As a reminder, this conference is being reported and will be available for replay later today and the companies.
Web site.
Now I'll turn the call over to keep like for example, Investor Relations.
Thank you and good morning, 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 companys actual results to differ materially from.
From current expectations.
These statements speak as of today and will not be updated in the future or circumstances change. Please review the cautionary statements and risk factors contained in the Companys 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 filed with the FCC today and posted to the Investor Relations section of less leaves website at IR Leds lease pool dotcom.
The call today.
And from Leslie think is Mikey jacket, Chief Executive Officer, and Steve Goodell, Chief Financial Officer with that I will turn the call over to Mike Echeck Mike.
Thanks, Kaitlin and good morning, everyone. Thank.
Thank you for joining us today, and it's great to be here on our first earnings call following our IPO.
And speak for all of Us at less leads and I'd say, we're pleased to have completed what was a very exciting and a very expedited and zoom intensive IPO process.
Now that we have that behind us we have settled into life as a public company.
With all of our focus firmly on executing against our initiatives to further solidify our market leadership.
And on driving value for all of our stakeholders.
For those of you have met and will resume before you might notice my voice and little refer the normal today Im.
From a little under the weather.
I'm going to say I'm running at about 90 cents, 90%.
But.
Steve is running as normal 120%.
So we should be fine and low.
Most importantly, we have good numbers to present.
Including.
Dosing or 57th consecutive year of sales growth and handily, surpassing $1 billion and sales for the first time and our company's history.
Achieving comp sales growth of 18% driven both by consumer file growth.
And for our productivity.
And growing adjusted EBITDA grew a record $183 million.
Steve will discuss our financial performance in more detail shortly but I would note that our results reflect the three pillars that are unique to Leslie and that make our business so compelling.
One we operated.
Great and one of the most advantaged and fundamentally attractive consumer products industries.
And the industry, which benefits from highly predictable recurring and non discretionary demand.
Two we have developed and integrated network of capabilities and assets that our competitors simply cannot match and three.
Despite being the largest direct to consumer brand in our industry, we have tremendous growth opportunities.
Let me make a couple of points about the current state of the pool industry.
The first is that the installed base and pools and U.S. has grown every year for 50 years for this year was an all time record year for new pool.
Permit growth.
It is estimated that more than 200000 goals will be built in 2020, and 2021 and once and Nucor's Bill that has to be maintained which is where we come in.
On average for cost about $800, a year to maintain which creates an annuity like revenue stream for aftermarket standard.
We estimate that the 200000, new pools built this year and next year will create $5 billion and incremental aftermarket lifetime value.
And will benefit our business for years to come.
The second point is that this year the industry benefited from an acceleration and several macro trends that collectively.
Contributing to what we believe is a permanent step expansion and.
Demand.
This year, we saw an increased focus on and investment in the home.
The embracing of a healthy outdoor lifestyle.
And migration to the suburbs and Exosomes.
And the heightened attention to safety and sanity.
Ablation.
All of these appear to be and during secular trends that will persist long. After the pandemic is behind us and we'll create favorable tailwinds for Leslie is as we move into fiscal 2021 and beyond.
Our results benefit from this resilient and strong industry backdrop.
And that they are driven by the competitive advantages of our integrated ecosystem of physical and digital assets.
Which enable us to provide pool and spa and as a total solution whatever their need and wherever whenever and however, they want to shop.
A key capability and our ecosystem is our.
Proprietary digitized arguably water test.
Which provides per warner's accrual score and a complete step by step prescription for proper water treatment and a clean and safe pool.
This is an important point to understand with regards to how we compete.
Our competitors sell pool products.
We sell the total step by step solution for a clean safe and beautiful pool.
That is the and product consumers need and want now more than ever.
We began the rollout of back and Blue earlier this year and it is now in place across all of our physical locations and we are seeing the benefits reflected in our call.
Comp sales.
In addition to completing the act and Blue low out our expanded omnichannel capabilities, including BOPUS bores ship from store and ship to store remain on schedule for the operational banquet cool season 2021.
And fully implemented these capabilities will.
Allow us to both leverage inventory more effectively and to serve and equal response, and the continental U.S. and 24 hours.
Further strengthening our integrated ecosystem and competitive positioning.
Now, let's talk about growth.
Despite our leading market share position, we have multiple.
Sizable growth opportunities available to us.
US go and mystery is highly fragmented with an estimated 8000 regional and independent operators and third party research and validated and there are 700 residential and 200 pro markets that are still under served.
We have multiple levers that we can and will deploy and.
And these opportunities to expand our market share include.
Including additional residential and colocations utilizing our new digital capabilities.
And programmatic M&A.
Let me take a moment to discuss a few of our other key initiatives.
Starting with growing our consumer file for.
The enhanced marketing.
And and capabilities Weve developed we have a significant opportunity to continue to increase customer acquisition and reactivation span with high ROI for us.
For presently focusing our file growth efforts on reactivating lapsed consumers Tom.
Targeting the 200000 pools, and adding new consumers by leveraging our proprietary.
Larry database for virtually all of the 14 million pools and spas in the U.S.
Next driving greater loyalty among our existing consumers.
We believe we have a clear opportunity to expand their existing consumers share of wallet through the introduction of the width and loyalty program and enhancing our product and services.
Assortment.
We're currently developing loyalty to call and all with proven best practice enhancements to drive loyalty penetration and member value and are on track to launch and time for cool season next year.
We will support our new loyalty program with and enhanced assortment with particular focus on expanding spawn hot products.
Ex lifestyle and recreation products and.
As well as operating eco friendly products across our categories.
And then there is the pro market.
Although we've grown our pro business significantly in the last five years, we sell less than 10 per cent market share.
A research suggests that small and midsize professional consumer.
Tumors value convenience and referrals, both of which less leads is uniquely positioned to offer given our 936 locations and the industry's largest consumer file.
With additional pro locations the launch of a pro affiliate program and a dedicated pro website all coming online.
In line and 2021, we intend to continue to grow share and this attractive market.
Finally for launching our new connected pools technology and subscription service, which we believe represents a disruptive opportunity and pool and spa care.
For some of you know we are leveraging our proprietary.
And water testing software to develop a full service and.
Correct and home solution that test for your water develops and prescribes and treatment plan and delivered to your home the assortment of products needed to maintain and to clean safe and beautiful cool we.
We know through our research and there is considerable demand for this offering and we.
We plan to have the initial version of that Blue Hall and market from currencies and 2021.
As we all know fiscal 2020 has been an unprecedented year, but.
Before I turn the call over to Steve to discuss in more detail our results and outlook I want to take a moment to thank our teams for their dedication.
Patient and contributions.
Our store and operating team gross to all the challenges and opportunities that 2020 presented and work diligently to safely and efficiently serve our consumers, while still producing excellent operating results and.
I'm extremely proud and higher associates perform this year and is that.
Outperformance and enabled us to successfully entered the public markets.
We have an outstanding team.
Approve and durable business model and clear strategies to capitalize on the growth opportunities in front of us.
We feel very good about our 2020 results and we look forward to continuing our track record of growth.
In 2021.
With that I'll turn the call over to Steve.
Steve.
Thank you, Mike and good morning, everyone as Mike said fiscal 2020 and was a record year for loans leases, we generate total sales of over $1.1 billion and achieved our 57th consecutive year of sales growth our income.
Tire organization rose to the challenges and opportunities and this unprecedented environment and continued to execute against our strategy.
Today I will review a few topics first our fiscal 2020 and fourth quarter financial performance and.
Next our guidance for fiscal 2021.
And finally our.
For long term growth algorithm.
I'm pleased to report that we delivered a very strong year as we previewed and the recent development section of our S. One filed in October.
I'll be discussing all results inclusive of the 50 Threerd week in fiscal 2020.
We estimate the 50 Threerd week contributed approximately $18 million and sales.
Sales of $3 million, and adjusted EBITDA and $1.5 million and net income for the fourth quarter and full year.
Both fiscal 2019 and fiscal 2021 consist of 52 week periods and as a reminder, our fiscal year and on a Saturday closest to September thirtyth.
We adopted and the new lease accounting standard referred to as a S. C 842 effective as of the beginning of fiscal 2020.
The adoption of assay 842 increased SGN, a cost by $1.3 million.
Reduced interest.
<unk> expense by $1.2 million and.
And reduced depreciation and amortization by zero point $1 million in the fourth quarter and for fiscal 2020.
As of October Threerd, 2020, and we reported operating lease right of use assets of $178 million.
And we recorded operating lease liabilities totaling $185 million on our consolidated balance sheets.
Now I'd like to discuss results for fiscal 2020.
The 50 Threerd week, the 53 week period ended October Threerd 2020.
We delivered a total sales increase of nine.
18.8%.
And and the adjusted EBITDA increase of 14.2%.
Comparable sales, which is a measure on a 52 week basis grew 18%.
We experienced broad based sales strength across channels and product categories throughout the year.
As we have.
Benefited from robust industry, Tailwinds and as we executed on the growth initiatives, Mike outlined earlier.
Our sales of 1000 $112 million, we're at the high end of the range of 1108.
Two 1100 $12 million provided in our EPS one.
Gross profit increased 21.3% to $460.7 million in fiscal 2020 from $379.7 million in the prior year.
The increase in gross profit was primarily due to increased sales volume while occupancy costs remain consistent.
Gross margin rate expanded by 51 basis points to 41.4% for.
From 40.9% in the prior year.
Selling general and administrative expenses referred to as SGN, a increased 21.8% to $314.3 million from.
From $258.2 million and the prior year.
The increase and SGN, a was primarily driven by increased costs related to higher sales volume and.
Expenses associated with COVID-19 of $8.6 million for temporary wage increases and personal protective equipment.
Expenses.
Just related to strategic consolidation of certain locations totaling $3.5 million.
And higher compensation expense associated with onetime bonus payments of $2.9 million.
Reported SGN. A also includes other items that are add backs from an adjusted EBITDA and adjusted net income Stan.
Endpoint, such as management fees equity based compensation and losses on disposition of assets, which totaled $7.5 million and fiscal 2020.
And $8.4 million and the prior year.
Excluding these items not indicative of our core operating performance SGN a grew 16.9.
Percent over the prior year.
Our effective tax rate was 4.3% compared to 95.5% and the prior year with the reduction primarily related to valuation allowance activity due to the limitation of interest expense deductions in fiscal 2019.
Net income increased to $58.6 million from zero point $7 million and the prior year.
This is above the range of $52.3 million to $55.7 million provided in our EPS one.
Adjusted net income increased to $65.0 million from 12 point.
$8 million and the prior year.
Diluted income per share increased 37 cents from zero cents in the prior year.
Diluted adjusted net income per share was 42 cents in fiscal 2020.
Our adjusted net income and adjusted net income per share do not include pro forma.
<unk> adjustments for interest expense related to the pay down of our senior secured notes.
Senior unsecured notes public company costs expected to be incurred following our IPO for the impact of primary shares restricted stock units or stock options issued in connection with our IPO.
Adjusted EBITDA.
Good day for the year increased 14.2% to $182.8 million from $160.0 million and the prior year.
Excluding the impact of the newly adopted lease accounting standard adjusted EBITDA would have increased 15.1% to 184.1 million.
And dollars.
Moving to our fourth quarter of fiscal 2020 performance.
We finished the year strong with acceleration in our fourth quarter performance as sales increased 27.9% inclusive of the 50 Threerd week.
Sales for the fourth quarter of fiscal 2020 were $381.3 million.
Compared to $298.2 million in the fourth quarter of fiscal 2019 compare.
Comparable sales, which is measured on a 13 week basis increased 23.3% and.
We provide some context around this performance.
And the first quarter of fiscal 2020, which is the period ended.
December 28, 2019, and before the pandemic began we generated a comp of 3.4%.
And the second quarter as we rolled out our accu blue water test process and executed and against a number of our initiatives, we generated a comp of 13.7%.
And then and our fiscal third.
Third quarter, the pandemic began to impact the industry and we experienced a considerable increase and consumer demand due to consumers heightened focus and water sanitation water safety outdoor living.
And the general increase and time spent at home.
We generated a comp of 19.4% in our third quarter.
Followed by continued strength throughout the fourth quarter, when we generate and a comp of 23.3%.
Gross profit increased 26.9% and to $166.6 million from $131.3 million and the fourth quarter of fiscal 2019.
Gross margin rate and narrowed slightly to 43.7% from 44.0% and the prior year as occupancy leverage was more than offset by business mix as well as a concerted effort to clear through inventory to make way for innovative products being introduced in 2021.
SGN aim and.
Increased 36.2% and to $98.6 million.
From $72.4 million and the fourth quarter of fiscal 2019.
The increase and SGN, a was primarily driven by increased costs related to higher sales volume higher.
Higher compensation expense of $7.2 million.
Related to performance pay accruals.
And $2.3 million of expenses associated with COVID-19.
SGN. A also includes other items like management fees equity based compensation and loss and disposition of assets, which totaled $2.0 million and the fourth quarter fiscal 2020.
And three per.
Point $8 million in the prior year.
Excluding these items not indicative of our core operating performance SGN a grew 27% over the prior year.
Net income increased to $42.1 million from zero point $8 million and the fourth quarter of fiscal 2019.
And then just.
The net income increased to $43.7 million from $5.8 million in the prior year.
Diluted income per share increased 27 cents from zero cents from the prior year.
And diluted and adjusted income per share was 28 cents in the fourth quarter of fiscal 2020.
Adjusted EBITDA increased 12.2% to $78.4 million from $69.9 million and the fourth quarter of fiscal 2019.
Excluding the impact of the newly adopted lease accounting standard adjusted EBITDA increased 14.1% to $79.8 million.
Dollars.
Moving now to the balance sheet.
We ended the year with cash and cash equivalents of $157.1 million compared to $90.9 million at the end of fiscal 2019 and ahead of guidance of $156.0 million provided in our S. One.
On inventory, even with sales growth of nearly 20% during fiscal 2020, we actively managed our inventory down inline with seasonal trends and finish with slightly lower inventory balances versus the prior year end.
At the end of fiscal 2020 total inventory was $149.0 million.
Compared to $149.7 million at the end of the prior year.
With regard to debt at the end of fiscal 2020 total funded debt was 1000 $201 million and net debt was 1040 $4 million.
As Mike mentioned earlier after our fiscal.
Total year end, we completed our IPO, which included the sale of 30 million primary shares of our common stock at an offering price of $17 per share.
Our net proceeds from the transaction were approximately $459 million after deducting underwriting discounts and commissions and other operating expenses.
We used a portion of these proceeds to repay the entire amount outstanding on our senior unsecured floating rate notes due 2024.
And we'll use the remaining proceeds for working capital and general corporate purposes.
Before I turn to outlook I want to remind everyone of the natural seasonality within our business.
Our primary selling season occurs during our fiscal third and fourth quarters, which spanned April through September.
The first half of the fiscal year accounts for approximately 20% of our annual sales, while the third quarter represents approximately 45%.
And the fourth quarter represents approximately 35%.
We have a.
And track record of investing in our business throughout the year, including and operating expenses working capital and capital expenditures related to our growth initiatives.
While these investments drive performance during our primary selling season, they reduce our earnings and cash flow during the first half of our fiscal year.
While we plan to provide annual guidance, but.
But it is important to understand this seasonality as you think about our business on a quarterly basis.
In addition, as a result of fiscal 2020 and being a 53 week year. There are calendar shifts that will take place in fiscal 2021 that will impact our quarterly comparison.
On a year over year basis.
For example in the first quarter of fiscal 2021, we replace a higher volume week towards the end of season that is the last week of September with.
With a low volume lower volume week at the end of our first quarter.
That is the last week of December.
We will outline these shifts.
And and their impact when we report each quarter.
As it relates to the first quarter of fiscal 2021.
Well, we are not providing details on our quarter to date performance. We are pleased to that to date our sales results.
Have exceeded our internal expectations and we look forward to.
For during our first quarter results in February.
Our fiscal year 2021 includes 52 weeks and ends on October 2nd 20.
2021.
For the year, we're providing the following guidance.
We expect sales of 1150 $5 million to 1100 and.
<unk> point $5 million.
And adjusted EBITDA of $192 million to $198 million we.
We expect net income of $82 million to $92 million and.
And adjusted net income of $96 million to $106 million.
We expect diluted.
Net income per share of 42 to 47 cents.
And diluted adjusted net income per share of 50 to 55 cents.
We estimated diluted share count of approximately 193 million shares which includes common stock outstanding following our IPO and the dilutive effects of restricted.
Net eyeq units in stock options currently outstanding.
Looking beyond fiscal 2021, we have a long term growth algorithm that target sales growth and the mid to high single digit range based and industry growth and our strategies to expand market share.
Low double digit EBITDA growth.
It's based on stable to positive gross margins and SGN a leverage.
Earnings growth and the mid to high teens range, driven by flat depreciation and amortization.
Modest reductions and interest expense.
And a consistent tax rate.
It is important to note that not included in this range is more aggressive debt pay down.
Potential redeployment of excess cash back into the business or returning cash to shareholders.
In summary, first fiscal 2020 and was a record year for loans leases, we drove strong financial results throughout the year.
We generated total sales over $1.1 billion and it represented our 57th consecutive year.
Year of sales growth.
Second our entire organization rose to the challenges and opportunities in this unprecedented and environment and I share mikes appreciation and gratitude for the contributions by all of our associates.
And finally look.
Looking to 2021, we will continue our relentless focus on enhancing our consumer.
Experience and executing on our initiatives to continue to drive growth and market share gains.
And with that I will hand, it over to the operator to open the lines for Q and a day.
Thank you Melissa.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one and your telephone keypad.
Had a confirmation total indicate your line is and the question to.
You May press star two if he like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset they for pressing the star keys.
And the interest of time, we ask that you each keep to one question and one follow up.
Our first question comes from.
The line of Ryan Merkel with William Blair. Please proceed with your question.
Hey, good morning, everyone. Two questions from me so first off I've been getting a lot of questions about surge sales in 2020 that might not repeat in 2021 I know this is hard to answer but how are you thinking about that.
Hey, Ryan. This is Mike question was how do we are thinking about search sales.
Yes, and what if there is any sales items that might not repeat in 2021 that happened in 2020.
You mean in terms of general search or in terms of items.
Yeah.
However, you want to answer it I was thinking more in terms of certain products like heaters and aboveground pools, but you.
However, how are you guys are thinking about it.
Yeah understood it and look I think I'll answer it both ways first day, there's for sure some unmet demand and above ground pools.
We sold out very early.
<unk>.
As did the whole industry.
I'll remind everyone its not a big percentage of our business.
Both spas and above goals and they both sold out very early we've been aggressive with our inventory purchases for this year and we expect it to be and.
Really good year for above ground.
Gross and spas and hot tubs, so that in terms of of that and I think we will see continued trends and what we saw this year a heater.
Heaters were in pretty good shape for the year.
But the demands remain strong all the way through the end of this year and now and.
People are clearly trying to stretch the amount of.
And that they can use their pool.
In terms of search overall I I'll take this moment to say, we're really pleased.
With how our transformation to a digitally and performance driven for much return driven marketing.
Marketing acquisition is going well.
We saw.
Nice acceleration in the fourth quarter of our customer file growth and.
And as we continue to spend into customer acquisition, we're still getting really hard our allies, which gives us confidence to.
Continue to increase that percentage.
Does that answer your question.
Yeah.
Yes, I did.
And then just secondly, I hear that equipment and chemical prices are going up can you just discuss how pricing might impact sales and 21, and then do you expect to see some gross margin lift from price cost.
Yeah, I'm really talking about.
Chemicals first.
As you know as well.
Most and you probably know there was a fire and out where other major treichler producing plant earlier. This year that particular plant produced a close to 40% of the.
[noise] of the Tri core granules for the end.
Industry, so somewhat disruptive to the industry and our supply is actually with a different domestic supplier.
We have a long term relationship for long term contract both for amount and for price. So we feel good about our particular position.
But we do expect to see some.
Inflation higher than normal and chemical pricing for this year.
And on the equipment side I think are in better shape there.
You know, Steve mentioned, our margins and the fourth quarter were impacted or.
To some extent by moving some branded and.
Inventory equipment inventory, primarily out of our inventory to make room for some proprietary brand and product, which show he feels better product and also gives us a as you know at a higher margin. So we expect some.
Margin improvement and our equipment business and that's.
So much from industry pricing, but from our switch from more.
Into more proprietary branded product.
And Ryan as Steve and I'd also add just to you know and the industry. As you know I inflation is regularly passed on to consumers. So six tenths from price increases are dying and we reduced.
Do you see and ability to pass those on high and second plane is when you think of by managing from a channel perspective, whether its locations versus digital or the current manufacturer and you have to have a much more aggressively kind of manage the channels and the last 12 months right and we're certainly seeing some progress to and against that.
Very helpful. Thanks, guys and pass it on.
Thanks Ryan.
Thank you. Our next question comes from the line of Jonathan manage and ski with Jefferies. Please proceed with your question.
Hey, guys. Thanks for taking my question and a nice finished for the fiscal year I'm just a follow up Mike My first.
Question is you mentioned, making more room for the proprietary branded product I think 55 per cent of your sales are private label now and you have that 70% long term target. So how should we think about kind of the you know the annual expansion of private label sales.
You know what's embedded in your model.
Model for Us for next year in terms of you know the penetration and sales that should get that private label margin boost.
Yeah, Jonathan Thanks for the question the.
You know, we're targeting about two to 300 basis points expansion and the proprietary brand mix each year.
So when we talk about getting to 70% you know it's over the for the next 557 years type of timeframe and.
And as you would be kind of a normal expansion I would say.
Great. Thanks for thanks for that color and then just my follow up question on actually Blue home no.
Elaborate a little bit more on the go to market strategy for your first generation of that solution. You know it sounds as if early early interest is a is strong in a product like that so you know how are you guys thinking about the marketing angle and and how you'll communicate the benefits too.
Consumers. Thanks.
Yeah, well, I think and the big news and asking for the home as we have prototypes out in the field now testing with consumers. So that was a and nice milestone in our development.
With regards to the subscription and and what that subscription price would.
Would be you know that's a that's still TBD, but our research has identified a sweet spot and we're quite comfortable we able to get there, which should result in and pretty high adoption you know the.
We've asked everyone not to build into their models for 2021.
A big lift from Mackie, both home, it's going to be a launch of the.
The volume might be a little bit limited and.
By production, but the important thing for us is to get it into market get proof of adoption.
Get proof learn a lot as we go along.
And then it's really a.
A 2022 initiatives and scale for us.
Great. Thanks, so much for the color.
Thank you for our next question comes from the line and Peter Benedict with Baird. Please proceed with your question.
Hi, guys. Thanks for taking the question and Mike Hope you.
If you feel better either for Hsas and I don't know whether there but a quick question just on curious on E. Commerce is what you can and tells about kind of how you kind of ended up the year, there and how you're thinking about E com and 21, as particularly as the store base fulfillment.
Capabilities start to scale. That's my first question.
Yeah, well look we're very pleased with the E commerce business through all of 2020.
[noise] you know, we don't break out our digital sales growth separately, yeah, I will say is growing faster than the physical locations is as you might expect.
And.
It's a it's and and.
No right how.
The omni channel capabilities will affect the ecommerce business next year for sure it's going to be a positive.
You look at other people like tractor and home depot and the amount of business the percentage of their business that they are doing through buy online pickup and store specifically.
Is quite impressive.
We're not sure how to model that we know little would be a positive for what we think we have it modeled conservatively, but we are ready to go up likely March is when will be fully implemented and we look forward to soon and how it works.
The way we look.
And those omnichannel capabilities, though is its really that connection of our physical asset base to our digital asset base, that's just something that consumers expect.
So we can model. It however, we want but the important thing is.
As a consumer first company and we need to have those capabilities because that's what the cash.
Sumer expects from us.
Sure and that makes sense and my next question from our follow up and just beyond the activity for water testing.
Rollout just remind us what that cadence was if he can this year and then just how that was impacting the stores and and do you expect and in fact, the kind of build next year for and.
21, or you know, it's just kind of a one shot deal in terms of lift that for much of the stores, what's what's your thinking around that thank you.
Yeah, we we rolled it out last year kind of quarter by quarter. It was we only had about 11 locations and Q1 and we got up into.
For the mid two hundreds by Q2.
And then by Q3, we had it in about.
60% of our our fleet, which is where we ended the year because during the season, we have slowed down the implementation.
We just recently and the last couple of weeks finish the implementation and to all.
At the store base.
And what we've seen when they go into the stores for is pretty consistent we get a ah well several hundred basis point lift right off the bat and.
And that lift seems to be a durable.
And we've got some indication and this would just and we'll have to see more data on we've got some indication that.
Net.
There is a virtuous cycle there that as people experience the score really the gamification of it and understand the sanitization level of their pools.
They test more often and as they test more often they they continue to.
And refine their pool and we see the lift really coming from the number of store visits and transactions. So we've got a little bit of a more you test memorial.
The more you like it more you test and we're going to be tracking and very closely as we go into 2021 and see how the other lift.
Matures.
And Peter and remember that this new actually Blue test and stores test the complete solution, each and every time and a much more efficient way and so we're certainly seeing and consumers a adopt a the solutions and and that's resulting and and better.
Sensitized water and.
And safe.
For for water and and as Mike talked about kind of repeat visits and and closer tied until at least.
Got it okay listen thanks, guys happy holidays circular.
Thank you.
Thank you. Our next question comes from the line of Peter Keith with Piper Standard. Please proceed with your question.
[noise].
Hi, Thanks, good morning, everyone.
And I know you were talking about and meeting or the the demand this coming year and.
And we don't think of you as a as a holiday weighted retailer, but I'm curious if you're seeing any unusual activity here going into the Christmas season that that might suggest.
Continued investment and and the pool and and the backyard and.
As consumers are now thinking ahead to the spring and summer.
Okay.
Yeah, Peter Good question.
I've come from businesses that are very very holiday and and a winter season oriented so.
I have to say I was in some ways looking forward to a business it slowed down a little during the holiday season, but.
Surprisingly to me and we have seen we have seen a lift.
You know and I think what we're seeing is the continuation just as you mentioned of trends around investment into.
Home and the back yard.
Continuing through the holiday season.
Our sales of patio heaters.
Aboveground pools, now and they're starting to come back online and in some respect.
And particularly in the hot items and even in the recreation products for the pool have all been.
And quite strong so.
Yes, I think what you're a buffer sizing. We are we are seeing happening in them and the cool space at least for our business.
Okay. Good to hear and then also another theme that seems to be building into 21 is just and improving housing market.
And with increased turnover.
Do you think about your business, maybe over a multiyear period in conjunction with a strong housing market.
Well I think you know the biggest thing for US is is pools, right and that 200000, new pools and 2020.
2021, that's.
That's a big that's a big thing for us.
They have to get built before we can start maintaining them.
But that's a on a per minute in a step change in the installed base and we're just very very pleased to see that the in other moved to the to the suburbs.
With the continued debt.
Element of new housing and and remodeling investment for 64 million homes in the U.S. that have room for people that don't have one.
So we don't have a data.
On pool builds past 21, but we would expect that.
Net investment in the back yard and an Oasis and our family Sanctuary should continue and we would expect some strong pool build activity for the next several years.
Okay, that's great to hear a text and much.
Thank you our next question comes.
Comes from the line and Steven Forbes with Guggenheim Securities. Please proceed with your question.
Good morning.
And maybe just start with a follow up to an earlier question right. If we think back to the historic 80, 20 mix of non discretionary versus discretionary and you sort of talked about some strength here right during the holiday and recreation.
Products patio heaters.
If we look back at 2020, and can you sort of baseline and on how you would speak to the comp trends right and yes. There is more discretionary product categories relative to the core of non non discretionary as we reach.
We try to build.
The walk for next year with.
Obviously to see how you contextualize right the potential transitory versus secular.
Revenue contributions.
Yeah, I will say you know across our product categories, we saw very nice growth and 2020, we.
We had a range from like 6% growth.
The 6% growth.
But the key categories.
Major categories chemicals equipment.
Maintenance supplies, all around the kind of 20% growth where the business was so it was really it was really a lift across all the product categories. Some of the some of the pool recreation.
Third and products for toward the higher end things like floats and pool toys, but we were pleased that the strength. We saw last year was pretty much across the board and Didnt in any way significantly change.
The penetration and any one category.
Thats great to hear and then just a quick follow up.
You think about the excitement here around a permit.
Permitting activity for new pools, and your your initiatives around customer file growth.
Curious if you guys have done the work and sort of have insights to share around how the.
How those the location of those permits for.
Potential locations.
Compare to.
Yeah your current market exposure.
From a from a retail store base and and and how you sort of think about those new pools.
And they do it for me versus the do it yourself.
Backdrop.
Yeah, well I would say our our information on the pool permits in terms of geography is it.
It's pretty much a loans with existing pool builds.
So its really focused and sunbelt.
Right, where we have.
Lots and lots of physical locations.
Right and the Sunbelt, we've got a allegedly location.
Within 15 miles and 90% of the pools. So we feel we're in really good shape to service those customers if they want to be serviced and the physical location.
You can also service and digitally right and with the ship from store and BOPUS capabilities, we have.
Yeah and we.
We think a lot of customers will avail themselves of that.
In terms of the DIFM and D I y.
We're setting ourselves up so that new pool owners will get a welcome kit from less lease so that we can introduce ourselves, but as you know.
Explained.
During the road show and IPO process, we're really agnostic to whether a big consumers DIFM or D. I y.
You know we have a we have a nice professional business.
We have our physical location base.
And we have our digital assets.
Well, we've set ourselves up so that we can be.
Hi, DIFM agnostic, and we'll see where those new consumers for.
Thank you happy holidays stay safe.
Thank you.
Thank you. Our next question comes from the line of Simeon Gutman with Morgan Stanley.
Please proceed with your question.
Hey, Thanks. Good morning, everyone had a question first about the quarter you mentioned relative to the US want I think your sales came in at the high end of the range I.
I don't I think on EBITDA and May have come and or just slightly below the mid point can you talk about what what was that dynamic and then.
And I don't know if you can share around your internal expectations about gross margin for the fourth quarter, but can you talk about how that land how the gross margin compared to your expectations.
Sure happy to think semi and for the questions. So when you think about performance and in the fourth quarter.
Hi, Yeah, we were impacted.
By the EPS, Jenny I increase associated with the new lease accounting standard of about $1.3 million. So.
If you add that back where we were at 184 point 24.1 versus the mid point I in the EPS, one document and that's for the year or sorry a of approximately.
Tony when 83.9, so slightly above I think when you think of the beat on the topline <unk> that was in part driven by some of the other the clearance of inventory and that I talked about so came in a little bit lower margin and that's part of what drove the margin and the.
Right and reduction in in Q4, so this and see that full flow through.
For the quarter and ultimately for the year, but and as we look at performance for the full year relative to the guidance kind of top end of the range for sales above the midpoint of the range from an EBITDA perspective, and then when you look at gross margin specifically for Q4.
And you think about the kind of reported number.
On on the fourth quarter, we were about 33 basis points down and I. If you think about the discounts related to the clearance that accounted for about 100 basis points of the decline so well be a lot of familiar trends right risk. We saw occupancy leverage we saw improvement in rates and each one of our businesses saw an offset from some.
Business mix and then this is a fairly discrete item and some of this inventory that got moved that had an impact so all in all a deliberate decisions and and for feel good about where we and it came out for the year and overall for on a gross margin perspective were up 51 basis points over last year. So feel good with the results.
Okay and itself.
Simple next I want to ask about demand and the next fiscal year I know were talking about pull permits curious if there's anything new and regarding the pace of new construction or new pool construction orders granted it's only going to be a small part of business I think and then it sounds like fourth quarter is lower fourth quarter and or sorry.
For quarter to date has gone better for them the dynamic dimension and any of that inform you about how demand could shape up next year does it feel like biased and it's going to be better than anything I don't know if there's anything you can learn from you know and in any of these factors for permitting or the quarter to date results.
Yes.
And then I think the way to think about that is.
We're very encouraged by the trends year to date.
The pool permits are no and.
So they are not I don't see them changing and that's a that's a real lift to the business.
So it's really important to keep in mind right. The first half of our year.
And it's only 20% of our year.
So while it's nice to have a great start for the year and we'll always take that.
We're very much keeping in mind internally that we.
Vast majority of the year ahead of US now we're really.
<unk>.
And then in the initiatives that we have in place, but or not and.
We're not going to guide any differently than Steve laid out at the at the beginning of the presentation based on what we know at the moment.
Okay. Thank you happy holidays.
Thanks, Jamie and happy holidays.
Thank you. Our next question comes from and line of key chain with Goldman Sachs. Please proceed with your question.
Hi, Good morning, Thanks for taking my question and.
And with regards to inventory and I knew you were making some changes to make way for us and new product but.
But inventory is down and versus what sounds like another.
From a very strong sales so could you talk about what your inventory it looks like ex that that change and and equipment.
And why.
If you're chasing any categories.
Yeah. Thanks, Kate good good question, and and and again I think from a overall inventory perspective, probably impacted.
Or you call it $5 million to $10 million and and total total inventory.
But it but again you will see how we typically manage our seasonality now is the time at which we are starting to bring inventory and I were negotiating with other vendors for procuring product for preparing for season, we can invest like nobody else can investing in inventory.
And.
And we will be prepared for season and the elevated demand that we see coming as Mike talked about and some other categories, where we were not able to meet demand for ourselves and the industry above ground pools Hot tubs and.
And and I think unique for this year or potentially some chemical categories again, I think we're uniquely positioned to and I invest.
And we those categories in order to meet the demand that we see coming and in fiscal 2021, so I wouldn't necessarily characterize it as as chasing but it because I do believe we'll have more inventory for the coming year than we've had in the past.
But I think we will have continued opportunities to work closely with our vendor partners.
Anyway.
And then if I knew vendors to source products to meet the demand for fiscal 21.
Thank you and then my next question.
I I related is just on the proud and.
I know and during the.
The road show that this was an area that you are focused on.
And your store openings are going to be a little bit more concentrated around the trial. Just wondering if there was any update there in terms of and the progress that you're making with that particular customer segment and how you're weighing the options out cash.
Continuing to grow that business between digital stores and acquisitions.
Okay, and I'll I'll take that one Oh I'll start by saying that the pro market for US we had another a really nice year of growth and 2020. So we're pleased with that.
But we're also still just really scratched the surface there and.
As we've talked about we've got the three initiatives lined up.
For 2021 to accelerate our growth there the first one being additional locations.
And you all are major those are both new locations and and conversions ups and residential locations. So those are underway.
And second is the prolific.
And at program.
Which is and its final design phases and will be launched in February of next year.
And then also the pro web site, which is up and running and test mode internally and at the moment I'm supposed to see a demo of that tomorrow actually.
So a real good about where we are with those and were looking for two.
Getting those out in the market and and seeing the impact because like I said. This is a this is a market that's traditionally been underserved by us.
And and the research that shows us that the pro consumers low.
Like the idea of convenience.
Onions will put a high value on it for the high value and referrals that just gives us no real structural advantages to go after this market and and really I'm excited to to get those three initiatives out in the marketplace and see what it does door growth.
Thank you.
Thank you.
Thank you. Our next question comes from the line of Liz Suzuki with Bank of America. Please proceed with your question.
Great. Thank you and so and I would imagine that pool owners really tried to extend the pool season for as long as possible.
Well this year given your lack of other forms of entertainment did that change the way that the 50 Threerd week played out this year versus others and the past where it may have been maybe last for the margin headwind because and wound up being a pretty decent an extra week in terms of volume sales.
Yeah. It's a good question lives and and I think there is.
Probably a couple and countervailing trends, so yes extended season, and I think both just due to current conditions and some better weather as well.
It will drive more chemical sales right chemical sales committed and decent margins what it delays as closings I and closings are also my involved chemicals and and come in at good margins as well.
So I I think I it it likely drove some incremental volume I and the 50 Threerd week that maybe is not as a as typical but and some ways. It pushed off now the inevitable, which is the coming winter and the closing season. So.
We had some pick up in Q1 from from closings.
That makes sense and I guess as a follow up I mean has the extension of and into I guess that you would have seen some of that and the first quarter. Then from the later closing and would you expect pool owners to be opening their pools, even earlier this year and what impact do you think that could have on you know on the seasonality of 2021.
Yeah, and I'd I'd characterize that is really weather permitting a I think there will be a bias a in the current environment to open your body of water earlier, but a day if its a still snow and in the north Eastern Midwest, you're you're not going up and your pool. So I. It is dependent on on some of the weather conditions, but with the bias of opening.
In an earlier and keeping it open longer it.
Certainly could have a a and minor shift I'd characterize it and as the core driver will be ultimately the other conditions during what we call kind of the shoulder season.
Great all right. Thank you.
Thank you ladies and gentlemen.
Our final question today comes from my ex <unk> with <unk> capital markets. Please proceed with your question.
Great. Thank you Oh, you cited a pickup and your customer file and the fourth quarter and I don't know if there's any way to provide some color as to if there is any specific initiatives.
That was driving the increase and.
Given the increase and.
Pool permits or is there a way to think about the potential increase in your customer file in fiscal 21, and maybe relative to the two and 3% and your growth algorithm.
Yeah, It's a good question Garik I.
The growth the acceleration and growth and new customer acquisition in Q4 is really all about as switching our.
Acquisition strategy from direct mail to digital.
And what we're finding is that just a much more effective way to acquire cash.
Customers and we have a really nice and a lie on AD spend and you know as as we talked about during the IPO process.
2021, we're going to increase our marketing spend somewhat.
But were really going to do is continue that shift from direct mail.
And to digital that should give us some outsides games and our ability to acquire and your customers.
And and I think.
That specifically and our ability to target that digital acquisition at the 200000, new cool owners.
And our lapsed file.
We also.
And track.
New home ownership that has pools.
For example, someone moves right.
Right from a house for the pool that potentially is us, losing a customer, but we've got customers coming in and purchase that house. So we're getting much much better EBITDA mining our file.
And targeting our digital capabilities and potential new customers and we can do that because.
We know where all the pools are we know world and pools are being built and we know when somebody moves from a home.
With the pool or moves and go home pool. So I think that's one of the most.
You know, it's one of those six growth levers that we talked about.
And I would say and 2021 and it's one that I'm a.
I feel very good about us executing.
Great and then just a follow up just around the seasonality and maybe more for modeling question and as you think about the 20% of sales so typically happen.
And in the first half of the year, no lots and puts and takes but is that fair.
For your ballpark again to use as we think about fiscal 21 or is there anything else you know seasonally that you want to call out there and then by deviate all for that and you're recognizing that you had a good start for Q1 and maybe you're seeing.
And some benefit from Deutsche closures, and maybe an earlier start to the pool season weather permitting so anything to call out relative to the cadence and sales.
That you outlined debt and know that this is Steve I I know nothing major I'd I'd say when you think about the seasonality and the timing of the 50 Threerd week.
Hi, eight year.
Your your fiscal compares are going to be lower in Q1, and Q4 are going to be higher in Q2, and Q3 and again it falls and natural week to week seasonality. When you look at the first half for the year that the give up week and in Q1 and the pickup weak in Q2 relatively similar so.
By the time, you get through the first half and and certainly.
Time, you get to the end of the year Weve completed a full season.
And you'll have less noise, but from quarter to quarter and it will certainly Q1 and Q2 on a standalone basis.
And we'll have some noise.
Great. Thank you very much.
You got it.
Thank you, ladies and gentlemen that concludes our question and answer.
Right and I will turn the for back to management for any final comments.
We'd like to thank everyone for joining us today and I'm from all that said Leslie is we wish you and your families a happy and safe holiday season. Thank.
Thank you very much.
Thank you this concludes.
This conference you may disconnect your lines at this time, thank you for your participation.