Q3 2021 Leslie's Inc Earnings Call
[music].
Good afternoon, and welcome to the third quarter of fiscal 2021 conference call first loves lease Inc.
At this time all participants are in listen only mode. Following the prepared remarks management will conduct a question and answer session should you require 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 Caitlin Churchill Investor Relations.
Okay.
Thank you and good afternoon I.
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.
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 GAAP and non-GAAP financial measures can be found on the company's earnings press release, which was furnished to the SEC today.
And posted to the Investor Relations section of Leslie Web site at IR Dot laws lease pool Dot com on.
On the call today from Leslie think is Mike <unk>, Chief Executive Officer, and Steve <unk>, Chief Financial Officer with that I'll turn the call over to Mike Mike.
Thanks, Caitlin and good afternoon, everyone.
Thank you all for joining us today.
I'd like to start by saying that we hope all of you on your families are staying healthy and safe in this current phase of the pandemic.
With regards to the Lovelies I'm pleased to report that our Q3 performance was both a record third quarter and also the largest sales gross profit and EBITDA quarter in our history.
Sales for the quarter were a record $597 million.
Comp sales increased 24% per the quarter on a reported basis and on a calendar basis, which adjust for the shift created by the 50 <unk> week in 2020, the comp increase was 19%.
For both the quarter and year to date, 2 year stack comp was 39 per cent.
Gross profit for the quarter was a record $284 million and margin rate expanded 364 basis points in the quarter.
EBITDA for the quarter increased 50% to a record $179 million.
Our Q3 results exceeded our expectations embedded in the increased guidance, we announced in June.
It also reflect the tremendous efforts and contributions of our associates and vendor partners to meet strong consumer demand in the face of constrained supply chains, especially in core chemicals and equipment.
Chlorine tabs are a prime example of the demand and supply dynamic we saw on Q3.
By proactive steps to increase supply and instituting purchase quantity limits across channels to manage demand, we experienced periodic shortages and stock outs and some locations.
Our data showed less lease due to our scale on long term supply contracts to be the most consistent supplier of residential tabs in the quarter.
But we were not able to meet the entirety of consumer demand.
Sales of tabs doubled in the quarter and we could have sold more price.
Price was about 1 third of the increase in volume represented about 2 thirds of the increase.
The demand we are seeing is being driven by the continuation on the macro trends that accelerated with the onset of the pandemic.
Further elevated by work from home and what Youre showing no signs of slowing.
Consumers are continuing to focus time and investment on their homes.
Pursue healthy outdoor lifestyles.
Move to the suburbs and Exurbs, particularly in the south and southwest.
And increase their attention to safety and standardization.
These macro trends are resulting in elevated levels of.
Cool usage as evidenced by increasing sales of core on alternative sanitizers.
Interest in pool ownership.
1 of the most search options on multiple real estate apps as does the house have a pool.
New pool on installations.
Cool installations have increased from an average of 70000 per year from 2014 through 2019 to nearly on 100000 last year to an estimated 110000 this year.
New pool installations are projected to stay at these levels for the next 5 years.
And finally pool construction backlogs backlogs, which are now reaching into 2023 in some markets.
Yeah.
The strong results being reported by our suppliers to pool, construction and remodeling or a particularly good sign for us.
Because when a pools completed our business of water and equipment maintenance starts and that annuity like demand continues for the life of the pool.
Against this robust background up demand the competitive advantages derived from our integrated system of physical and digital assets and our growth strategies continue to gain traction.
I will start with omni in.
In the quarter, our omni channel capabilities.
Online pickup in store ship from store ship to store and buy online return in store allowed us to utilize the inventory in our location network to ship digital orders that we would not otherwise have been able to fulfill.
Our omni capabilities, which we call <unk> connect enabled more than 29% of Leslie digital orders in Q3.
Our consumer file continues to show strong growth.
Target file growth was 16% in the quarter.
This result was particularly gratifying as we are now lapping our shift from direct mail to digital marketing from last year's third quarter.
Our new omni capabilities also accelerated omni consumer growth.
New omni consumers those that shop, both our physical and digital channels grew 285% in the quarter.
In Q3, we launched our new loyalty program led lease pool perks.
The launch drove loyalty file growth of 17% in the quarter, which represents a 700 basis point improvement over the Q2 growth rate.
The pro market.
We are now operating 10 converted in 3 new build pro locations and they continue to outperform our pro forma expectations.
Based on those results we have identified 25 additional pro conversion and targeted 5 additional pro newbuild locations for next pool season.
Our pro affiliate program also continues to scale, we now have more than 500 pro affiliate agreements and continue to sign up new affiliates across our locations.
Year to date, our pro affiliate partner comp sales have increased 90%.
The last component of our pro initiative, our pro ecommerce site went live in the quarter and has been well received by our pro consumers.
The new and converted pro locations are expanding pro affiliate program.
And the launch of our new dedicated pro site helped grow our total probe business, 59% in the quarter.
On the M&A front.
We closed on the acquisition of Hot Springs bonds of southern Oregon during the quarter.
And in the current quarter, we closed on the acquisition of capital Hot Tubs, which operates in the greater Washington D C Metro area.
We continue to see an abundance of acquisition opportunities across the highly fragmented pool on how tough industry and we continue to manage an active pipeline of targets.
Accordingly, we have 2 additional opportunities, which we expect to close in the fourth quarter.
With regard to our residential white space opportunity, we opened 6 new locations in the third quarter and will open an additional 5 new locations in the fourth quarter.
We now expect to close the year with more than 950 locations.
Also and importantly, we launched ackee Blue home are connected pool technology solution and subscription service in the quarter.
Despite launching somewhat late in the pool season, we are very pleased with the reaction from our consumers to version 1 <unk> of the device and service.
Version 2 point <unk> is currently in the prototyping stage and planned for launch next pool season.
With regard to corporate governance, our sustainability working group comprised of internal resources and external advisers.
To make good progress on our inaugural ESG report.
We plan to complete that report by the end of our fiscal year.
To wrap up we are pleased with our record results for the quarter and our outlook for the balance of the pool season, and our fiscal year.
We are encouraged by the durable demand, we're seeing from our consumers and the momentum we have across our growth initiatives.
Looking ahead, we do believe challenges across portions of the supply chain will continue into our fourth quarter and likely the first half of 2022.
However, we are confident that our associates, our organization and our vendor partners will continue to mitigate those challenges with superior execution.
And we will continue to provide a growing consumer base the products and services, they need to confidently and safely enjoy their pools and spas.
Therefore, we are raising guidance for the year.
With that I will hand, it over to Steve to discuss the quarter and our revised guidance in more detail.
Steve.
Thank you, Mike and good afternoon, everyone. Our business strength continued into the third quarter as we generated record sales and profits were incredibly proud of all of our associates as they continue to deliver against our strategic priorities and they generate the results. We're reporting today today, we will review our third quarter of fiscal 2021 performance.
Our performance for the first 9 months of fiscal 2021, and our upward revision to our full fiscal 2021guidance that we provided in June.
Before I get started just a reminder, on the calendar. This year as a result of fiscal 2020, having 53 weeks there are calendar shifts in fiscal 2021 that impact our quarterly comparisons on a year over year basis.
In the third quarter of fiscal 2021, we replaced a lower volume week at the end of March with a higher volume week at the end of June.
This shift positively impacted sales by approximately $18 million during the third quarter and.
In the fourth quarter, the shift will reduce comparable sales growth by approximately $20 million.
And combined with the 50 <unk> week in fiscal 2020 that will not repeat this year. The total sales impact in the fourth quarter will be approximately $38 million.
It's also important to understand that the calendar shift and the 50 <unk> week will reduce adjusted EBITDA in the fourth quarter by approximately $11 million when compared to the prior year.
These impacts on sales and adjusted EBITDA have been factored into our raised guidance out I will cover in a few minutes.
But first I'll cover our third quarter results. Our third quarter included 13 weeks and ended on July 3.2021.
Total sales for the 13 week period increased 24, 3% or $116.6 million to $596.5 million in the current quarter compared to $479.9 million in the third quarter of fiscal 2020.
Our comparable sales growth on a reported or unshifted basis increased 23, 9%.
Due to the 50 <unk> week in fiscal 2020, our comparable sales growth in 2021 is impacted by that 1 week shift as I just mentioned using that realigned period in 2020 for comparability, our comparable sales growth on a shifted basis for the third quarter of 2021 increased $19.4 per cent.
This increase is on top of comparable sales growth of $19.4 per cent in the third quarter of fiscal 2020 and represents comparable sales growth on a 2 year stack.
38, 8%.
We generated strong results across consumer types and saw particular strength on the core sanitizer and equipment product categories. During the quarter. We also continued to see elevated retail price inflation, primarily related to chemical products channel management by major equipment manufacturers as a result of higher input costs and less of it.
Discounting across product categories.
Gross profit increased 34, 6% or $72.9 million to $283.7 million in the current quarter compared to $210.8 million in the third quarter of fiscal 2020.
Our gross margin increased by 364 basis points to 47, 6% from 43, 9% in the prior year per.
Due to product margin improvements and occupancy leverage and partially offset by business mix.
SG&A increased 18, 18, 2% or $18.1 million to $117.3 million on the current quarter compared to $99.2 million in the third quarter of fiscal 2020.
While SG&A increased at a lower rate than our sales and profit growth.
The SG&A increase was driven primarily by our sales increase and investments to support our growth higher.
Higher compensation accruals and an increase in noncash equity based compensation were also drivers of the increase over the prior year.
SG&A as a percentage of sales decreased 101 basis points to 19, 7% in the current quarter compared to 27% in the third quarter of fiscal 2020, it's on.
Also important to note that during the current quarter. We also absorbed public company costs in our reported results versus the prior year period, when we were still a privately owned.
Adjusted EBITDA increased by 49, 7% or $59.5 million to $179.3 million from the current quarter compared to $119.8 million in the third quarter of fiscal 2020.
Adjusted EBITDA as a percentage of sales increased 510 basis points to 31% compared to 25.0% in the third quarter of fiscal 2020.
During the current year quarter, we converted the increase in sales and a higher gross margin and leveraged our costs, even as we invested against our key strategic priorities.
Adjusted net income increased by 68, 8% or $57 million to $124.4 million in the current quarter compared to $73.7 million in the prior year.
Improvement was primarily due to the increase in adjusted operating income a reduction in interest expense and was partially offset by an increase in income tax expense.
Our lower interest expense when compared to the prior year was the result of our repayment of outstanding senior unsecured notes in November of 2020.
Lower LIBOR on our floating rate debt and no borrowings on our revolver in the current year quarter.
Adjusted diluted net income per share improved by 36, 2% or 17 cents to 64 cents in the current quarter compared to 47 in the third quarter of fiscal 2020.
Now I'll turn to our year to date results. Following are a few highlights.
Total sales for the 39 week period increased 28, 1% or $204.7 million to 934.0 million and the current year compared to $729.3 million in the prior year.
Our comparable sales growth on a reported or unshifted basis increased 27, 2%.
Using our realigned period in 2020 for comparability, our comparable sales growth on a shifted basis increased 23, 4%.
This increase is on top of comparable sales growth of 15, 5% on the prior year period and represents comparable sales growth on a 2 year stacked basis of 38, 9%.
Gross profit increased $39.5 per cent or $115.3 million to $407.1 million in the current year compared to $291.8 million in the prior year.
Our gross margin increased by 358 basis points to 43.6 per cent from 40.0% in the prior year.
Adjusted EBITDA improved by $83.6 million.
Excuse me adjusted EBITDA improved by 83, 6% or $85.9 million to $188.6 million in the current year compared to $102.7 million in the prior year adjusted.
Adjusted EBITDA as a percentage of sales increased 611 basis points to 22% in the current year compared to 14, 1% in the prior year.
And adjusted diluted net income per share improved by 46 cents to 59 cents on the current year compared to 13 cents from the prior year.
Moving to the balance sheet, we finished the third quarter of fiscal 'twenty, 'twenty, 1 with cash and cash equivalents of $309 million compared to $149 million at the end of the third quarter of fiscal 2020, an increase of $160 million on.
On inventory, we finished the third quarter with 224 million compared to $181 million at the end of the third quarter of fiscal 2020, an increase of $43 million.
Our team continues to proactively work with our vendor partners to manage the flow of inventory and to identify opportunities to strategically invest in inventory to meet heightened consumer demand across product categories, even with our higher inventory balances the tight industry supply situation and long lead times across multiple product areas.
Has driven periodic supply shortages that we expect to continue into our fourth quarter and likely through the first half of fiscal 2022.
With regard to debt at the end of the third quarter of fiscal 2021 total funded debt was $808 million compared to $1.2 billion at the end of the third quarter of fiscal 2020.
$397 million reduction was due to the repayment of our senior unsecured notes and quarterly amortization payments on our outstanding term loan.
And as previously announced during the third quarter of fiscal 2020, 1 we amended our $200 million ABL credit facility to reduce our rate to LIBOR plus a range of 125 to 175 basis points based on percentage utilization preview.
Previously our rate was LIBOR plus a range of 175 to 200 basis points.
We also reduced our unused fee from 37.5 to 25 basis points and the maturity on our revolver remains August 2025 net.
No amounts were outstanding on our ABL credit facility as of July 3.2021.
Next I'd like to turn to our outlook today, we're raising our full year fiscal 2021guidance for the fourth time this year.
The 2 primary contributors to our guidance raise this quarter include first our third quarter results exceeded our expectations embedded in the full year guidance that we shared in June.
And second while we expect our fourth quarter to be better than our previous expectations, we do not or we do expect our growth potential on the quarter will be impacted by the availability of certain products, particularly as it relates to chlorine tabs.
Before I review the updated guidance figures. It is important to note as I mentioned earlier that the calendar shift and the 50 <unk> week effectively reduced fourth quarter sales by approximately $38 million and adjusted EBITDA by approximately $11 million when comparing to our prior year performance.
The tireless efforts of our associates and our business performance gives us confidence today to raise our guidance, which incorporates both sales and adjusted EBITDA growth on the fourth quarter on a year over year basis. Despite the nonoperational headwinds on the calendar shift on the 50 <unk> week in the prior year.
For fiscal 2021, we're providing the following guidance.
First sales of 1.305 billion to 1.325 billion, which at the midpoint represents a total sales increase of 20% year over year. After excluding the impact of the 50 <unk> week in the prior year.
This compares to our long term growth algorithm of mid to high single digits.
Our increased sales outlook for fiscal 2021, and Corporate's comparable sales growth of 36% on a 2 year stack calendar basis.
Second adjusted EBITDA of 260 million to 270 million net.
At the midpoint represents a 54 per cent increase year over year, excluding the impact of the 50 <unk> week in 2020, and adjusting for public company costs.
This compares to our long term growth algorithm of low double digits.
And finally adjusted diluted net income per share of <unk> 80 to 85 cents.
You'll also note that we now expect 192 million weighted average shares outstanding on a diluted basis for fiscal 2021 versus our year to date fully diluted share count of 190 million shares.
So in summary, the third quarter of fiscal 2021 was a record quarter by all measures we drove strong financial results throughout our P&L are.
Our entire organization is making great strides against our key growth initiatives and with the partnership of our long term vendors were successfully navigating the tight supply chain in this environment of heightened consumer demand we.
We will continue we're relentless focus on enhancing our consumers experience and executing our initiatives to continue to drive growth and market share gains and with that I'll hand, it over to the operator to open the lines for Q&A. Thank you.
Thank you.
I'll now begin the question and answer session to join the question queue. You May Press Star then 1 on your telephone keypad, you'll hear a counterbalancing on request if youre using a speakerphone. Please pick up your handset before pressing any keys to withdraw your question. Please press Star then 2.
We will pause for a moment as callers trying to queue.
The first question is from Jonathan matches that ski of Jefferies. Please go ahead.
Hey, guys.
Quarter. Thanks for taking my question first 1 is on chlorine availability you mentioned some periodic shortages in dock outs in some locations sounds like a supply chain issues will persist maybe into the first half of next year do you think are out of stocks will sequentially worse.
<unk> are in the final quarter and what alternatives are you pursuing it do you think about potentially heightened demand for chemicals, Mexico season. That's my first question. Thanks.
Yeah, Hi, Jonathan it's Mike.
First of all regret a bit of a low point in the flow of chlorine granules into our manufacturing.
We do expect the fourth quarter to be constrained to demand.
We will have a nice comp in our chlorine tab sales, but we're not going to be able to drive the 100% comp that we saw in Q3.
So that's the first comment second comment is.
We've been working very hard to secure additional chlorine for our next fiscal year.
That pipeline is growing nicely and we expect to have somewhere in the 40% to 50%.
Increase in chlorine granules in pounds for next year, So I think the sum it up.
Tight in the fourth quarter for sure.
Better next year, while we don't expect supply to really normalize until after pool season in 2022.
That's super helpful color. Thank you for that and just as a follow up you mentioned, a 40% to 50% increase in <unk>.
On chlorine granularity in pound for for next year.
A question we get from investors a lot is is how do you think about that long term sales growth trends of 6% to 9% after 2 record years.
So not looking for formal guidance for 2022, but is it fair to say that kind of the those building blocks are still on the table, even after 2 record years, and we should see growth year on year.
Yeah, well look it's too early for us to provide guidance, but here's how we're thinking about 2022.
The first thing is that the secular macro trends that were experiencing is they show no signs of slowing down.
Recurring demand for our essential products and services is growing along with the installed base.
And the industry continues to be able to pass cost through to the consumer.
So if you look at that set up for the industry.
It's in great shape, great shape from a demand perspective.
We also know we have great collaborative vendor partners.
But that being said there likely will be likely will be some shortages of product into next year.
I'd say, especially chlorine.
So.
We feel very confident in the momentum we have on our growth strategies.
Confident we're gaining share this year and will gain share next year, but we're not providing any any more specific guidance for 2022 yet.
Gotcha, thank for the color Mike.
Yep.
The next question is from Steven Forbes from Guggenheim Securities. Please go ahead.
Good evening, Mike maybe just to start a follow up question on the shortage.
Just the outlook here right.
Curious if you can comment on the behaviors of those customers that were underserved per se during the quarter.
And why do you think its impact on your customer file growth trends or do you think about the traditional sort of funnel and.
Wallet share capture in the customer journey right that you'd say how is the shortage impacting the journey today and what are you sort of doing to prevent.
Migration right away from Leslie.
Yeah in 'twenty, 1 and I'm thinking about 'twenty 2 as well.
Yeah, Stephen I think the first thing to note is look we were comping at.
At very high rates and our tap sales, we worked very digitally beginning.
Last October to secure additional Korean granules, so I feel good about the work we've done there I did say, we weren't able to meet all the demand and that's correct.
But we are definitively gaining consumers by having tabs when others don't and I mentioned that the file growth of 16% in the year.
Excuse me on the quarter.
The new customer file was up plus 30%.
And of that 30% about a quarter of it came from new customers who bought tabs.
So we're actually seeing a boost to file growth from tabs currently.
It's not the preponderance of the growth, but it but it is a positive and we expect with the work we've done now to secure additional supply for next year, we'll be able to keep or accelerate that dynamic.
Thank you and then just a quick follow up.
You've given us is that in the past right just the percentage of sales.
<unk> generated by the loyalty members, we look at sort of the growth here accelerating sequentially.
Any sort of update on the percentage of sales representative transactions being generated by the loyalty members.
Yeah, I will say this with the launch of pool perks, we saw loyalty file growth grow.
We also saw engagement grow and we saw penetration increased about 500 basis.
Penetration as a percent of total transactions so.
I mean, we feel we feel really good about dynamic the dynamics we have.
And the regular file as well as the loyalty file and 1 of the things.
Particularly encouraged about is new customers. This quarter are spending 7% more than new customers did last year same quarter and our retained customers basically last year as new customers.
Buying 14% more this year than last year's retained customers. So the dynamic that we've been talking about where we launch loyalty it improves engagement.
Membership growth total filed grows we get a consumer on a file and then we're very good about ladder income up.
Last thing I would would quotas on a 3 year look back basis.
Our customer lifetime value on.
On contribution not revenue Q3, 'twenty, 1 versus Q3 'twenty is up 14%. So however, we look at the file.
Very encouraged by the metrics.
Yeah.
Thank you Super helpful stay safe.
Yeah.
The next question is from Kate Mcshane from Goldman Sachs. Please go ahead.
Hi, Thanks, good afternoon.
My question is around pricing power adjusted.
Mt.
Inflationary headwinds there seems to be across all of retail right now.
Because of different.
Current drivers could you remind us.
How much pricing power you think you have what options you may have taken during the quarter on what we could expect for the rest of the year.
Yes Kate.
We have said, we expected inflation for the quarter to be around 6%. It's it's it's 6% to 7%.
As far as we are calculating it and we haven't seen any resistance to passing that cost through.
We're also we're also doing fewer promotions.
At this point when we say we were able to pass costs through we haven't seen any.
Anything that would tell us we cannot continue to do that.
We haven't seen any hesitancy for the consumers to buy at a higher price.
And if you if you take tabs just as an example, I mean, 1 way to look at it is.
Chlorine cap pricing is up it's up almost 40%.
But you know on a 35 bucket of tabs, that's 35 pound bucket of tabs, that's maybe $35.
Versus prior year so.
Homeowner.
With a pool a.
Little higher income.
Pools up 50 to $100000 plus asset.
And you're spending 30 or $50 more too.
To pay to maintain a portion of it I think that's very reasonable on it and I think when you think about it that way.
It's intuitive debt.
We should be able to pass that cost on.
Yeah, and I'd add to that as well when you look across our categories given the non discretionary in nature.
Seen that that inflation on that those price increases throughout our business, So mike's calling out sanitizers and and Tricolore because it does was largest increase in Q3, but we saw increases across our entire portfolio of our product categories.
Okay. Thank you.
The next question is from Garik <unk> of loop capital. Please go ahead.
Great. Thanks for taking my question today.
Given the growth margin expansion this year on recognizing you're not providing guidance for 2022, but just how should we think about the step up.
And how sustainable this new elevated level of gross margin is.
Yeah, I'll take that so you're right, we're not going to provide guidance on gross margins going into next year and historically you haven't done so either even for the current year, but you know, we're clearly pleased with being up 358 basis points year to date over last year, which is well above our long term growth algorithm. When you think about our performance this year.
And what the core drivers, where you certainly saw rate improvements.
And occupancy leverage given the sales increase was partially offset by business mix as we grow other other portions of our business, including the wholesale channel as well as the hot tub business. So when you think about the those trends very consistent with how you've discussed gross margins in the past and you know kind of a core driver being rate improvement and we.
About what allows us to drive rate improvements year on year out it's our direct vendor relationships. It's a proprietary product offerings, it's a vertical integration of our supply chain and manufacturing operations.
Ultimately right when you step back on gross margins are very important part of our model, but ultimately we're looking to drive EBITDA and earnings growth. So it's a balanced formula that we will continue to focus on and I and our team is laser focused on identifying opportunities to continue to improve rates irrespective of where we're starting from.
Okay. Thanks for that and then just on the M&A front you man.
The 2 acquisitions in the quarter sounds like it was a couple more coming.
Provide any more color on the acquisitions that you've made and you know just in general how the pipeline book.
Yeah.
Yes, Garik I would characterize them as tuck in acquisitions.
And as I said in the in the.
In the remarks, just an abundance of opportunities out in the industry at the moment at very attractive multiples. So we are we're doing 2 things we're being very active.
In managing that pipeline.
And we're also staffing up internally to increase our throughput because theres more opportunities available right now and we'd like to be in a position to be able to take advantage of those both the balance of this year and going into next year.
Great. Thanks for the help.
The next question is from David Bellinger from Wolfe Research. Please go ahead.
Hi, good afternoon nice quarter.
My first 1 on just a follow up on the inability to meet customer demand you highlighted so is there any way to quantify the level of sales you missed out on the quarter and is that dynamic is that potentially leading to some type of sales deceleration rolling into the fiscal Q4 period.
Yes, David it's a good question and.
And we've thought about it internally.
We can't come up with a number of demand that we missed book when I say, we've had periodic outages.
It has indeed been the case I'm actually very.
We are proud of the team's work and our suppliers work on keeping us in stock most of the quarter.
But again I said, they're like I said, there was periodic allergist in some locations.
So when you look at the next quarter.
We spoke to the fact that we will have some supply chain challenges.
Particular earlier in the quarter, which is right now.
Around chlorine availability so.
We doubled chlorine sales in the third quarter, we're not going to be able to do that in the fourth quarter.
Understood. Okay, and then my follow up here, you mentioned on omni business flexing well growing very nicely. This quarter can you talk about whether you view those sales is largely incremental in areas without a store presence are you, reaching a new customer there are these somewhat cannibalistic to store sales.
And also any color on the margin profile of online if he could.
Yeah.
Yes, well first of all with gradual omni.
We can track how much of it is pure incremental.
And the way we do that is is how we look at ship from store orders, which way the way. We currently have that set up as we ship from stores when we don't have.
Inventory in the Dcs for a digital order and.
That's running in the 10% to 15% range just on pure incremental so we're quite pleased with that.
We don't see any trade out.
And it was very advantageous in the third quarter to have buy online pick up in store because.
When you manufacture coring tabs.
Chlorine tabs to ship online need to be individually rapped.
Colombia to manufacture.
So we made the decision to manufacture.
Manufacture less wraps tabs.
Can maximize the throughput on unwrapped tabs, but we were still able to offer those online with buy online pick up in store. So just.
Just a really key capability to have this last quarter.
Very interesting.
The color here.
Yeah more broadly when we talk about profitability by channel.
Give us specifics, but when you think about the total contribution so I'll get past the gross margin line and get the total contribution very attractive business and so ultimately we're going to consume we're going to serve consumers how they want to be served and as Mike's talked through we're seeing great traction through our omni initiatives and a lot of benefit to having the <unk>.
Capabilities in the market today.
Great. Thanks, again and best of luck in Q4.
Thank you.
The next question is from Ryan Merkel from William Blair. Please go ahead.
Hey, Thanks. So my first question is on Labor shortages has this been an issue at all for you and if so how you managed it.
Yeah.
Yeah. Good question. So you certainly have had challenges across the country.
From a staffing perspective, I think we're very happy with the levels of staffing across the organization I think we've managed through a little bit more turnover in certain markets at certain times as you know that's been a very kind of uneven a reopening of the economy.
So our team has worked.
Through the challenges and ultimately we think we were appropriately staffed throughout our network to serve consumers, but it's been an area of focus for us so well.
I would expect that to continue but I you know not not concerned about the liver level of labor availability to serve consumers.
Yeah, Ryan I think we're not little a little bit more color on that Ryan.
We're fully staffed as Steve mentioned I think the nuance is we're having to use a little bit more temp labor than we would like.
So going in.
With schools, we believe and hope reopening in September.
And stimulus coming to an end then we expect the labor market to improve somewhat.
But very pleased with the way we were able to manage through.
Any tightness.
Year to date.
Okay.
Good day here and there.
Then secondly.
Peak pool is a concern for some you know Mike based on your comments doesn't sound like it's a concern for you as we sit here today, but I know you're not giving guidance for next year, but any reason that the industry wouldn't see its normal on mid single digit growth is there any puts and takes day you can call on here today.
Yes, Ryan I don't I don't see any.
Right I mean the.
The elevated level of pool builds.
Seemed very intact I know there was some concern.
Last year with the backup in permits in some backlog at construction with people just get tired of waiting and cancel out.
We haven't seen.
We haven't seen anything to that to that effect and if anything construction backlog seem to be growing.
Permits are growing and installations are growing so so fundamentally when you think about pool spaces.
As you as you know it's about the installed base.
And it's grown every year for 50 years and it seems to be growing faster now. So we're we feel good about the industry set up for next year.
Perfect. Thanks pass it on.
The next question is from Liz Suzuki from Bank of America. Please go ahead.
Great. Thank you.
Are you finding that pool owners are able to stretch the life of their existing flooring. They just don't really have a choice in a matter of is how much of a shortage and I guess on top of that what kind of lasting damage do you think under chlorination causes and does that represent an opportunity for future sales of corrective measures.
Yes, Steve do you want to talk about under coordination you know more about that than I do.
Sure, Yeah, I'd say its pretty acute.
When there's under coordination because you end up with algae blooms and it has to be handled so I think more likely folks are finding alternatives. We're seeing growth on alternative sanitizers are the growth is not as large as kind of chlorine tap growth that we've seen.
Again, we sell all solution. So if a consumer wants a salt cell generator, we can sell it to them, we can install up for them and in many markets. If they went on by alternative sanitizers be beyond kind of the traditional treichler, we carry that as well so.
The sense that we have is that consumers are not ignoring their chlorine need we have talked with a pretty loud voice with our consumers about how to optimize their coring usage. If you think about the balance or is that are required them to keep chlorine effective it can limit your need for access of coronation and so you know that.
There are certain I am processes that that you can utilize them to extend the life of chlorine, but clearly I know that that's a benefit to our consumers and ultimately deepens the relationship that we have with our consumers.
Great.
We plan to enter the off season, which is usually a time of investment there and what are the biggest areas of opportunity that you'll be focused on for next season.
If you could talk a little bit more but I keep low home can play out and just be curious to hear about what you have planned there.
Okay.
Yeah sure first of all on.
Well the first thing I'll say is our slow seasons or certainly not as slow as they used to be.
Stephen I recently toured our distribution centers and.
1 of the consistent themes was that they are busy all the time, which.
Which we feel very good about in terms of next year. The work that's going on right now is to secure the appropriate amount of supply.
We are buying forward further into next year than we ever have before specifically for equipment.
And also chlorine commitments.
Other key categories. So it's.
It's the same process. We go through every season, but we are doing it sooner this year and we are making commitments further into the season.
And then with regards to the Accu blue.
The.
We launched in mid July, which it's a little bit late in the pool season.
And I would characterize it as a soft launch.
There was no marketing, but in a couple of emails.
We didn't operating stores that was online only and that was purposeful alright, we wanted to see kind of a slow build.
Despite.
Really no marketing, we've sold through more than 80% of what we produced and to be clear, we only made a few thousand.
Best way to think about this as it is and it is an extended user experience test.
We're very pleased to say is that it was well received and well received I mean first of all it works. There's a there's actually a fair amount of the competitors' products that don't consistently work. So we're getting great feedback on that.
It's relatively easy to use.
<unk> 2.0, we'll improve usability a lot.
It matches the in store results. So they actually Blue home is matching hockey Booth store I think our consumers are anxious to see if that was the case.
It is and you know on.
And that really makes it superior to other residential water testing systems.
Some really good learnings as well, we're fine tuning the customer on boarding and the learning collateral, particularly around on how to videos.
And in the device comes with a calibration desk, which is causing a little bit of confusion, because you don't need to calibrate the device prior to using it the calibration desk.
As only needed if you have to do a diagnostic recalibration.
And that is highly unlikely so we're likely to take that calibration desk out of the operating per version 2 point out.
Version 2 point all I've got.
Got prototypes in the office, it's dramatically evolved design much much better user experience.
It's a very commercial product and next year, we will be ready to scale it.
We're not giving any guidance yet on what to expect for version 2 point out, but as we as we do give our formal 2022 guidance. We will certainly included.
Great. Thanks, so much.
Yes.
The next question is from Peter Keith from Piper Sandler. Please go ahead.
Hi, good afternoon, thanks for taking the question guys.
Yes, Mike you talked about the the install base growing which clearly.
We can see with that backlog and adding 100000, new in ground pools every year.
But what about the above ground pools that were purchased during 2020 in 2021 do you think there could be.
Some elevated level of abandonment that potentially could take down the total pool installed base at some point in the next year or 2.
Yes, it's really it's a really interesting question and it's something we're watching I guess, the first thing I'd say is over.
Over the course of the history of the above ground pool business, there's been a fairly high percentage of abandonment.
Tough number to get at but.
Quarter is not out of the question, maybe maybe more so we do expect some abandonment debt is typical of the industry. I think also this time, though what we're seeing is.
And I've said this before on a on average.
On some of our calls it's a little bit of a like a gateway drug and above ground pools, we see people buying above ground pools, who are waiting for an in ground pool. So some of that a banding and ending of the pools they purchased.
When they get there in ground.
So it's it's a it's.
It's a squishy number to try to get at for sure.
We expect.
Some abandonment rate, probably a little bit higher than historical that would make sense to us.
Our above ground pool and hot.
Sales for the quarter doubled.
But it's still less than still less than 5% from our <unk>.
Total sales for the quarter.
Okay.
And you know as a as a customer and you go through the Covid process. So you kind of logging on your pool specs. So you guys should have a pretty good picture of of the per.
Net of in ground pools versus above ground versus hot tub, but what do you think you stand now.
As a percentage of your loyalty program on your customer base.
It's above ground pool owner.
Yeah, Peter you're right, we're getting a lot of rich data from the devices, but it's early days.
It was 3 weeks ago, we launched so we're not that is the number we're very interested in and we should be able to get at but not something I'm not something we are currently able to quote.
I'm sorry, Mike just to clarify I was talking about the in store testing.
That part you guys you collect a pretty good information on the pool size and things like that.
Yes, yes, I'm, sorry, I'm sorry.
Yeah, we do at night.
Hi, Steve I cant recall that number do you know that number.
No I adjusted when you think about loyalty and water tests, increasing and you think about the overall percentage of sell for above ground I think it's instructive to understand its less than 5%. So we're not gonna have an outsized percentage of our customer base being above ground above ground. He's spending a smaller amount of money. So I don't I.
Don't think it's a large portion of the file.
Okay, Alright, guys. Thanks, so much for the feedback and good luck.
Thank you.
Thanks.
Next question is from Simeon Gutman from Morgan Stanley. Please go ahead.
Hi, This is actually Hannah <unk> on for Simeon I wanted to ask you about the updated guide it.
It looks like top line change is kind of in line with the beat this quarter, but the net income changes a little below. So I was just wondering if you could bridge kind of the quarter's beat.
Versus the updated guidance for the full year.
Yeah, Great Great question and on certainly appreciate it and when you think about when we gave our guide last in early June right. We were 8 weeks through our third quarter. So we had a fairly good visibility on what our expectations were gonna be for Q3 now look at it we perform better and so it had a strong finish in and outperformed even those expectations.
And when we look at into Q4, you know provided us a stronger conviction about the demand and better visibility into Q4 inventory availability. So as Mike talked about you know no no doubt we think we can serve more consumers if we get more inventory.
We're working very aggressively to procure more inventory to serve those consumers and I think 1 of the keys as you'd think about are you preparing that bridge between Q4 last year. In Q4. This year are the numbers that I provided is based on the calendar shift and the the 53rd week. When you think about Q4 from a shift perspective, we're going on in Q.
4 will lose the first week of July which is a peak 1 of our peak weeks.
You pick up a week at the end of September early October So and then.
That's about $20 million and then we talked about the $18 million just loss of the 50 <unk> week. So when you adjusted and on normally talk about EBITDA on a calendar basis, but if you adjust for some on the calendar shift and that extra week I. It shows more growth than just gonna be reflected on a reported basis.
Gotcha, and there's no kind of incremental factors, we should be considering at the operating margin level.
Yeah. Good question as well so as we think about day, you know from a rate perspective on EBITDA margin I E that shift again, when you think about the that peak week in July that's a very high profitability weak for us and so you know about 75 basis point impact on EBITDA margin.
A reduction because of the calendar shift right and then because of the year, we're having and the opportunities that we see to continue to invest in the business. We are pulling forward some investments and into Q4.
That will drive future growth and and that's probably another 100 basis points in Q4.
Those are the 2 key callouts that I provide impacting kind of the margin rate. If you will on EBITDA for Q4 year on year.
That's very helpful. Thank you.
Yeah.
As a reminder, it is star 1 to ask a question.
The next question is from Joe Feldman from Telsey Advisory Group. Please go ahead.
Great. Thanks for taking my question.
Wanted to ask again on on the chlorine side of things.
What I'm I guess why can't it be produce faster.
I thought last quarter also you guys have had some new relationships with some suppliers.
And we're able to procure more than the competition and it like did that change over the past quarter or is there supply just gone away so kind of 2 parts to that.
Yeah, I think on following the question Joe.
We were able to secure quite a bit more this year.
In the range of 30% more.
And we've been able to manufacture it.
We were.
Did not anticipate.
The level of demand.
Right.
To be clear, we will we will have a very strong comp in chlorine tab sales in Q4.
But we don't currently own enough inventory in the raw chlorine.
To be able to comp a 100% like we did in Q3.
So.
Still very healthy growing part of the business.
And it is a constant emphasis for us.
To acquire more and as I've mentioned, we have acquired quite a bit more for next year already and we continue to look for additional incremental resources.
Yeah, Thanks for that and then yeah.
I think Steve you mentioned that.
You know the shift towards other.
Alternatives like Salt water did you guys see an increase in that this past quarter, because I remember last quarter same thing like I thought you were starting to see that I know, it's a fairly constantly transition to move to saltwater but.
Where did you see on that front.
Yeah as I mentioned, we saw alternatives Sanitizers increase.
Quarter on quarter, or sorry core year over year in the quarter, but not not as much as tricolore. So chlorine tap sales so not a big shift from a overall percentage and again, we've talked a lot about this but where we're agnostic for consumer wants an alternative sanitizer, we're going to provide that solution for the consumer so.
Certainly seeing some increases, but not not compared to what we're seeing on the chlorine tab on market.
Yeah got it okay. Thanks, guys and good luck with this quarter. Thank you.
Thank you. Thank you.
This concludes the question and answer session I would like to turn the conference back over to Michael <unk> for any closing remarks.
Yeah.
Thanks Archie.
We appreciate you all joining us today and your interest in less lease we look forward to speaking to you again at our year end call and in the meantime stay safe.
Thank you.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
Yeah.
Yes.
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