Q1 2023 Leslie's Inc Earnings Call
Good afternoon, and welcome to the first quarter of fiscal 2023 conference calls for less lease incorporated at this time all participants are no listen only mode. Following the prepared remarks management will conduct a question and answer session.
You should require any afraid or 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 prepay later today on the company's website I will now turn the call over to Caitlin Churchill Investor Relations. Thank you you may begin.
Thank you and good afternoon, I would like to remind everyone that comments made today may include forward looking statements, which are subject to significant risks and uncertainties that could cause the company's actual results to differ materially from management's current expectations.
These statements speak as of today and will not be updated in the future if circumstances change.
To review the cautionary statements and risk factors contained in the company's earnings press release, and recent filings with the SEC.
During the call today management will refer to certain non-GAAP financial measures a reconciliation between the GAAP and non-GAAP financial measure can be found in the company's earnings press release, which was furnished to the SEC today and posted to the Investor Relations section of Leslie website at IR Dot Leslie pool Dot com.
On the call today from Leslie This is Mike <unk>, Chief Executive Officer, and C Codell Chief Financial Officer.
With that I will turn the call over to Mike.
Thanks, Caitlin and good afternoon, everyone. Thank you for joining us.
Please note that we have posted a short earnings deck. The Leslie is IR site.
We will be referring to certain pages in that deck during our call.
I'd like to start by reminding everyone that the first quarter is our smallest quarter of the year, representing only about 12% of total year sales.
However, it is an important quarter as we take the actions incurred the expenses and make the appropriate investments to set ourselves up for the all important second half of our fiscal year, which is pool season across the country.
With that in mind I'm pleased that we delivered overall Q1 performance was in line with our expectations. Despite some very challenging weather in the quarter.
Sales for the quarter grew 6% to a record $195 million.
Average order value grew 7% and transactions were down 1%.
Average revenue per customer grew 6% and our customer file was flat.
Residential hot tub grew 35% quarter and pro pool grew 11%.
Residential pool sales decreased 3% in the quarter.
Comp sales decreased 4% for the quarter, which contributed to a two year stack comp plus 17%.
Comp sales for the quarter were negatively impacted by wet and cold weather, particularly in Texas, California, and the southwest salesman.
Sales in Florida benefited from the cleanup associated with hurricane yet.
In total our weather service provider calculated that weather was a 5% headwind to comp sales for the quarter.
This is the first quarter since the positive impact of the Texas freeze in the second quarter of 2021 that weather has had a significant impact on our overall comp sales.
Gross profit for the quarter was 65 million and gross margin rate was down 290 basis points.
Please refer to page six of our supplemental deck to review, our Q1 margin right rich.
As you can see the primary drivers of the change in margin rate are.
Number one business mix, driven by acquisitions, but disproportionately impacted margins in the quarter.
Two incremental product cost and excess of retail price increases.
Three incremental D C expense associated with the execution of our strategy to peak store N D. C inventory earlier in preparation for pool season, and poor deleverage of occupancy costs driven by a decrease in comp sales.
These factors are all reflected in our full year guidance and we expect these same factors to impact our Q2 margin rate.
To complete our summary of Q1 financial performance adjusted EBITDA for the quarter was negative $12 million and adjusted diluted earnings per share when they get a 14th yes.
Given the seasonality of our business the loss in the quarter was anticipated and does not change our expectations for the full year.
Accordingly, we are reaffirming our full year outlook, we provided at our Investor day in November .
As we noted in November we expected tougher first half comps this year in our first quarter results were in line with our internal expectations.
However, the makeup of those results did have some differences from our full year outlook.
As you can see illustrated in the table on page nine of the deck.
Total comp sales of minus 4% was less than our full year guide of minus two 5%.
Comp sales were non discretionary products ex tricor were down 3% in the quarter and had a total comp sales contribution of minus two 5% versus our full year guide of plus one 3%.
Try core comp sales grew 8% in the quarter and had a total comp contribution of plus 1% versus our full year guide of minus one 1%.
We saw no price deflation versus the prior year's quarter or the fourth quarter of fiscal 2022.
Discretionary product comp sales were down 11% in the quarter and had a total comp contribution of minus two 5% versus a planned comp contribution of minus two 7% for the year.
Non comp sales in the quarter were plus nine 6% versus our full year guide of plus 5%.
In summary, non discretionary sales ex strike or were not as strong as we expected due to adverse weather.
Discretionary sales overall performed in line with our expectations, although hot tub sales were somewhat better than we expected.
Tricor outperformed as retail prices remain stable and non comp sales outperformed driven by acquisitions and new stores.
As we look to the second quarter, whether it is projected to be less of a headwind.
We do expect our hot tub business to decelerate such that we continue to anticipate first half comps to be as we described at our Investor day.
Moving to the industry backdrop.
The pool and hot tub industry experienced reduced consumer demand in the quarter.
As you can see on page 10 of the deck are especially cool retail competitors.
Based on third party aggregated credit card data experienced a decline in sales of seven 2% in the quarter.
This softening demand has two primary components.
First as we discussed concerning our own results, whether it was a significant negative factor year over year for most markets.
Second consumers were less confident based on the challenging macroeconomic backdrop.
For our business. We saw this decreased confidence manifested in consumer behavior changes, including purchases of smaller sizes of our two key sanitizers Trichlorfon Cal hypo.
And reduced units per transaction.
P T for the quarter was down 2%.
Against this backdrop of reduced demand the competitive advantages derived from our integrated system of physical and digital assets and our associates strong execution of our diversified growth initiatives drove continued market share gains.
Turning now to the performance of our strategic growth initiatives.
First despite the macroeconomic and weather challenges in the quarter.
Consumer file was flat versus the prior year's quarter and improved 200 basis points from our fiscal Q4 2022.
Next we continue to deepen our relationship with our consumers average revenue per consumer grew 6% in the quarter.
And the number of loyalty members increased 15% over the prior year's quarter.
With regard to our pro initiative, we ended the quarter with 2850 prologue contracts in place and we are currently operating 80 pro locations.
Our plan to convert 15, CRO locations and build three new co locations in 2023 remains on track.
And all 18 locations are scheduled to be operating by the start of the pool season.
Pro consumer group sales grew 11% in the quarter with comp sales down 4%.
Our pro comps were affected by the same factors, we discussed for our overall business as well as some product availability challenges with one equipment vendor.
M&A was the standout contributor to the quarter accounting for more than $15 million in non comp sales.
Year to date, we have closed on two acquisitions that added six locations.
We have another five acquisitions under LOI that would add 13 locations.
We expect to close the acquisitions under LOI prior to the start of cool season.
The current macroeconomic conditions in the pool and hot up industry have created additional attractive acquisition opportunities and we plan to continue accelerating this initiative.
Regarding our residential white space initiatives in.
In the quarter, we added five locations through acquisitions.
And one new store and closed two stores for a net increase of four locations.
We currently operate more than 990 locations. We're on track to operate over 1000 locations by the startup of cool season.
We're actually below home, we have finished consumer testing of the version two point all device.
And then on track the launches initiative.
Cool season in 2023.
Okay.
With regard to corporate governance.
We have published the proxy for our annual shareholder meeting scheduled for March 16 2023.
In the proxy, we announced that MS. Jodi Kozak will not be seeking reelection to our board and Mr. Mark Bagley economy L. Catterton will be resigning from our board effective with the completion of our annual meeting.
We thank jodi and Mark for their service and many contributions to Leslie.
In conjunction with these changes we also announced that our board will be revised from 10 to eight members.
Now I will turn it over to Steve to share more detail on our Q1 financial results.
Thank you, Mike and good afternoon, everyone as Mike mentioned, our first quarter results were in line with our expectations and we reported record sales for the quarter.
We're grateful for our team as they continue to execute against our initiatives and prepare for pool season in 2020 three.
For the first quarter, we reported record sales of $195 million, an increase of 6% or $10 million when compared to the first quarter of fiscal 2020 two.
Our comparable sales decreased 4% or $7 million.
This decrease is on top of our comparable sales growth of 21% in the first quarter of fiscal 'twenty to 'twenty, two and calendar adjusted comparable sales growth of 26% in the first quarter of fiscal 2021.
Our comparable sales growth on a two year stack basis was 17% and on a three year stack basis was 42%.
Our non comparable sales totaled $17 million in the first quarter of fiscal 2023, which was driven by seven completed acquisitions that added 32 locations as well as eight net new store openings since the end of fiscal 2020 one.
Our comparable sales decreased by 4% for residential pool.
4% for pro pool, and 2% for residential hot tub.
On a two year stacked basis, we generated comparable sales growth of 14% for residential pool third.
<unk> six per cent for Propofol and 4% for residential hot tub.
Unfavorable weather had a 5% impact on sales growth during the first quarter with the Texas market experiencing the largest impact.
Gross profit decreased 3% or 2 million when compared to the first quarter of fiscal 2022, and gross margin rate, which decreased in line with expectations was down 290 basis points to 33, 5% from 36, 4% in the prior year.
On page six of our supplemental deck I'll review, our Q1 gross margin rate bridge in more detail.
During the quarter gross margins were impacted by the following.
First business makes lowered gross margins by 130 basis points, primarily related to M&A completed during the last 12 months.
Second lower product margins had a 40 basis point impact as a result of higher input costs.
During the quarter promotional activity was flat to slightly down and did not have a material impact on our gross margins.
Third occupancy costs Deleveraged by 85 basis points due to rent increases and negative comparable sales growth.
And finally incremental distribution expenses lowered gross margins by 35 basis points disc.
Distribution expenses were elevated as we executed on our plans to receive N and distribute more product to our store network earlier than last year in preparation for the coming fall season.
Now I'll turn to SG&A.
SG&A increased 16% or $12 million when compared to the first quarter of fiscal 'twenty to 'twenty two.
We estimate inflation during the quarter increased SG&A by approximately 5 million primarily related to payroll and digital marketing spend.
The current year quarter also has an additional 4 million of non comparable SG&A associated with acquired businesses.
Adjusted EBITDA was negative $12 million for the first quarter of fiscal 2023, which was slightly ahead of internal expectations.
Adjusted net loss was $25 million in the first quarter of fiscal 2023 compared to a loss of $11 million in the first quarter of fiscal 2022.
Interest expense increased to $13 million during the quarter from 7 million in the first quarter of fiscal 2022.
And our effective tax rate remained consistent at 25%.
Adjusted diluted earnings per share was negative 14 cents in the first quarter of fiscal 2023 compared to negative six cents in the prior year.
And basic and diluted weighted average shares outstanding were 184 million in the first quarter of fiscal 'twenty twenty-three compared to 189 million shares in the first quarter of fiscal 2022.
Moving to the balance sheet.
We finished the first quarter of fiscal 2023 with cash of $3 million and we had 91 million outstanding on our revolver compared to cash of $53 million and no borrowings on our revolver at the end of the first quarter of fiscal 2022.
The reduction in net cash was primarily due to investments in inventory and higher M&A activity during the past 12 months.
At the end of the first quarter of fiscal 2023, we had $99 million available on our revolver.
We ended the first quarter of fiscal 2023 with $430 million of inventory, an increase of $185 million or 76% compared to $245 million at the end of the first quarter of fiscal 2022.
The increase in inventory is primarily related to equipment chemicals and M&A activity.
Both the equipment and chemical product categories, our non discretionary in nature and are not subject to technology or fashion risk.
And as previously stated our first priority is to put the company in a position to meet consumer demand for the season.
In furtherance of that objective, we continue to view our current elevated inventory position is appropriate and sensible given the uncertainty of supply.
We also have the ability to use our balance sheet is a competitive advantage and invest in higher inventory levels in both our stores and our distribution centers.
When we believe we have sufficient inventory to meet consumer demand through season in <unk>.
We see supply chains across the industry become more predictable.
Then we will strategically manage inventory levels down.
On debt at the end of the first quarter of fiscal 2020. Three we had 796 million outstanding on our secured term loan facility compared to $804 million at the end of the first quarter of fiscal 2022.
The applicable rate on our term loan during the first quarter was LIBOR, plus 250 basis points and our effective interest rate was six 1% compared to an effective interest rate of 3% during the first quarter of fiscal 'twenty to 'twenty two.
Before I wrap up our first quarter performance I'd like to share an update on our supply chain readiness.
In November we discussed specific actions, we're taking to improve our supply chain across three key areas.
First expand capacity by implementing a two shift seven day, a week model during pool season for our distribution centers.
Adding additional three pls to our network.
Second stock more inventory across our network and third diversify our supply base.
I'm pleased to report that we have made significant progress against all three of these areas and our team is focused on meeting consumer demand across our entire network during the upcoming fall season.
Now, let me turn to our outlook for fiscal 'twenty to 'twenty three.
Our performance in the first quarter of fiscal 2023 was inline with expectations and today, we are reaffirming the outlook we issued at the end of November .
As we discussed a couple of months ago, we're expecting a more uncertain macroeconomic environment in fiscal 2023 of them up to and including a recession that will pressure industry sales margins and earnings growth.
Approximately 80% of our sales are non discretionary products and services, which will mitigate but not eliminate a recessionary impact on our business.
For fiscal 2023 we continue to expect.
<unk> of 1.56 billion to $1 six 4 billion.
Gross profit of 667 million to $708 million.
Adjusted EBITDA of 280 million to $310 million.
Net income of 131 million to 146 million.
The net income of 145 million to $160 million.
And diluted adjusted earnings per share of <unk> 78 cents to 86 cents.
And diluted share count of 185 million shares to 187 million shares.
Finally on our 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 stand April through September .
We invest in our business throughout the year, including in 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.
Consistent with our commentary in November in fiscal 2020, three we expect negative comparable sales growth and significant gross margin declines in the first half of the fiscal year, given the strength of the comparable periods in fiscal 2022 and fixed cost deleverage.
We also expect to generate all of our adjusted EBITDA and earnings in the second half of the fiscal year.
In summary.
During the first quarter of fiscal 2023, we generated record sales and performed in line with our expectations.
We're grateful for the contributions of our entire team as they continue to execute against our initiatives and prepare for the 2020 three pool season.
And we will continue our relentless focus on enhancing our customers' experience and executing our initiatives to drive growth and market share gains.
And with that I will hand, it back over to Mike. Thank you.
Thanks, Steve.
Pool and Spa industry has proven over time to be one of the most durable and advantaged consumer products categories.
But it does have some sensitivity to macroeconomic conditions.
In addition during periods that are not prime pool season consumers can take some shortcuts and maintenance with less danger of law swimming days safety concerns and equipment damage from poor water care and maintenance.
In the first quarter, we did see some indications of reduced confidence and demand from pool and spa owners.
Especially for discretionary products.
Theres reduced confidence combined with some very unfavorable weather made for a challenging industry backdrop.
Against that backdrop, we feel good about meeting our internal profit expectations and growing our top line 6%.
These results are a testament to our team performing at a high level and to the ability of our diversified strategic initiatives to drive growth in adverse macro conditions and.
And importantly, we feel very good about the progress we've made against our plans to Derisk, our supply chain and ensure that we are in position to win big during the 2023 pool season.
With that I will hand, it back to the operator for Q&A.
Thank you if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question. Kim You May Press Star two if he would like to remove your question from the queue and for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star.
Yes.
Our first question is proud to Simeon Gutman with Morgan Stanley . Please proceed.
Hey, good afternoon, everyone hope you're good I think you've talked about this in the past I wanted to ask what recession could look like for you and I think theres a lot of puts and takes and who knows how the consumer will spend on travel and maybe it comes back into this category, but if there was a history lesson and and then just to clarify minus five to flat is it is that in.
That is that bracketing, a potential recession or that is a non recession scenario.
Okay.
Yeah. Thanks for the question Simeon knee.
The full year guidance does include challenging macroeconomic conditions up to including a recession. So so that that does bracket it to answer your question.
And you're right. There's a lot of puts and takes in there right a recession could could slow down spend on travel and could keep more people at home you could also look for people to just try to.
Skip some steps in pool maintenance, but they can only do that for a period of time as you know so yeah.
Yeah, where we're comfortable that our full year guidance.
Sufficiently brackets.
Economic conditions up to and including a recession.
Okay, and then a quick follow up.
How are you I don't know, if it's deflation or disinflation or price tracking relative to expectations and then demand for durables, you mentioned, you're starting to see some pockets of durables, but I guess units per se, how how our units tracking versus how you thought and how is price tracking versus how you thought.
Yeah, just starting to start with price.
Inflation was a little higher than we anticipated in the quarter, but came down across all of our product categories. So definitely hitting heading in the direction. We anticipate it doesn't change our outlook for 5% for the full year.
In terms of durables or if you would big ticket items, we have seen some weakness in equipment.
And at the same time, our equipment repair and parts businesses have picked up so there's a little bit of a of a signal that some people are looking to repair versus replace or upgrade right now but.
But I think we got to keep in mind that this is a.
A very small quarter for us and it's not we we internally.
Try Barry specifically not to take the trends, we see in Q1 and apply them to the balance of the year.
Such a small quarter that a you know a little bit of changes in consumer behavior or in this case.
Really challenging weather.
An outsized impact on the quarter that just don't impact the full year.
Okay. Thanks, Mike Good luck.
Thank you.
Our next question is from Steven Forbes with Guggenheim Partners. Please proceed.
Hey, this is Rene Marion on for Steven Forbes I wanted to touch on the pro side of the business can you discuss any incremental learnings from this customer. Additionally, can you discuss any notable trends with pricing in the segment. Thank you.
Okay, No that was specific to the pro consumer is that correct Yep Yep.
Yeah, you know our pro business is run through our residential stores are predominantly.
And so in the pro business, we saw a similar impact as we did in residential due to the weather.
So comps were down 4%, we looked very closely to see if we saw any signs of an increase in DIY.
Behavior among consumers.
And maybe some reduction in their use of pros and we did not see anything of.
Of that nature.
In the data that we got so I think you know for us focused on smaller pros and servicing them through our own retail stores.
Pro conversation is very similar to the it was very similar to the residential conversation we did see some of the pros buying some smaller quantities of sanitizers.
You know I think there's a there's a feeling in the pro market that chemical prices could come down.
And I think they're trying to wait it out frankly, a little bit, but we have not seen any indication of any deflation in chemicals at this point.
Got it thank you.
Yep.
Our next question is from Ryan Merkel with William Blair. Please proceed.
Hey, guys. Thanks for taking the question.
Can we start with inventory, Mike the inventory kind of pop off the page and up a bit sequentially.
<unk>, how much safety stock and when do you see inventory normalizing.
Yeah. It's a great question Ryan Thank you for that and as we think about our inventory growth I mean, theres two key reasons that that inventories up when one is sales growth over the last year last few years and then importantly, this cheap decision that we made to intentionally pull forward of 2023 receipts in advance of season.
We believe that pull forward, it's appropriate when you look at the last two years. The industry has had a number of supply chain challenges, we've had far too many out of stocks on key products and we're unable to serve consumers. So the pull forward. It allows us to load our stores with more product.
And facilitate the replenishment cycle during the early part of our season.
And it's also one of the reasons that ESI and some of that just distribution costs I'd be a little bit higher than in the last quarter as well, but again the inventory that we're procuring today is for this season I and it's inventory that was being brought in earlier and preparation for season, it's not are not stocking up for kind of long.
Our term needs.
Okay. So you know very much on purpose and I know some M&A is in there too yeah.
Yeah exactly.
Yeah, but that's very purposeful and the only thing I would add Ryan with our omni channel capabilities the ability to load up the stores kind of maximum capacity early and then you keep it there year round allows us to take advantage of the ship from store.
Okay.
And then my second question I wanted to dig in on the discretionary sales I think you mentioned down 11% can you just unpack some of the weaker categories and I know you mentioned equipment at what else is in there.
Yeah, we we consider most all equipment non discretionary.
Alright, he heaters is probably the one we've talked about in the past that you don't have to have the heat or two.
Keep them cool maintained and we did see heater sales down.
Very very much in line with what we saw in Q4 as well in terms of other discretionary categories. As you might imagine we've seen above ground pool business be very.
Be very weak prices have come down considerably and theres a lot of excess inventory in the market. We're not we're not playing a price game on that so we've seen ourselves come down as well.
And then recreation products in general.
Floats and noodles and things like that have you know.
Are down considerably yet as we anticipated and above ground pools is as anticipated as well we saw that.
I'll start to occur very.
Actually in the fourth quarter and then also very early in Q1.
Got it yep those categories makes sense. Thanks.
Thank you.
Our next question is from David Bellinger with Mek and partners. Please proceed.
Hey, guys. Thanks for taking the question.
First one on gross margins does seem to be back at Q1 of 'twenty 'twenty levels, even though sales are up almost 40% lower back back then so how should we think about the mix impact going forward is that the largest headwind we should keep in mind as we as we update our models here and there.
Is that discretionary piece also playing into that as well.
Yeah.
Do you want to take that Mike. Yeah. Go ahead, yeah. So I remember back to our guidance in November was flat to negative 35 basis points for the year. So we do anticipate a reduction in gross margins for the year, we talked about the first half being being lower or down significantly I should say a with some improvement in the back half. So the core question that you're getting at is.
Well the current quarter impacts persist and if not why might they change as we work through the year and so let me kind of walk through each of the individual line items, but business mix are number one related to M&A that we can play in primarily in the back half of last year as we work through this full year it'll be much less impact.
Fall on $1.6 billion of sales versus the first quarter sales of 195 million are when you think about product costs were in the off season. So our expectation is that by the time that pool season starts a industry retail pricing will have caught up with industry cost increases I, maybe have seen some what of a a.
Slow adoption of some of those higher costs in the current environment, but I, absolutely expect that to occur.
And then D C expenses than in the first quarter and you know those expenses will moderate as we get in to the full year as well I mean, we talked a lot about the challenges we had in our New Jersey D C and vendor delivery cadence last year I and since we brought forward some of the inventory receipts and movement of that inventory around our network. We've also pulled forward.
Some of those expenses as well.
And then again as we look to the second half and and better comps were gonna see occupancy normalize as well.
So no no changed our overall outlook that we provided back in November I again that 290 basis point decline this quarter in line with our expectations and see a path to what we previously provided.
Got it that's very helpful. And then just my follow up here on my some of your ending.
And and comments in the prepared remarks, just on the indications of reduced confidence in the category.
So are you hearing that from your pro customers as well as some of the larger pros, particularly and I'm curious if if we were to see a wider slowdown across pool would you see that more pronounced from the pro or the DIY customer at first maybe you can just give us some some thoughts there.
Yeah the.
But.
I think the way to think about about demand as is to keep in mind. It's a it's a very small quarter right for the whole for the whole industry and I know, we've said that a lot, but but again trying to extrapolate trends from this first quarter, which is a small and b had a really outsized weather.
<unk> I just think that's that that's tricky and internally, we're trying not to do that.
In terms of.
DIY versus pro.
Sit in their earlier question the very similar behavior that we saw in.
In both channels and we looked really hard for any indication that there might be some switch from Proto DIY and we did not see that so we we expect our pro business to play out for the year as anticipated when we put out our guide and we expect the residential business to do the same.
Got it thank you.
Our next question is from Garik <unk> with loop capital markets. Please proceed.
Oh, hi, Thank you I'm just wondering if you could speak on the impact of Tricor, obviously hold in here and you've said in the past we plan to hold onto it as much as you, possibly can but just give me the big Delta between our house resilient, placing because it's been so far versus what's in your day.
I was wondering if you could maybe provide some perspective on you know you would anticipate.
I seem to come down and when might that be or if there was any fines.
That you see at this point at all.
Yeah, Gary Thanks for the question.
You know the pricing for pool season, really gets sad Memorial day weekend.
We've talked about that a little bit before at some conferences as well as calls that's when I would say the industry settles in on price for the balance of the pool season, so up until that point.
Not to make any assumptions, we talked about at our Investor day that there's a case for price deflation and Tricor. Our we have not seen any evidence of that we know that tricolore costing is up I think that is now.
Set in the industry and it would be unusual for the industry to discount off of that.
But there's a lot of there's a lot of chatter about that.
That potential outcome. So we're not discounting it which is why we have it in our guide as a possibility but to date, we haven't seen any we haven't seen any inclination of price deflation and probe or residential.
And and just to reiterate there's there's plenty of inventory in the channel I would say everybody is now fully inventoried and tricor.
Got it no. That's helpful follow up question is just you.
What kind of weather impacts on the quarter.
Sounds like most of that was.
On the non discretionary side, but I'm, just wondering if there might possibly be any pent up demand.
From from any purchases what might have been pushed out I'll give them to the weather or shall we assume we'll go fields, where we lost with the.
The poor weather in the quarter.
Yeah, I think yeah, I think it would be interesting to see I think chemicals right that that sales opportunity as has probably past I think it remains to be seen on equipment, because you know what the weather being as challenging it was.
It impacted our store traffic site traffic and pools were not on People's mind. So I think there's a I think there's an opportunity to recover that.
And again.
Small quarter.
Upsized weather impact.
We're being very careful not to draw any.
Trends for the full year from it and we didn't and we didn't see anything despite those two factors that would tell us we need to.
Got it thanks, Yeah, I'd only add to that Derek that you know I think the last standardization days in the calendar fourth quarter or de Minimis.
So I think Mike's right, it's more along the lines of traffic and could that have deferred some purchases round sanitizers sure.
But loss amortization days are just not not meaningful.
Okay great.
Great. Thanks for that best of luck.
Our next question is from Peter Keith with Piper Sandler. Please proceed.
Hey, good afternoon, everyone.
One follow up a little bit on the prior question around try four like you'd noted theres a lot of.
Inventory in the industry. So we'll see what happens with pricing I guess in the event. There is some price cuts as we get closer to memorial day, how would that impact your product margins are you guys already kind of bought up on a lot of the tricor inventory has sort of stuck with your cost how should we think about the flow through it but if I had to place when it comes to be.
Yeah. We are our costs are set for triangular so if we and I would say the industry costs are set so if we see if we see price deflation from this point retail price deflation.
That would be an impact on margins.
It's also the reason I don't we don't think we're going to see it in the industry.
I believe there's a need for any price deflation.
And in our mind inventory demand.
Supply both domestic and import has all kind of settled in.
A at a specific price in a specific volume and we consider the category.
Healthy at the moment.
Okay, and then maybe just on that same topic.
It seemed to be some concern or some speculation that you and others in the industry are sitting on elevated.
Chemical or tricolore margins versus historic margins.
Where are you on it relative to like a 2019 level are you in line or above on strike or what does that margin profile looks like.
Yes.
Yeah, Peter I'm, sorry, I'm going to have to pull the competitive information on that one we.
You know we have.
Grown margins throughout the quarters.
So as David brought up earlier on a question we're closer to 2019 currently overall.
But we expect the year end the year in a better position than we were in 2019, and so margins are up overall for the business.
And I would say our tricolor margins are higher but to go into specific some of them.
And then after the client that one.
Okay Fair.
Fair enough I appreciate that thanks for the insights.
Yep.
Our next question is from Andrew Carter with Stifel. Please proceed.
Thank you very much good evening, what I wanted to ask is you mentioned, the smaller pack sizes or something youre seeing and as a potential sign of consumer weakness it.
I guess, how do you compare those that percentage of the volume versus say before the big Tricor disruption, where there was a 35 pound bucket of tabs and people thought they couldn't get anything they grab it second thing I'd ask is wouldn't a smaller pack size be accretive to you from a product margin standpoint, and finally as you know depending on how you are.
Extrapolate that is is it an easy switch if you're over inventoried at the store big pack sizes to make that correction given pack sizes or you're stuck with it anything you can help out with there. Thanks.
Yeah. Thanks, Thanks, Andrew for the question the smaller sizes are a little more profitable for us.
We do particularly now that we do the bulk of our own tablet ing have the ability to switch between bucket sizes during the season.
The advantage we have this season is we're just fully inventoried across all sizes.
But the but the behavior, we're seeing and going to more smaller sizes and this is I'm gonna stay. This is anecdotal from our stores, but we have a lot of stores and it's a it's a fairly common explanation when we ask our general managers, what's going on there.
That people seem to be coming in with a monthly budget. If you would for their pool and so they seem to be you can't manage sanitizers down because your pool size doesn't change, which you can do is spread sanitize sanitizer purchases out bye bye bye.
Smaller buckets at a time, we think that's what we're seeing right.
Right now but.
But again it's.
Small quarter weather.
Try not to draw any trends from it.
I appreciate that second question I would ask you in this kind of goes back to where you've kind of consistently shown that you've outperformed the industry. I know you said costs are set for you on tricolore cost or are set for the industry. How do you think the rest of the risk of you know your competitors sitting on too much inventory and that really being the leg.
Down in deflation it and what's your visibility into that to be able to react quickly and it'd be preemptive or whatever on that thanks.
Yeah, I don't know.
No I can only speculate about the level of competitors' inventory, but what we do know is that industry is fully inventoried.
So in that case, there is an opportunity for some irrational behavior, we have like I said, we haven't seen that.
I don't think we expect to see it however, as we said at our Investor day, when we laid out our full year guidance, we're more than prepared to compete if we need to we're not going to do is lose market share and sanitizers and we believe we have a cost structure, where we are oh.
While we are more than able to do that.
Thanks, I'll pass it on.
Thanks, Andrew.
Our next question is from Jonathan Mattresses ski with cafes. Please proceed.
Great. Good afternoon, and thanks for taking my question. My first question was just to follow up on inventory and I'm curious if you could just break out Steve maybe just the increase in units versus price I'm not sure if he could get them.
As granular as as the Tricolore units versus price, but that would be helpful. And then just a second piece of that first question is how you're thinking about the rate of inventory growth in fiscal two Q right. So I think overall inventory balances were up around 74% this quarter just things.
<unk> you know how should we expect that rate of growth in fiscal two Q. That's my first question. Thanks.
Yeah. So both good questions I, certainly expect inventory to be up again in Q2, we typically will peak in our inventory. The last couple of weeks of March 1st couple of weeks of April .
And then when you start getting into kind of a replenishment cycle as season starts to kick off so well.
We would expect inventory to be up again in Q2 less less so than in Q1, but still our adult dollar increase but when you think about inflation.
Expand out and I talked through you know a fourth factor.
It's equipment, it's chemicals, it's M&A and it is inflationary and inflation was a you know a top four contributor to the increase year on year definitely have a larger increase from a unit perspective than from a cost perspective, but certainly I've seen those costs flow through to the inventory balances as well.
And we feel good about the inventory that we have a in our facilities and in our stores.
And when you think about that composition of product that we're bringing on early it's high turn product top skus that we know we need for pool season.
And where last year, we talked a lot about kind of getting behind the curve and and replenishment cycle, we have more inventory available to distribute out to whether it's e-commerce.
A question on Tricolore you know.
Mike I think he mentioned you werent seeing any evidence of a price.
Price deflation I think we've seen some online retailers, maybe cutting price in January not sure. If that's just a seasonal kind of promotion that they typically do but any any commentary on that would.
Would be helpful. Thanks.
Yeah, there's a.
There are some.
There's a little bit of an import.
Actually call it questionable import chlorine are running through Amazon at the moment.
But it's it's quite small and it's literally small buckets.
And there was something similar last year for a short period of time and then it disappeared and I think I think we're probably in a similar situation. There's always some competition around the edges, but in terms of you know.
Our retail price competitors.
Our scale did.
Digital competitors I think the Tricor pricing is acting pretty rationally.
That's great thanks for clearing that up.
As a reminder, just star one on your telephone keypad, if he would like to ask a question. Our next question is from Peter Benedict with Baird. Please proceed.
Hey, Mike Steve.
Just a couple of questions first just on the sector supply chain, maybe just help us what's still not operating efficiently and you're bringing a lot of inventory yet.
I'm just curious are there what what areas of the business are you still kind of concerned about or maybe are operating.
I guess fluidly at this point that's my first question.
Yeah, you know Peter as is.
You'll remember in Q3 and Q4 of last year, we had some challenges with specialty chemicals in particular.
And we said we would address that in two ways, we buy more earlier, which we've done and we'd also diversify our vendors there, which we've done as well survives to point to one area that would be probably a predominant in terms of equipment equipment vendors you have done a nice job getting themselves are back on schedule.
So fairly recently and we have taken in a lot of equipment inventory purposely so that we won't won't be looking necessarily to reorder in season.
Perfectly fine to buy it upfront, which I think we've successfully done with all except maybe one vendor.
And then in Tricor. That's you know that's really us and we control most of that supply chain now, particularly with our particularly with our investment in stellar for tablet. So we feel we feel good about where we are with treichler, but we've also we've also bulked up the inventory there as well with the idea that we're gonna preposition are much higher.
Percentage of it.
Into into the stores themselves.
And the only other area, that's a little it's been a little bit challenging but.
But it's coming along nicely now as Cal Hypo kind of the second largest sanitizer in the industry that was in a rather short supply in Q4 and as you know just really now in December January coming online and into volumes we'd like.
Alright, that's very helpful. Thanks, and then just on the on.
On the loyalty file up I think you said it was up 15% I think that's a that's a bit of improvement in the rate of growth relative to how it was running kind of last year, maybe talk about what's driving that and in the end the maybe the complexion of who you're bringing into oil for trial. Thank you.
Yeah. We're just we're really pleased about the loyalty file is performing you know it's now it's now up to about 75% of our total sales.
<unk> continues to grow and the members are continuing to continuing to get more productive for us.
What's most encouraging for US is you know as we look at the different cohorts in our file.
We have a I'm going to say a limited number of loyalty members who are in our top cohort.
Despite.
In total accounting for 75% of sales and the way. We look at that is that is a really significant opportunity to continue to trade people up through those cohorts. So a lot of the loyalty growth is coming from reactivation.
Customers who have not.
We're in a loyalty program, maybe much earlier several years ago and have come back in as we've up the marketing of it.
And also we're signing up.
A nice at a nice rate new loyalty members from our existing base.
That's predominantly in stores and then also digitally and those are predominantly brand new customer celebrities.
So good we feel we feel really really good about the loyalty files not just not just for this quarter, but long.
Long term as we continue do build it its productivity.
Okay.
Terrific. Thanks, Good luck guys.
Thank you.
We have reached the end of our question and answer session I would like to turn the conference back over to Mike for closing comments.
Thank you operator, and thank you all for joining us this afternoon.
Those of you with pools.
Yes, you start thinking about pool season, because there's I believe we've made clear in our call. Today. We certainly are certainly are preparing for it and looking forward to it.
You.
Thank you. This will conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
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Okay.
Okay.
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