Q4 2023 Leslie's Inc Earnings Call
Good afternoon, and welcome to the fourth quarter of fiscal 2023 conference call for Leslie zinc.
At this time all participants are in a listen only mode.
Following the prepared remarks management will conduct a question and answer session.
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<unk> Press Star zero on your telephone keypad.
As a reminder, this conference 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.
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 Madison current expectations.
These statements speak as of today I will not be updated in the future circumstances change. Please.
Please review the cautionary statements and risk factors.
And 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.
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 lessons web site at IR Dot Baas lease pool Dot com.
On the call today from Lessees are Mike Jackson, Chief Executive Officer, and Scott Bowman, Chief Financial Officer.
That I will turn the call over to Mike.
Thanks, Kevin and thank you all for joining us this afternoon.
Everyone had a good Thanksgiving holiday.
To start I'd like to express my sincere appreciation to all of the Leslie Associates, whose contributions allowed us to serve our residential pool pro pool, and residential <unk> customers and a consistently high level throughout fiscal 2023.
Because of their efforts the foundation of <unk> lease business remains solid for the year, our brand awareness in stock service levels and corresponding NPS scores were at all time highs or.
Our loyalty program grew for the year and our customer lifetime value also increased.
We remain the largest specialty retailer in our industry with unmatched capabilities and clear long term growth opportunities and industry credit card data indicates that we gained market share again in fiscal 2023.
While our financial results for fiscal 2020, where you were not what we expected heading into the year, we are well positioned for future success as the pool industry continues to normalize from the temporary challenges of this year's pool season.
We entered the fiscal fourth quarter facing three headwinds, which are the same ones that broadly impacted our full fiscal 2023 results first unfavorable weather.
Second a macroeconomic environment that resulted in decreased retail chemical pricing and discretionary spend especially on high ticket items and.
And finally customer stockpiling of course, Sanitizers, resulting from three years of supply uncertainty and price inflation.
Well the latter two factors were largely in line with our expectations for the quarter, whether it was better than we originally anticipated and helped us to deliver sales at the high end of our implied fourth quarter revenue guidance.
Stability in the quarter fell short of our expectations driven entirely by gross margin.
Gross margin performance was impacted by larger than expected inventory adjustments made after the completion of our annual physical inventory count.
Scott will discuss the inventory adjustments in more detail when he goes over our financial results. Let me explain the entire delta between our implied fourth quarter guide and our actual gross margin and are the reason that EPS came in at the low end of our guidance range.
As we navigated these dynamics, we remain disciplined on costs and reduced fourth quarter SG&A expenses year over year as planned.
Drilling down into our Q4 sales performance total sales were down 9% in the quarter with residential pool down, 9% pool down, 5% and residential hot tub down 17%.
We were up against some tough comparisons from the prior year's quarter. When total sales were up 16% with residential pool up 10% pro pool up 18% and residential hot up 80%.
As weather normalize traffic improved to down high single digits in the quarter.
Total transactions were down 5%, which was also an improvement from down 12% in the third quarter.
Average order value was down 4% versus plus 3% in Q3.
Equipment sales were down 17%, we saw continued weakness in high ticket discretionary categories, and we had a full quarter's impact of the chemical retail price decreases we implemented in June of this year.
Chemical sales were down 4%.
Discretionary product sales were down 23% and contributed roughly half of the quarter's total sales declining.
Non discretionary product sales were down 6%.
Across our geographies sales remain challenged with the exception of Florida, which saw a 3% increase in sales in the quarter and was up 11% for the year.
Our analysis of credit card data shows that our sales underperformed the industry by 250 basis points in the quarter, but outperformed the industry by a total of 130 basis points for the year.
Turning to our results for the full year sales of $1 $45 billion were down 7% with comp sales down 11%.
Non comp sales added 4%.
Residential pool sales were down 9%.
<unk> sales were flat and residential hot tub sales were down 6%.
Gross margin decreased 530 basis points, driven by the June chemical retail price actions year end inventory adjustments DC costs associated with higher inventory levels.
Lower rebates based on decreased equipment purchases and occupancy deleverage.
We believe the majority of these headwinds are specific to this fiscal year and Scott will discuss how we expect these to significantly abate in fiscal 2024.
Adjusted EBITDA for the year was $168 1 million and adjusted diluted earnings per share was 28.
In the face of the transitory headwinds this year the fundamentals of the industry have not changed.
New pools continue to be built and the growing installed base of pools need to be maintained.
In addition, we believe the secular tailwind that drive industry demand remain intact <unk>.
Including ongoing investment in homes and backyards.
Gration to the sunbelt and Exurbs pursuit of outdoor lifestyles.
Creasing attention to safety and sanitation and the adoption of new technologies.
The pool industry has a long track record of consistent growth and Leslie has consistently grown faster than the industry.
We remain the leading direct to consumer pool, and spa retailer with scale capabilities and brand awareness that our competitors do not have.
While our team navigate the current headwinds we remain focused on executing the strategic initiatives that underpin our competitive advantages and then we expect to continue to drive our success as interest rate conditions normalize.
Turning to our strategic growth initiatives first our customer file was down 6% in the quarter and for the full year due to the weather and traffic trends we experienced.
Second average revenue per customer was down 3% in the quarter and 1% for the year driven primarily by decreases in big ticket items.
Typically hot tubs heaters and above ground pools.
With regard to our pro initiatives, we ended the year with more than 3900 pro contracts in place and completed the conversion of 15 residential stores to our pro format.
We currently operate 98 pro locations.
<unk> sales were flat for the year, which we consider a solid outcome given the overall environment.
Try core pricing was a more pronounced headwind to our pro sales and to overall company gross margin performance as competition in distributor channel drove prices down.
Try core pricing now appears to have stabilized.
M&A and new store growth remain important initiatives for less lease for.
For fiscal 2023, M&A and new stores drove $60 million in non comp sales during.
During the year, we opened 12, new stores and acquired 12 stores and now operate 1008 total locations.
We remain confident in our long term store expansion opportunity and have identified over 800 opportunities for store Densification.
We will continue to address each of these opportunities with a buy or build analysis. So we will be prudent with the pace of expansion as we bounce store growth with our other capital allocation priorities.
Frank You go home, we were excited to launch the program in May and have been very pleased with the consumer response and demand we have seen to date, even with limited marketing.
<unk> home member spend is averaging $1000 per year, and we believe members see value in the experience as evidenced by an average review rating of four eight out of five stars.
They commented the program pays for itself and site convenience greater confidence in our water treatment routine and overall water quality as core benefits of the program.
While demand during the pool season, a strong manufacturing capacity at our third party vendor limited sales and we deferred launching our consumer marketing campaign due to insufficient supply.
We have worked with our vendor to ramp up production during the off season to meet our expected 2024 pool season consumer demand.
We continue to have confidence in the long term industry outlook and remain focused on prudently executing our strategic initiatives to capture the opportunities in front of us and extend our industry leadership.
At the same time, we are taking actions to improve our near term performance.
Number one we are pricing based on current market conditions and after our June price actions, we are at our relative historical price position of slightly above mass and at or slightly below specialty.
We expect this positioning to hold for 2024.
Number two we are aggressively managing inventory and expect to reduce our 2020 for peak and year end inventory by approximately $100 million and $50 million respectively.
Number three we are managing costs throughout the P&L, including utilizing strict ROI criteria on our marketing investments.
Number four we continue to evaluate develop and elevate our processes and people to help improve our efficiency.
And number five we are utilizing consumer insight surveys to further improve our understanding of evolving consumer behavior.
I will now hand, it over to Scott to discuss our results and outlook in more detail Scott.
Good afternoon, everyone and thank you Mike.
I will review, our fourth quarter and fiscal 2023 performance and then provide details about our outlook and assumptions for fiscal 2024.
Turning to fourth quarter results, we reported sales of $432 million, a decrease of 9% compared to the fourth quarter of fiscal 2022.
Comparable sales decreased 11%.
Comparable sales decreased 1% on a two year stack basis increased 15% on a three year stack basis and increased 38% on a four year stacked basis.
Non comparable sales totaled $9 million in the quarter, which was driven by a total of 18 net new stores, including 12 through acquisitions and six net new store openings during fiscal 2023.
With respect to trends by consumer group comparable sales for residential pool declined 9% co pool declined 13% and residential hot tub declined 23% compared to the prior year period.
Two year stack basis comparable sales were flat for residential pool increased 4% for pro tool and declined 10% for residential hot tub.
These declines were in line with our expectations and continuation of recent trends in the business.
Gross profit was $160 million compared to $217 million in the fourth quarter of fiscal 2022.
Margin rate declined approximately 860 basis points to 37%.
Page 11 of our supplemental deck illustrates our Q4 gross margin late bridge in more detail during.
During the quarter gross margin was impacted by the following factors.
Product gross margin declined 385 basis points in the quarter.
This was primarily driven by our June 2023, chemical pricing actions and the negative impact of 70 basis points due to lower rebates.
Second we incurred unexpected incremental inventory adjustment costs resulted in a 260 basis point headwind in the quarter.
This increase was mainly due to excess shrink and scrap higher levels of inventory in third party storage locations higher movement of goods between facilities and higher global unsolvable returns.
Additionally, gross margin rate was negatively impacted by 120 basis points.
The expensing of capitalized DC costs associated with the drawdown of inventory.
And finally occupancy costs deleveraged by approximately 95 basis points, mainly due to the decline in comparable sales.
SG&A was $122 million down, 9% or $12 5 million compared to the fourth quarter of fiscal 2022.
Excluding nonrecurring items, including costs incurred from the discontinued use of certain software subscriptions and executive transition costs associated with restructuring.
SG&A decreased $18 million, driven by lower sales lower incentive compensation and expense management actions.
Adjusted EBITDA was $60 million compared to $100 million in the fourth quarter of fiscal 2022.
Interest expense increased to $17 million from $10 million in the fourth quarter of fiscal 2022, due primarily to higher interest rates.
And our effective tax rate increased to 22, 9% compared to 21, 2% in the fourth quarter of fiscal 2022.
Adjusted net income was $26 million compared to $64 million in the fourth quarter of fiscal 2022.
And adjusted diluted earnings per share was <unk> 14, compared to 35 in the fourth quarter of fiscal 2022.
Diluted weighted average shares outstanding were $105 million in both the fourth quarters of fiscal 2023 in fiscal 2022.
Moving to our full year results total sales for fiscal 2023, or 145 billion, a decrease of 7% compared to the prior year with comparable sales down 11%.
Comparable sales were flat on a two year stack basis increased 21% on a three year stack basis and increased 39% on a full year stack basis, non comparable sales totaled $60 million in fiscal 2023.
Gross profit was 548 million for fiscal 2023 compared to $674 million in the prior year and gross margin rate was 37, 8% decrease of 530 basis points compared to the prior year.
As shown on page 11 of the supplemental deck to 105 basis points of the rate decline was due to chemical pricing actions and lower rebates.
Third 15 basis points towards the DC costs and inventory adjustments.
Third 10 basis points was due to occupancy deleverage.
SG&A was 446 million for fiscal 2023 compared to $435 million in the prior year.
Excluding nonrecurring items in non comp expense from acquisitions, and new stores SG&A decreased $15 million compared to the prior year.
Adjusted EBITDA was $168 million for fiscal 2023 compared to $292 million in the prior year.
Interest expense was $65 million.
2003, compared to $30 million in the prior year.
Adjusted net income was $51 million for fiscal 2023 compared to $176 million in the prior year.
And adjusted diluted earnings per share was 28 for fiscal 2023 compared to 95 in the prior year.
Moving to the balance sheet, we ended fiscal 2023 with cash and cash equivalents of $55 million compared to $112 million in fiscal 2022.
The reduction was primarily due to the decline in net income.
At the end of fiscal 2023, we had no balances outstanding on our revolver and availability of $239 million.
Year end inventory was $312 million, a decrease of $50 million or 14% compared to fiscal 2022.
A sequential decrease of $125 million or 29% compared to the third quarter of fiscal 2023.
This reduction was possible due to fewer supply chain disruptions implementation of a new inventory management system and strong execution out of D. C. Locations importantly, we are maintaining strong in stock positions at the store level to support a high level of customer service, which is reflected in a higher NPS scores.
At the end of fiscal 2023 $790 million outstanding on our secured term loan facility compared to $798 million of fiscal 2022, which translated into a leverage ratio of four four times.
The applicable rate on our term loan with <unk>, plus 275 basis points in the fourth quarter and our.
Our effective interest rate was eight 1% compared to four 3% in the prior year quarter.
Now for our fiscal 2020 for outlook.
In fiscal 2024, we expect an uncertain macro environment and a more cost conscious consumer, especially in discretionary categories to continue affecting sales. We anticipate this to be more acute in the first half of the year, but we expect positive comps in the back half of the year due to the lapping of the June 2023, chemical pricing actions and <unk>.
As your competitors.
2023, being an anomaly from a seasonality standpoint.
Planning for seasonality to be more comparable to fiscal 2022 and.
And expect to deliver more than all of our profitability in the second half of the year during our peak pool season.
We expect sales of 141 billion to $1 47 billion, which assumes normal weather over the course of the year and a non comp sales contribution of approximately 7 million.
The low end up our outlook assumes comparable sales growth of approximately negative 3%, while the high end of our outlook assumes comparable sales growth of approximately 1%.
For the full year, we expect to see gross margin rate improvement of approximately 100 basis points compared to the prior year.
Given by lower DC costs, and fewer inventory adjustments due to reduced inventory levels and improved supply chain efficiency.
That said, we don't expect to see the majority of these benefits until Q4, when we start to lap the unusual items that impacted Q4 and fiscal 2023.
Additionally, we expect higher impacts of deleveraging in the first half of the year due to lower sales compared to the prior year.
We expect adjusted EBITDA of $170 million to $190 million and expect a slight decline in SG&A expense as we drive efficiency in our cost structure.
<unk> prudent investments in the business.
We expect net income of $32 million or <unk> $46 million adjusted net income of 46 million to 60 million and.
And diluted adjusted earnings per share of <unk> 25.
33.
Our outlook assumes an average interest rate on our floating rate debt at eight 2%.
Interest expense will be approximately $7 million higher than fiscal 2023.
Our outlook also includes an effective tax rate of 26%.
We estimate a diluted share count of approximately 185 million shares.
Which assumes no share repurchases during fiscal 2024.
Now as you will see on page 14 of our supplemental deck.
Along with our full year guidance, we are providing an outlook for Q1.
While it has not been our historical practice to provide quarterly guidance, nor do we intend it to be our practice going forward given the unique dynamics related to Q1 and the comparison to the same period in fiscal 2023, we believe it is appropriate to provide a view of Q1.
For the first quarter, we expect total sales of $166 million to $172 million adjusted EBITDA of negative $27 million to negative $24 million net income of negative $43 million to negative $41 million adjusted net income of negative $39 million to negative $37 million.
And adjusted EPS of negative <unk> 21 to negative <unk>.
Underlying this outlook is our expectation that comp trends will be similar to Q4 fiscal 2023 non comp sales will contribute approximately $3 million.
In addition, we expect a significant gross margin declined compared to the prior year quarter, driven by the expensing of capitalized DC costs and occupancy deleverage.
Turning to Capex, we expect to invest $50 million to $55 million in fiscal 2024 of which approximately $20 million is expected to be invested in our existing assets.
<unk> is expected to be investment in growth.
These investments include new store openings, improving the capacity of our distribution and manufacturing facilities.
Testing in it and other projects to improve the business.
We also expect a meaningful improvement in working capital and plan to reduce inventories by approximately $50 million.
Regarding capital allocation, we expect significant improvement in free cash flow due to higher net income and lower inventory and our first priority will be to pay down debt with the goal of achieving a leverage ratio.
Three 5% to three seven times in fiscal 2024.
Longer term our goal is to achieve a leverage ratio of 3.0 times.
Our second priority is to invest in growth. This will include organic growth through the opening of 15, new stores and the conversion of six residential stores to the pro format.
We have not included any M&A activity in our fiscal year guidance at this time.
Our final priority is to return excess cash to shareholders. While we do not expect to repurchase shares in the near term. We will continue to evaluate this based on our financial position and market conditions.
Before I turn it back to Mike I want to address two items that will be covered in greater detail in our Form 10-K.
In short we have identified two material weaknesses in internal controls over financial reporting.
One weakness relates to insufficient controls over internal database.
You used to calculate vendor rebates and the other weakness related to controls over the performance of physical inventories.
As a result, we are designing and implementing new processes and enhanced controls to address the underlying causes of the material weaknesses and expect remediation to be completed during fiscal 2024.
And with that I'll hand, it back over to Mike. Thank you.
Thank you Scott.
After three years of unprecedented growth the pool industry and Leslie space multiple transitory headwinds in fiscal 2023.
Despite these headwinds and their impact on our results. We continued to deliver exceptional service to our customers as evidenced by brand awareness in stock levels and corresponding NPS scores that are all at all time highs.
Taken together these serve as a testament to the focus and execution of our team members.
As the industry continues to normalize we remain focused on leveraging the competitive advantages from our scale and capabilities and executing our strategic initiatives to continue to drive growth and market share gains.
With that I'll hand, it back to the operator for Q&A.
Thank you.
We will now be conducting a question and answer session.
I would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue.
You May press Star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please pull for questions.
Thank you. Our first question comes from the line of Ryan Merkel with William Blair. Please proceed with your question.
Everyone. Thanks for taking the questions today.
First off I, just wanted to ask about sales guidance for 'twenty four I'm, a little surprised with the guidance of flat to down Mike can you just walk through some of the pieces there because it was a pretty rough year in 'twenty three we had horrible weather and your business is largely.
Non discretionary aftermarket.
So kind of explain why we're not seeing a bit more growth in 'twenty four.
Yeah. Thanks for the question Ryan.
First assumption is we don't see any.
Recovery in discretionary sales.
The midpoint of our guidance, we have discretionary sales, which as you know it was about 20% of our business planned down an additional 10%.
Non discretionary sales that we do have growing plus one 5%.
But we also have the headwind of the chemical price actions, we took in June which through the first seven periods of the of the year our definitive headwind.
So with the discretionary sales being down which are predominantly high ticket items.
And with the headwind from the chemicals.
We have.
About 400 basis points of headwind in those two items.
Prior to any growth.
So that's why we're that's why we've got the midpoint of the guidance basically flat for the year.
Okay. That's helpful.
And then just a question on trends it looks like <unk> sales are also coming in a little bit below where the street was modeling.
Do you start seeing out there you've seen the consumer slowdown what what's happened with traffic glass.
A couple of months.
Yes, the way the quarter played out September.
First of all let me back up in Q4.
July was the best month August was a little weaker and September was TWA tough.
Tober, we saw continuation of that trend in November we are seeing some turnaround in some of the categories and some increases in traffic.
It's a slow turn.
It's not definitive yet but.
But the real change in the business has been as traffic is has normalized or excuse me as traffic has improved with improved weather. We are seeing transactions start to recover but at the same time, we're seeing the average order value down and thats really being driven by the equipment business.
And the discretionary business the high ticket items.
And equipment is.
It's been a.
It's been a tough trend for equipment was down 17% in the quarter, 12% for the year starting to see it turn now but.
The the more discretionary parts of the equipment business particular heaters and robotic apc's has been a little challenging.
Got it very helpful I'll pass it on thanks.
Thank you. Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.
Hey, good evening, everyone Hey, the first question I guess it could go to either way I think Mike you said that the biggest gap in the guidance. You gave was the inventory adjustments can you talk about why those were not observable in July.
I can I can start with CME and then Mike can tag on if needed.
The main reason is we kind of step back and look at the issue on inventory adjustment.
The main issue.
Just having too much inventory.
B P close to $500 million and it started to come down, but it's more inventory than we've had in the past.
Matt.
Required us to use several third party offsite storage facilities.
With a lot of movement of product between those facilities.
We had some higher and Sellable returned and so it just created a lot of movement of goods.
And goods not in our inside our four walls and so that is the root of the problem and so as we kind of thought about it and talked about it.
The problems that we had with inventory adjustments are really Matt systemic.
They are fixable and we are.
Sure.
Kind of on that path to improvement and the first step in that direction was just to get out of all of those outside warehouses and kind of get it inside our four walls and so we've worked really hard over the last.
Several weeks to do that in.
As we stand here today, where we're out of those additional offsite storage facility. So that's that's a great first step for us.
So we can put eyes on inventory.
<unk> four walls, we don't have the movement of goods that we had before.
So just extra visibility and having it there is.
As a first step.
For us to improve that whole process.
Along with that we.
There is some improvement we can do just improve controls on our scrap.
<unk>.
Downsize with just the sheer volume of inventory.
<unk>.
We had to add to our excess and obsolete reserves on inventory because we had so much as we have now brought that inventory down we should be able to release some of that.
And we're also just put more focus on kind of monthly processes just identified.
The major variances to come along.
Early warning signs, but.
Before we build up that inventory.
We actually control it pretty well.
And so now that we're back down.
A really good team some new talent.
Feel like we're in a much better position to manage it going forward.
Okay.
A follow up it's maybe a bit broader.
Your your approach to your guidance and I heard some of the components and then the answer to the last question.
And thinking about the industry.
Your assumption does it grow or contract units get better I heard what Mike said around discretionary stays weak are you doing that assumption out of prudence.
Or.
Could happen that way and then even in your gross margin youre not even recouping. What you gave back this year and inventory adjustment right. It's a very mild level of game. So your approach seems.
Conservative but.
It's a tough it's a tough argument to make given dismiss but curious how you thought about it.
Yeah Yeah.
Go ahead Scott.
Uh huh.
Yes, I can start off on the gross margin side.
Mike can chime in on the sales side and a lot of that is driven by just don't commentary around discretionary.
Purchases still constrained interest rates still high.
Especially in the hot tub business very high ticket items and so we just haven't really seen a ton of relief yet on the consumer side.
And their ability to ratchet up discretionary purchases that may happen, we haven't seen.
Meaningful signs of that yet.
So we're kind of taking it.
The knowledge that we have today.
As we look at gross margin.
We feel like we will recover.
The lions share of inventory adjustments that we saw come through in Q4. So that is kind of a key fluor benefit if we if we can fix the problem, we should see a big improvement in Q4.
And we fully expect to see that.
We do have a couple a couple of other headwinds as well we've talked about the chemical price reductions.
That we took back in June.
Which was needed just to get our pricing kind of aligned where it needed to be.
And so as we kind of roll into the new year, we will see some impacts of that we did take some prices up.
In January of last year.
So.
Kind of coming into Q2 that will be.
Little bit even more of an impact.
Q1 will be an impact as well.
But we'll also have.
With lower sales, we will have some pretty significant deleverage on occupancy as well so.
Yeah.
We feel like the gross margin will get better as the year goes on.
But in the first half of the year it'll be.
It will be constrained.
Yeah.
Yes.
Jim in your remarks.
Yeah, a little more color on the sales guidance.
We are planning transactions positive plus three at the midpoint.
We have seen a recovery in traffic.
We feel good about our conversion rates.
And we feel good about the chemical business, which as you know is 45% to 50% of our business.
And those trends have turned positive.
We are however, planning <unk> <unk>.
<unk>, 4% at the midpoint.
And that really is driven by the mix and a trend we havent seen turn yet in discretionary repurchases hot tubs above ground pools and.
And more recently heaters and robotic apc's. So that's how we're thinking about the business that a recovery in traffic recovery in transactions, but pressure on the <unk> and that's how we get to the midpoint of the guide.
Yes, that's helpful. Thank you.
Okay.
Thank you. Our next question comes from the line of Steven Forbes with Guggenheim Securities. Please proceed with your question.
Good afternoon, Mike Scott.
I wanted to maybe start with the performance of the assets acquired during the past few years, just trying to get a better understanding of.
How much of a headwind those newly acquired assets are on both sales and profitability as we look out to 2024 or if you've seen some stability to the point, where those those assets or sort of neutral right to sales and profitability in any context on just how are you.
Do you think through the more recently acquired assets.
Yes, Thanks, Stephen well, if we think specifically about the hot tub businesses.
And I'll talk to those first because as we've talked about.
Big ticket.
Discretionary items.
Often financed that business has been has been challenging we were down on a comp basis with the hot tub business, 22% for the year.
That being said.
There is still very good levels of profitability.
We feel good about the businesses long term and in terms of a mix on our total adjusted EBITDA.
Ratios there they are not a drag on the business.
Helpful. And then maybe just a follow up for Mike or for Scott.
I think it was Mike who mentioned the inventory reduction of $100 million from the peak right at 50 million at year end as.
As we think through the guidance here any help with sort of working capital needs for the first half of.
2024.
Just as we sort of think through the the interest expense implications in free cash flow sort of on a quarterly basis.
Yeah sure I can take that one.
So just just given the seasonality of our business we typically.
Start to use our revolver.
Usually in the late late first quarter as we start to.
Execute on inventory build.
We kind of see this year playing out.
A similar way.
And so as we start to get into the end of this calendar year.
We'll probably be on the revolver.
As we ramp up usually we ramp up our inventory.
Late March early April kind of weighting, we hit our peak and then win.
Yes, that's kind of the start of the pool season.
And our peak selling periods and that's when we draw on that revolver down.
And then the last few months of the year is when we build cash on.
On the balance sheet and so we see it happening.
In a similar kind of way this year.
It will play into our benefit that our peak inventory at least what we're planning on.
As Mike mentioned will be close to $100 million last.
And then what we saw this past year.
That's really a testament to kind of the merchandize planning team and some new tools, we have in place.
But we really have a good plan of how we kind of get into the season and come out of it.
And I think we have some some other things kind of on our side you know the supply chain is operating.
More normalized lead times are shorter so thats certainly helping us.
Our D C team.
It's getting more and more efficient.
So we feel like that that's how it's going to play out.
So.
Kind of a working capital standpoint.
I think one thing to keep in mind is that when we started 2023.
We had almost a $160 million of payables.
We paid down close to $100 million of payables during the quarters of 2023.
This year, we're starting at less than 60 million payables and so we will not have that huge cash green that we saw last year on just paying that net payables balance down.
Reason for that is we reduced inventory towards the end of the year than in the prior year at the end of 2022 of building inventory.
And so that is the cause of that but it puts us in a much better position to generate free cash flow this year that along with higher net income.
And tight management on working capital will give us much better free cash flow number then.
Sure.
Scott that's super helpful and maybe just given that you guys provided first quarter guidance any okay.
Can you sort of marry that together and give us a thought on sort of what the guidance implies for liquidity as of quarter end <unk>.
As of quarter end when Q.
Yeah and so.
Our total liquidity.
We'll be close to close to $200 million at the end of it.
<unk>.
Thank you both.
Thank you.
Our next question comes from the line of Peter Benedict with Baird. Please proceed with your question.
Alright, guys. Good evening, thanks for taking the question.
First just.
Talk a little bit about inflation, I think I heard <unk> stabilized I don't know.
The inflation view, that's embedded I guess in the outlook for 'twenty four that's my first question.
Yes, Peter Thanks, Thanks for the question.
It varies by product category this year, but like it does most years, but a little more pronounced we think going into 'twenty four.
The pricing.
We have the pricing on 24 from the equipment companies.
As is typical their practice their 3% to 5% increases in price with.
Corresponding increases in map prices. So it's not it's not margin dilutive for us.
And that's well planned in our purchases have been made so very very easy to follow on in terms of the chemicals.
At each of the levels of guidance low mid high we have planned a low single digit ASP decline.
We're not seeing that at the moment and chemicals chemical prices are holding from where they were during the pool season in fourth quarter, but we think it's prudent debt that we plan some slight decrease in prices and if we don't get that then we should and we should see a little bit more of a tailwind.
Inflation in the equipment business.
Slight deflation in the chemical business.
All together with the other categories, we think it's a it's a pretty flat year overall.
Well that's helpful. That's helpful, Mike and just related to that just the promotional tone I guess.
Your promotional film, but also what's happening in the industry, how that's evolved here.
Yeah.
Vince.
Over the last several months of what Youre kind of thinking as you as you look out to 'twenty four in terms of promotions.
Yes, again, it differs by section of the business and the residential business.
Last pool season, we think was a very normalized in terms of promotions. We were pleased to see that our promotions were.
As we plan them.
Going into the residential business for fiscal year 'twenty four.
We again expect a normal promotional environment.
Normal weather, which we also assumed should make sure that stays intact.
<unk>.
We believe we can plan, our promos slightly down.
But sufficient to move the inventory that we need to move including any.
<unk> items or other items that are a little more price sensitive.
In terms of the pro side, there was more competition on price as I mentioned in my script on the pro side in fiscal year 2000.
Fiscal year 'twenty, three saw kind of a convergence of.
Domestic production of chemicals, specifically treichler coming back online at the same time, there was a fair amount of imports in the market.
That looks to have.
Stabilized I think supply and demand on the pro side now looks to be a pretty good place.
<unk> have been stable for the last quarter and we expect that.
We expect that kind of normalization, if you would of pricing and pro now to be to be set for the next year.
That's great and then maybe one for Scott just on the margin profile of business, obviously, Youre just coming on board here, So maybe premature but.
Pre COVID-19 this business was kind of call it 17%.
On the EBITDA line.
I think your outlook. This year is somewhere mid 12, so I think at the midpoint.
Are we thinking about maybe the profitability of the business kind of in a stabilized environment.
You talked about SG&A dollars being down a little bit.
For this year.
Any more color on kind of your view on maybe opportunities.
To build back the margin kind of longer term. Thank you.
Yeah, Yeah sure.
Start with Jim.
The product gross margin.
So <unk> has been impacted here lately with some of the price changes that we've made I think it was the right thing to do.
Make sure we have that balance price and.
And volume in positioning.
So I think that was definitely the right thing to do I think our opportunity is in a couple of areas. When you look at DC costs.
So the inventory adjustments that we talked about.
The burden of the excess inventory.
Will.
To improve and so.
We were impacted by about over 200 basis points of D C cost.
For 2023.
And that does also include the expensing of capital IDC costs and so.
The way that that works is as we draw down our inventory we have to bring those capital IDC costs to the income statement.
To kind of match with the flow of those goods, okay, and so as you can imagine when you're building inventory you put those cost on the balance sheet.
Until you draw it down and so what we're seeing is a big headwind now as we draw down inventory as we can as we expense those capitalized costs, okay, and so once we get that inventory down we're still going to draw down a little further that headwind will tail off.
I think that is a key issue.
Because without that the DC costs are going to be way down in.
In 2024 and that is just.
Just.
Better talent and management of those facilities.
Easy more metrics and dialing in the expenses to run those facilities.
So the team has done a great job of really getting efficiency out of those Dcs.
Unfortunately, we haven't seen the full effect of that yet because we have had the burden of itch.
These capitalized cost.
As sales improve occupancy has been deleveraged.
This deleverage over 100 basis points.
And last year, and so as sales improve we will get some natural leverage on occupancy.
And then from an SG&A standpoint.
<unk>.
We see a pretty good path.
Improving G&A. So we had some nonrecurring costs that came in this past year those go away.
So the path to improve SG&A for this next year will.
It will be really good because.
We've kind of day later in the organization with streamlined.
We've gotten some of these nonrecurring items out of the way.
We expect that we'll get.
Some decent leverage out of SG&A as well.
Alright, great. That's helpful. Thanks, So much guys. Good luck.
Thank you.
Our next question comes from the line of Kate Mcshane with Goldman Sachs. Please proceed with your.
Hi, good afternoon, thanks for taking our question.
Wondering if you could talk a little bit more about any differences you're seeing between <unk>.
And the pro versus residential market and what your survey work is telling you today about the level of stockpiling chemicals.
And as a second question could you maybe comment.
On your share commentary in the quarter.
Yes, thanks for the question Kate.
Sure.
In terms of demand residential versus pro.
As we said there was there was.
Heightened price competition.
In chemicals.
And our pro business is.
It really dominated by chemical sales for the most part so that pressure.
The chemical side of the pro business.
Impaired.
Headwind.
More predominantly on the pro business than it did on our residential business.
The reason for the differential in performance.
For both the quarter and the year for the year the comp was down 11 and pro pool.
It was down 9% in residential pool and it was really the the chemical headwind in pro that drove that difference we haven't seen any switch from DIY to DIR film.
Really over the course of the last decade that that number hasn't moved a lot and we don't see it moving a lot.
In terms of.
Stockpiling.
It's a good question, we put out surveys additional surveys.
In September and also in November.
And our most recent results from that.
Definitively that fewer consumers have excess carryover chemicals.
Did the prior year.
I'm going to say unfortunately between the two surveys were.
We're not confident that we can size that.
And so for our guidance, we haven't assumed any tailwind or headwind from customer stockpiling, we're going to continue to test every 60 to 90 days trying to get smarter about how the consumers are acting but for right now we can say it doesn't look to be.
Any more of a headwind.
Could possibly be a tailwind, but we are not able to size it with the current data we have.
And then in terms of share.
We mentioned that we did not grow as fast as the industry in fourth quarter.
250 basis points.
That's a big Miss for Us.
We bridge all of that with the full quarter of the chemical price reductions that we put in place.
You don't look at.
It's a good question is should we have reduced the chemical prices.
So you understand our thinking on that.
There was two things that were.
That were very strong signals one was directly from our consumers.
Through post purchase.
Surveys that we were too expensive.
And we were not a good value and we can't have that long term that's not the brand positioning that was one the second ones, we were seeing our volume Ingalls chemicals drop.
So we made the decision to take the prices down.
We did see an increase in volume but.
Not enough volume to make up the entirety of the headwind I believe it was the right thing to do long term for the brand in the business.
However, it did cost us some sales growth versus the industry in Q4.
Thank you.
Okay.
Thank you. Our next question comes from the line of Garik <unk> with loop capital markets. Please proceed with your question.
Oh, hi, Thanks, I'm, just wondering if you could provide maybe a little bit more handholding on how to think about gross margins.
In the first quarter, just given that you're providing a little bit more.
Near term visibility.
Just given all the moving parts.
Around that.
Business here in the near term.
Okay.
Yes.
Let me kind of break it down.
Kind of first half of the year versus the back half so.
You know, what what I would see in the first and second quarter of the year.
As you know some some pressure on product gross margin as we kind of.
Lap those chemical price changes that we did back in June.
It will be more impactful actually in Q2.
Because back in January we raised prices on several items and so it'll be a little more acute in Q2, almost chemical price changes that's still in effect.
Q1.
DC costs will be likely unfavorable mainly because the expensing of those capitalized expenses that I talked about as we reduce inventory.
And then with a little bit lower sales, we should see some occupancy deleverage mostly in first quarter.
Second quarter, not not as much deleverage.
And then as we get into the back half of the year Q3, probably more flattish.
Q4, we should see the biggest improvement as.
As we start to lap those extremely high inventory adjustments that we saw.
And as you know DC cost.
Our more moderate without all of the outside storage facilities and movement of goods and the D. C calculation capitalization expensing it should be much lower in Q4 as well.
Got it thanks for that and then just on the discretionary piece.
It sounds like you are expecting sales to be down 10% through the year.
You talked a little bit about the buckets.
There, but any any additional color as to how you expect discretionary sales to track and maybe kind of where you are seeing.
The largest maybe.
Incremental change.
In fiscal 'twenty four.
Yes garik.
<unk>.
Hot tubs have been soft in the higher priced hot tubs have been softer.
We haven't seen that have any material change either in Q4.
So far through Q1.
So thats been relatively consistent.
The one change we have seen is in some of the more discretionary equipment businesses, specifically heaters and some of the robotic apc's.
That was more challenging than fourth quarter equipment sales were down 17% versus 12% for the year.
And started out Q1 also relatively soft we are starting to see some improvement there, which is encouraging but not enough for us to.
<unk> planned discretionary sales.
Other than we have planned them, which is down 10% at the midpoint.
Understood Thanks for that and I'll pass along.
Yeah.
Okay.
Yeah.
Thank you. Our next question comes from the line of Jonathan <unk> with Jefferies. Please proceed with your question.
Great. Thanks for squeezing me in first question was on the 2024 sales guidance.
So this past year pro with.
And outperforming.
Customer segment flat relative to two kind of residential down.
The mid to high single digit so what is your topline guidance assume in terms of relative performance between our.
Pro and residential.
Okay.
Yes, Jonathan Thanks for the question, we've got pro and residential planned fairly similarly.
For 2024.
Really based on.
The forecast of increased transactions as I talked about with some continued pressure on <unk>.
Got you that's helpful. And then just a follow up in terms of SG&A for next year, Scott I think you mentioned.
The opportunity for slight decline year over year can you just expand on kind of the areas you see to kind of further.
Rationalize that that line item in our <unk>.
Potentially soft demand environment, what are the Buck.
Buckets that you have been.
Used yet the levers you have been pulled.
Yes.
Looking at SG&A for this next year.
Yeah.
We've done a really good job of kind of <unk>.
Tightening up labor and so we'll see some benefits from that come through.
Hmm.
Marketing will be a little bit lower this year as we continue to kind of test and learn on marketing to understand kind of the best uses of $1 and continue to optimize that there's some room to bring that down a little bit.
Really the biggest pressure.
For SG&A and I hope that comes through is incentive compensation.
Extremely low.
In 2023, and so if it would come back to more of a normalized incentive comp payout.
That's actually the biggest pressure point do we have outside of that are.
Our expenses are down.
Just kind of on the core SG&A and then we'll have the added benefit.
Of about $14 million of what I would call nonrecurring.
Severance cost and some of the write offs.
So as we lap that.
Kind of unadjusted SG&A.
Actually be lower than the prior year.
Very helpful Best of luck.
Thank you.
Okay.
Thank you. Our next question comes from the line of Peter Keith with Piper Sandler. Please proceed with your question.
Hey, good afternoon, everyone.
It sounds like on the M&A front youre not anticipating any acquisitions, but could you just comment on what youre seeing with the M&A backdrop. It seems like it's been pretty good. The last couple of years has anything changed on that front.
Thanks for the question Peter.
Yes.
Yes, Thanks, Scott I'll start you can you can follow on.
Look we think M&A is still very attractive and.
We're pleased with the prices, we're pretty pleased with the returns we're getting.
And our current situation and with our debt and with the interest rates as Scott had mentioned our first priority is going to be debt paydown in terms of capital allocation in.
In terms of M&A, our focus this year is really going to be on building the pipeline.
In finishing the integration of last year's.
Last year's acquisitions.
No.
Still think its a big opportunity.
It's going to work on building the pipeline and a lot of these deals with entrepreneurial minded founders and owners.
Take some time to.
I am to work through so that'll be the focus and then.
Get ourselves in a position from.
Debt levels and leverage where we can get back on an M&A cycle.
Okay helpful and then I guess.
I'm intrigued with the 200 basis points.
Inventory adjustment that you are referencing.
With regard to Peter better next question for FY2023.
It seems like a big recovery opportunity, but I'm trying to size it up if that's a multi year.
I guess I was looking at Q4 is when we hit the inflection you start to see full recovery by by Q4 or is this something that might take.
And through FY, 'twenty, five or even longer to fully recoup.
Good question.
I would say that we.
We can recoup most of that this year.
And the reason I say that is mainly because just like I was saying about having our inventory inside our four walls.
The biggest step that we can take in that process.
So we're not moving product around we're not an outside.
Storage third party storage and this having better control that inventory goes.
A long way and avoiding a lot of that cost.
There's continued improvements will will do on on scrap.
So.
But it was it was in control before we started this big inventory build not a ton of work to do but just further refinement of that.
The one piece that I didn't really.
Go into a lot we did have some additional unfavorable returns just returns coming back.
That those returns are a little bit elevated.
By a little bit and so as we continue to refine our process of going through those.
Those returns and making sure that we're taking advantage of all opportunities to sell those products, either as new or or.
Other outlets.
That's a bit of an opportunity for us and so.
The returns did tick up a little bit I don't know if thats a long term thing we're just now.
Anomaly, but that wasn't the major portion of it.
The spend there so.
What I would say.
Basically 80% of what we saw.
Okay.
Last quarter are fixable in 2024.
Okay, and just to verify that Scott recoup this year, but you don't start to recoup it until Q4.
And I guess that in the following quarters as you'll recoup the rest on an annualized basis.
Yes, that's the way to think about it.
Predominantly it was a fourth quarter impact for us and so.
As as we lap fourth quarter.
This year, we should see that benefit.
Thank you very much guys. Good luck.
Thank you.
Thanks.
Thank you our.
Our next question comes from the line of Dana Telsey with Telsey Advisory Group. Please proceed with your question.
Hi, good afternoon, everyone on a big picture basis, when you think about the pool season. In 2024 are you expecting a positive pool season in the second half of the year is that what the guidance infers and how you're thinking about it.
And then breaking down the components of the same.
Even compared to last quarter, you talked about equipment sales and what made it more impactful this quarter than last quarter, how youre thinking about.
And how you're planning ARV going forward. Thank you.
Yes, Thanks Dana.
Look we expect that 2024 pool season based on what we know right now to be fairly flat.
Like I had mentioned earlier, we will see some inflation and equipment, but we think the units might be challenged.
Likely to see a little bit of deflation in chemicals that we think the volumes will be higher.
And mixing those together we think.
It's a fairly flat season.
We were showing a big recovery as Scott walked through from first half to second half that has more to do with our internal decision on the price adjustments and when we made them last year, but overall for the industry and for ourselves from a demand standpoint, we expect the pool season to.
B relative relatively relatively flat again discretionary items in there being down non discretionary being positive.
In terms of <unk> at the midpoint, we're planning <unk> down about 4% for the year and transactions are up about 3%.
With normal weather, which we've seen now in the fourth quarter and also into the first quarter.
We're seeing traffic recover conversions are holding steady that's giving us a transaction boost but the mix out of high ticket discretionary items.
Some of the more discretionary equipment categories is is challenging.
Yes.
Got it thank you and just following up on the competitive front what are you seeing from your from your competitors.
Any change there in terms of whether it's pricing or store.
Store openings store closings.
Are you seeing there.
Yeah, you know there hasn't been any new scale competitors that have come on the scene either in the pro side or on the residential side.
On the pro side, we've got two big distributors.
They continue to go about their business running very nice businesses in.
Little bit challenged this year by their own reporting but.
But still very very healthy businesses and then on the residential side.
<unk> scale competitor.
And she opinion, Florida seems to be having a fairly flattish year.
And when you would.
Specced.
I'm going to be continue to be good competitors for next year and can say, how they are thinking about it but.
I'm not sure of the situation in Florida is much different than the rest of the country in terms of how we're thinking about it.
Thank you.
Yeah.
Yes.
Thank you.
This concludes our question and answer session and with that this will conclude today's teleconference. You may now disconnect. Your lines at this time. Thank you for your participation.
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