Q1 2025 Leslie's Inc Earnings Call
Speaker Change: [music].
Good afternoon, and welcome to the fiscal first quarter 2025 earnings conference call for Leslie at this time all participants are in a listen only mode. Following the prepared remarks management will conduct a question and answer session. If you require any operator assistance during the conference. Please press star zero on your telephone keypad.
Speaker Change: As a reminder, this conference call is being recorded and will be available for replay later today on the company's website I will now turn the call over to Matt Skelly, Vice President of Investor Relations.
Thank you and good afternoon.
Speaker Change: I would like to remind everyone that comments made today may include forward looking statements, which are subject to significant risks and uncertainties that could cause the company's actual results to differ materially from management's current expectations. These statements speak as of today and will not be updated in the future if circumstances change. Please.
Speaker Change: Please review the cautionary statements and risk factors contained in the company's earnings press release, and recent filings with the SEC.
Speaker Change: During the call today management will refer to certain non-GAAP financial measures a reconciliation between the GAAP and non-GAAP financial measures can be found in the company's earnings press release, which was furnished to the SEC today and posted to the Investor Relations section of <unk> website at IR dot less lease pool Dot com.
Speaker Change: On the call today are Jason Mcdonald, Chief Executive Officer, and Scott Bowman, Chief Financial Officer, with that I'll turn the call over to Jason.
Jason Mcdonald: Thanks, Matt and thank you for joining us this afternoon.
Jason Mcdonald: Before we begin there are many people I Wanna say since I joined <unk> in September.
Jason Mcdonald: From our frontline field leaders, providing me thoughtful feedback when I'm out in the field to our corporate team members being all in and two our board of directors for their level of partnership perspective, and support I say thank you.
As I mentioned during my first quarterly call last November as soon as I joined the company I embarked on a listening and learning tour.
I spent time in stores listening to our valued customers team members and suppliers.
Jason Mcdonald: After reporting year end fiscal 2024 results I spent time with fellow shareholders and analysts in a shared thoughtful questions perspectives and feedback.
Jason Mcdonald: I've continued my tour over the past couple of months, bringing my stores visited to over 65 across nine states. This has been a critical part of my time spent at Leslie.
Jason Mcdonald: My listening and learning tour also took me to the recent pool and Spa show in Atlantic City, where I met with suppliers and customers My experience there reinforced my confidence in the pool and spa industry and its future potential.
Jason Mcdonald: These experiences have also helped us confirm our strategic themes and prioritize the resulting set of initiatives that I will outline for you today.
Jason Mcdonald: I mentioned during the last earnings call that our team is going to be laser focused on the fundamentals.
Jason Mcdonald: Putting the customer at the center of everything we do.
Jason Mcdonald: And as I mentioned, we intend to perform while we transform.
Jason Mcdonald: Before I review some initiatives on how Leslie will transform.
Jason Mcdonald: I will give you a high level summary of our performance from the first quarter of our fiscal year.
Jason Mcdonald: Our revenue came in at the top end of our guidance with sales of $175 million up 0.7% compared to the first fiscal quarter of 2024.
Jason Mcdonald: Even excluding a few million dollars of sales we estimate from the serious storms in Florida in the quarter. Our results still would have fallen within the guidance range.
Jason Mcdonald: Across our consumer groups on a year over year basis Pro pool sales grew 9%.
Jason Mcdonald: Residential pool sales declined 1% and residential hot tub sales declined 5%.
Jason Mcdonald: Our adjusted EBITDA was at the bottom end of our guide at a loss of $29 million, we would've been at the middle of the guide, but we made additional inventory optimization decisions and incurred additional professional fees to support the transformation as we lay the foundation for growth in the pool season.
Jason Mcdonald: As a reminder, Q1 and Q2 are seasonally smaller quarters for us where we typically produce losses.
Jason Mcdonald: Digging deeper into our sales results, we saw improvement in a number of key areas.
Jason Mcdonald: This past quarter, we produced sales growth for the first time in two years that said.
Jason Mcdonald: This is early days and we are on a continued journey of transformation at Leslie.
Jason Mcdonald: Traffic at Leslie has improved to flat compared to down mid single digits, both a year ago and in the fourth quarter of 2024.
Jason Mcdonald: Conversion was up in the first quarter by over 160 basis points versus the year ago period.
Jason Mcdonald: This is driven by the great work from our team members to ensure we meet the needs of our customers every day.
Jason Mcdonald: Helping our conversion rate you may recall from our last earnings call.
Jason Mcdonald: We have challenged our team members to be more focused on the fundamentals of retailing.
Jason Mcdonald: And they are answering the challenge.
Jason Mcdonald: Most notably our key initiative was driving precision inventory to improve our in stock position on our top 600 items, which include our newly defined never outs or critical skus.
Jason Mcdonald: I'm pleased to share that we've already seen significant improvement in in stock levels with most categories up over 300 basis points since the end of fiscal 2024.
Jason Mcdonald: This improvement is helping us convert more customers.
Jason Mcdonald: I'm also pleased to report that even with increased in stocks, we've lowered our overall inventory by $63 million or 19% versus a year ago.
This is due to a sharp focus on inventory improvement throughout the year as we look to improve our working capital and pay down our debt with excess free cash flow.
Jason Mcdonald: Turning to our core categories, our core chemical sales were positive in both dollars and volume versus the same period a year ago.
Jason Mcdonald: The same was true for our specialty chemicals.
Jason Mcdonald: Equipment sales are stabilizing versus a year ago and sequentially versus last quarter.
Jason Mcdonald: Equipment sales were down 4% compared to down 18%, a year ago and down 15% last quarter.
Jason Mcdonald: Excluding post storm demand in Florida equipment sales still showed an improving trend in both cases.
Jason Mcdonald: Lastly, we were pleased with our pro results at 9% growth. The results were driven by our better in stock positions and our double digit increase in pro partner contracts.
Jason Mcdonald: In summary, our team remained focused to start fiscal 2025.
Jason Mcdonald: I would like to credit the whole Leslie his team for their performance this quarter, which I'm pleased with considering we are executing on a transformational change at Leslie.
Jason Mcdonald: Now that we've covered perform I would now like to update you on the transform part of our efforts.
Jason Mcdonald: When it comes to Leslie transformation it starts with a principal appreciation of the lessees legacy.
Speaker Change: Since 1963, our company has had a strong history of market leadership stemming from a simple notion.
Speaker Change: Leveraging our pool and water expertise through elevated care for our customers to help them achieve a clean safe and beautiful pool.
Speaker Change: As I mentioned last quarter, Leslie says a lot more than just sell pool supplies, we provide customized pool solutions to a broad range of DIY and pro customers on a national scale.
Speaker Change: Our scale and footprint are unmatched by any other provider in the United States. We are also closest to the pools.
Speaker Change: This means we are able to serve a customer DIY or pro more conveniently and quicker than anyone else.
Speaker Change: A great differentiator for Leslie is our potential to leverage our national Omnichannel capabilities.
Speaker Change: We expect to continue to expand these capabilities and drive same store sales growth with our leading product portfolio and best in class service and installation expert advice and a personalized relationship with our customers.
Speaker Change: Our goal is to not just when the customer during that visit but to win them for life of their pool and spa care needs.
Speaker Change: With that backdrop I want to remind you from last quarter that our transformation initiatives are going to be pursued with three key strategic themes in mind.
Speaker Change: Customer centricity convenience and asset utilization.
Speaker Change: I mentioned that I would update you with a set of initiatives to begin our transformation I shared one of these last quarter, which had to do with our focus on inventory optimization, including reducing overall inventory, while also getting to a place of precision inventory.
Speaker Change: This includes introducing our new never outs category or critical Skus that we expect to always have in stock.
Speaker Change: We have had strong improvement already on in stocks and with continued reduction in inventory levels.
Speaker Change: Now I will detail. The next set of initiatives that are currently underway.
Speaker Change: The first initiative I would like to share with you is that we are establishing local fulfillment centers known as L. F sees.
Speaker Change: In some retail Subsectors. This is also known as the hub network.
Speaker Change: There are two main goals of Lfc's.
Speaker Change: One consolidate additional quantities of key skus in our hub or L. F C locations.
Speaker Change: And to.
Speaker Change: Leverage our inventory in a market and the store network to better serve our customers.
Speaker Change: Our initial plan entails enhancing 12 commercial service centers and 14 stores from our existing footprint.
Speaker Change: To also make them local fulfillment centers.
Speaker Change: We believe our store network and our proximity to pools are a key competitive advantage for Leslie to serve our DIY and pro customers.
This further enhances disadvantage.
Speaker Change: I'll share an anecdote on why this is important.
Speaker Change: Early on I visited a store on the west side of Phoenix that was out of a key product in our portfolio.
Speaker Change: That same day I visited a store in the east side of Phoenix, They had plenty of the same key product.
Speaker Change: Why wait for the next shipment from a D C.
Speaker Change: Let's solve this locally.
Speaker Change: It is clear we need a more flexible networks to overcome this challenge.
Speaker Change: This is a clear opportunity for us and local fulfillment centers will help us capture it.
Speaker Change: For decades, Leslie has operated under a traditional model of using distribution centers to send large trucks to different regions of the country to supply our stores.
Speaker Change: This can be inefficient and sometimes in between shipments we risk being caught out of stock on items that can impact winning the sale with our DIY or pro customers.
Speaker Change: This is especially true when our business significantly increases during our peak pool season.
Speaker Change: In peak season. It is critical that we have a localized solution to ensure our stores are in stock all the time.
Speaker Change: With L. F sees in key markets, we can serve DIY and pro customers better by being in stock more consistently we expect this to improve customer frequency and in turn help traffic to our stores and improve conversion rates.
Speaker Change: This initiative of establishing local fulfillment centers or L. F. C's touches on all of our three strategic themes.
Speaker Change: The solution makes it possible to better serve our customer.
Speaker Change: Be more convenient for the DIY or the pro <unk>.
Speaker Change: And as you will hear is a good example of asset utilization.
Speaker Change: Specific to asset utilization, we believe this initiative will help us move some of the stock depth in slower turning and higher ticket inventory from our stores to the Lfc's.
Speaker Change: To be perfectly clear.
Speaker Change: We are not adding new locations for our L. F six.
Speaker Change: Or reducing selling square footage or adding net inventory overall.
Speaker Change: These locations will also continue as a commercial service center or retail store and they serve dual purposes as an LLC.
Speaker Change: We are utilizing our existing footprint to leverage proximity to better serve our customers with little capital expenditure required.
Speaker Change: We also do not expect it to materially impact our SG&A.
Speaker Change: Through better asset utilization, we will use our store and supply chain network more efficiently and better serve our customers.
Speaker Change: The initial markets, we've chosen for L. S sees our high volume markets that will benefit most from this initiative.
Speaker Change: I am pleased that we have already completed many of the changes necessary to enable these capabilities and look forward to having all 26 locations opened in advance of pool season.
Speaker Change: We will also be looking at other locations in the future to further add L F C's where needed.
Speaker Change: We expect to use of L. F cease to be a key initiatives to meet the needs of our customers overtime.
Speaker Change: Our next initiative supports our strategic growth area for us winning with the pro customer.
Speaker Change: And connecting with our team members and talking to pool owners about their customer journey. It is clear that the customer chooses how they are going to keep their pool clean safe and beautiful.
Speaker Change: They choose to do it themselves because they have the capability or want to save money.
Speaker Change: Others are looking to have weekly pro service for their pool as they may not have the time or the experience to get the job done right. We.
Speaker Change: We need to be focused on serving the diyer or the pro in any way they like.
Speaker Change: As mentioned last quarter, we had the largest footprint in our stores are within 20 miles of 80% of the pools in America.
Speaker Change: That means we believe we have the ability to win a larger portion of the pro business as we meet their needs.
Speaker Change: Over the past number of years, we have converted some stores to Leslie pro stores.
In my travels I've observed that these conversions really meant opening these stores a bit earlier and we added a pro sign to the Leslie logo on the front of the store to send the message in the market that we were in the pro business.
Speaker Change: It is clear to me, we have the capability to cater to pros not just in our Leslie pro stores, but in our entire thousands store footprint.
Speaker Change: Today, the majority of our stores have some pro customers, whether it has a leslie pro sign out front or not.
Speaker Change: With our customer centric approach and our focus on enhanced omnichannel capabilities. We aim to make it clear that we are open for business with all pools across America.
Speaker Change: Weather service by a pro or a diyer.
Speaker Change: In essence, we have shifted our mindset from our previously defined 100, plus pro stores to now leveraging our entire thousands store footprint to serve pros.
Speaker Change: Our year to date performance in pro has been strong and we want to continue that momentum.
Speaker Change: As a part of this initiative, we have already put a focus on pro assortment with a customized list of never out pro Skus and we're looking to expand our assortment further to fill in any remaining gaps by leveraging our new L. F C network.
Speaker Change: As you can see similar to our introduction of L. F. CS are rethinking of our pro business covers all three of our strategic themes as well.
Speaker Change: We're increasing our customer centricity for the pro.
Speaker Change: Adding a higher level of convenience with store level assortment changes.
Speaker Change: And leveraging our footprint more effectively to drive same store sales.
Speaker Change: In addition, our L. F. C initiative also provides a valuable local resource for our pros. So we can better meet their needs.
Speaker Change: We're excited to deploy this new holistic way of thinking about serving our pro customers in advance of the pool season.
Speaker Change: Our next initiative is focusing on winning in DIY by building DIY Omnichannel loyalty.
Speaker Change: To accomplish this we've enhanced our Leslie is mobile app.
Speaker Change: We believe this is a key area to build stronger relationships with our DIY customers.
Speaker Change: We saw strong growth in performance in mobile App purchases in fiscal year 2024, and our conversion rate on this platform was over 30% higher than the website alone.
Speaker Change: Our latest update on our mobile App has added multiple benefits for our DIY customers, including.
Speaker Change: New and improved search and shopping with a recommendation engine.
Speaker Change: New voice search to find products faster and get order status updates.
Speaker Change: Easier access on the homepage to see pool parks rewards, including personal barcodes for quicker checkout in store.
Speaker Change: And better base technology upgrades to improve the experience and reduce load times.
Speaker Change: In addition to the mobile App upgrades to help drive DIY loyalty. We are looking to continue to connect with our DIY customer and build future technology enhancements to better meet their needs at Leslie.
Speaker Change: To enable this we.
Speaker Change: We have refreshed a couple of key senior executives to help bring this to life Scott Davis, our new senior Vice President of marketing and ecommerce and Maryann Byrdak, our new senior Vice President of technology.
In addition to heading their respective departments. They will oversee additional DIY focused initiatives and we will share additional information about those initiatives in the future.
Speaker Change: In conclusion, I mentioned last quarter that there were three strategic themes that we're going to be key focus areas for our teams.
Speaker Change: Customer centricity convenience and asset utilization.
Speaker Change: Inside those strategic themes are key initiatives that I've just outlined.
Speaker Change: In summary, they include.
Speaker Change: Precision inventory with never outs.
Speaker Change: Launching local fulfillment centers.
Speaker Change: Growing pro.
Speaker Change: And building DIY Omnichannel loyalty.
Speaker Change: With these initiatives, we expect to deliver on our vision of Leslie is being the number one choice for customized pool care solutions for the DIY and the pro customer.
Speaker Change: We expect these initiatives to contribute to our results this year.
While we are not going to quantify the impacts of these initiatives. In these early days, we will provide progress updates and proof points of those benefits as we move forward.
Speaker Change: Our team is laying the foundation for future benefit during this smaller volume quarter, and we expect the fruits of our labor to be more visible when higher volumes materialize during the peak second half of our fiscal year.
Speaker Change: Our financial focus is crystal clear.
Speaker Change: Continue executing against strategic initiatives that support sustainable revenue growth and margin dollar expansion to drive incremental cash flow to strengthen our balance sheet.
Scott: I will now turn it over to Scott for his prepared remarks.
Speaker Change: Scott.
Scott: Thank you, Jason and good afternoon, everyone.
Scott: I'd like to remind everyone that my comments on our quarterly performance on a year over year basis, unless otherwise indicated.
Scott: Overall, we finished the first quarter within our guidance we were at the top end of our revenue guidance and we're at the bottom of our range on adjusted EBITDA.
Scott: I will share specifics on this during my commentary as well as provide our second quarter and full year guidance, but first I'll take you through our first quarter performance.
Scott: We reported total sales of $175 million, an increase of 0.7% driven primarily by strength in pro and growth in core chemicals or comparable sales increased 0.2%.
Scott: With respect to sales trends by consumer group Pro pool increased 9%.
Scott: Dedental pool declined 1% and residential hot tub declined 5%.
Scott: The results were driven by better in stock positions and a double digit increase in pro partner contracts.
Jason Mcdonald: Jason mentioned, we will continue to focus on probe is a strategic area of growth in the future.
Scott: Another area of strength in the quarter was in core chemicals.
Scott: Sales were up approximately 4%, which included positive unit volumes. The key driver was our strong improvement in in stocks and our focus on supply chain to meet the needs of our customers.
Scott: Gross profit was $48 million compared to $50 million in the same period last year and gross margin rate decreased 180 basis points to 27.2%.
Scott: The decline in rate was mainly due to 95 basis points of increased inventory adjustments as we optimize our inventory and 75 basis points of deleverage on occupancy and distribution costs.
SG&A was 87 million for the quarter and was negatively impacted by payroll costs and professional fees offset by favorability in equity based compensation and executive transition costs.
As mentioned, our first quarter adjusted EBITDA was a loss of $29 million compared to a loss of $24 million in the same period last year.
Scott: The decline was due to higher occupancy costs payroll and benefits and as Jason mentioned higher transformational costs that included inventory adjustments and professional fees.
Scott: Interest expense was $16 million in the quarter down $1 3 million versus a year ago due to reduced debt levels and lower interest rates.
Scott: Adjusted net loss was 41 million compared to a loss of 37 million in the same period last year and adjusted diluted loss per share was 22 cents compared to a loss of 20 cents in the same period last year.
Scott: Diluted weighted average shares outstanding were $185 million.
Scott: Moving to the balance sheet, we ended the first quarter with cash and cash equivalents of $12 million compared to $8 million in the first quarter of 2024.
Scott: The sequential decrease in cash versus the fourth quarter of last year is typical for our business and it's mainly due to investment in inventory as we build for pool season.
Scott: In addition, we paid down $27 million of debt in the quarter.
Speaker Change: Also as Jason mentioned, we are focused on in stocks and continued inventory optimization.
Speaker Change: Our inventory ended the quarter at $271 million, a decrease of $63 million or 19% compared to the prior year quarter.
Speaker Change: Even as our in stock position service metrics and net promoter scores remain very strong.
Speaker Change: At the end of the quarter, we had 757 million outstanding on our unsecured term loan and $40 million outstanding on our revolving credit facility.
Speaker Change: This compares to $788 million on our term loan and $38 million on our revolver at the same time last year.
Speaker Change: Overall, our debt levels were 29 million lower than a year ago and the effective interest rate on our term loan with 7.6% compared to eight 2% in the prior year.
Speaker Change: With that I'd like to turn to our fiscal 'twenty twenty-five outlook.
Speaker Change: We've had a constructive start to the year with topline growth showing much improvement sequentially and versus a year ago.
Speaker Change: We realized that our first and second fiscal quarters are smaller in terms of full year contribution, but a very important as we lay the foundation for us to win during pool season. We are looking forward to the early initiatives that were rolled out during the quarter and to further improvements as we prepare for the startup pool season.
Speaker Change: Given the timing of our new initiatives that Jason articulated and to provide perspective on year over year Comparables, we have decided to give both second quarter and full year guidance at this time.
Speaker Change: Our outlook reflects a balanced view of year to date company performance, the current macroeconomic environment and a realistic view of the timing of costs and benefits from our recently undertaken initiatives.
Speaker Change: Additionally, our outlook includes favorable comparisons for the fourth quarter as we cycle onetime impacts related to rebates and warranties from the prior year.
Turning to our 2025 outlook, our main financial goal remains to maximize free cash flow and reduce our overall debt levels.
Speaker Change: For the second quarter of fiscal 2025, we expect sales of $179 million to a 189 million, implying a range of flat to negative 5% versus the prior year.
Speaker Change: Gross profit of 44 million to $48 million inclusive of higher inventory adjustments in D C costs.
Speaker Change: The negative impact from rebate timing and a higher degree of fixed cost deleverage due to a lower volume quarter.
Speaker Change: Adjusted EBITDA of negative 38 million to negative $33 million, which reflects a lower gross margin rate and includes increased professional fees and higher incentive compensation accrual.
Adjusted net loss of 46 million to $42 million.
Speaker Change: And adjusted diluted earnings per share of a loss of 25 cents to a loss of 23.
As we shift from the smaller first half to a more meaningful second half, we expect better operating leverage favorable impacts from the timing of rebates.
Speaker Change: Our transformational cost and the cycling of onetime impacts from last year.
Speaker Change: For full year fiscal 2025, we expect the following.
Speaker Change: Sales of $1 3 billion to 1.37 billion, implying revenue in the range of a decline of 2% to growth of positive 3% year over year.
Speaker Change: This includes an estimated contribution of approximately 1.5% due to the 50 <unk> week in fiscal 2025.
Speaker Change: Gross profit of 473 million to $505 million.
Speaker Change: Adjusted EBITDA of 96 million to $116 million.
Speaker Change: Adjusted net income of negative $2 million to positive $13 million adjusted diluted earnings per share of negative one to positive seven cents.
Speaker Change: And capex of 35 million to $40 million.
Speaker Change: From a balance sheet perspective, we will continue to look for opportunities to optimize your inventory with the goal of having better in stock positions as we pursue our new precision inventory approach, while reducing our overall inventory levels in fiscal 2025.
Speaker Change: Our number one capital allocation priority remains reducing our overall debt and lowering our leverage profile, we will keep a sharp focus on maximizing free cash flow to pursue this objective.
Speaker Change: From a growth standpoint, we will pause on M&A activity, but we'll continue with our prior commitment to open three new stores in fiscal 2025.
Speaker Change: I'm looking forward to the future and I'm confident we have the right plan to execute on our initiatives.
Jason Mcdonald: I will now turn it back over to Jason for closing remarks.
Jason Mcdonald: Thanks Scott.
Speaker Change: I've laid out on this call. The first wave of initiatives, we are executing on.
Speaker Change: As you can see Leslie has embarked on a transformation journey with a clear focus on the fundamentals of retailing we.
Speaker Change: We are being very deliberate on both the choices, we're making and the initiatives we are pursuing.
Speaker Change: There will be more to come.
Speaker Change: Every decision we make every day he is done with putting the DIY and pro customer at the center of everything we do.
Speaker Change: The next three months will be critical to make sure. We are set up to win the pool season better than before.
Speaker Change: I am humbled and proud to lead this positive change and I'm appreciative of all of our team members, who continue to perform while we transform.
Speaker Change: It's a new era at Leslie and I'm looking forward to our future.
Speaker Change: I will now turn it back over to the operator for Q&A.
Speaker Change: Please proceed.
Speaker Change: Thank you well now we conduct a question and answer session if you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Speaker Change: Our first question is from Jonathan <unk> with Jefferies. Please proceed with your question.
Jonathan: Great Good afternoon, and thanks for taking my question.
Speaker Change: So Jason as you look at the initiatives you laid out for us on the transformation journey do you have any early signs of progress youre seeing from their implementation you can share.
Speaker Change: Yeah. Thanks, Jonathan Thanks for the question.
Speaker Change: Obviously, we've been very deliberate to share information with initiatives once they've actually started being implemented so.
Speaker Change: I am seeing some nice progress on some of the initiatives. So maybe I'll take you through some of those.
Speaker Change: Firstly as a reminder, our initiatives are.
Speaker Change: Directly tied to support our three key strategic themes of customer centricity convenience and asset utilization.
Speaker Change: I'll give you a couple of examples of where we're starting to see some green shoots.
Speaker Change: Performance as we look to the future.
Speaker Change: First one is in the area of asset utilization. So we've established our local fulfillment centers and our teams are already adjusting the depth levels of inventory in the stores. So.
Speaker Change: So over the past year, we've made nice progress on improving inventory turns per store and we plan on making this.
Doing this going forward.
Speaker Change: The team is currently pulling larger higher ticket equipment, that's like a.
Speaker Change: Peter back from our stores to the LFC and our D C.
Speaker Change: Specifically, we don't need to have for heaters in the store we could have won.
Speaker Change: And it can't get replenished the next day or even the same day from an LLC. So lsc's cover about 20 stores in the market as a backstop.
Speaker Change: So what this is going to allow us to do in the future and it's going to allow us to improve our working capital obviously reduce inventory per store is going to free cash up because our number one capital priority is to make sure that we're paying down the debt.
Speaker Change: And then as a reminder, we do.
Speaker Change: Adding new new stores here. This is a L. Ftes are not new builds they are using the existing footprint, so and low capital investment at that so it's a good example of asset utilization that we're already seeing some green shoots on the other one would be convenience.
Speaker Change: I've seen this firsthand in the marketplace. If you if we just look at the data the 300 basis point improvement that we mentioned and we mentioned in the prepared remarks.
Speaker Change: I mean, the stocks has been helpful.
Speaker Change: In addition, our in stocks are improving overall in a variety of key categories. So that's going to make us more reliable in this as a need based categories. So it's one that you get more reliable you have the opportunity to help people solve their problems in minutes and hours and that's a critical focus for us.
Speaker Change: The LSE on convenience.
Speaker Change: Already witnessed having been in stores.
It has an advantage first LFC I went too here in Arizona, Arizona and Angie Our general manager told me that the LFC helped the market already helped the market that day, where.
Speaker Change: We could have.
Speaker Change: She got a call.
Speaker Change: Notification to us.
Speaker Change: Two more pumps as a store in the local market needed to pumps and we had those pumps in the LFC. So instead of waiting for the next trucks, we were able to satisfy and not lose that sale.
Speaker Change: So you know.
Speaker Change: We are witnessing signs of progress both from an inventory efficiency standpoint, our asset utilization and also see oven and convenience from an in stock standpoint.
Speaker Change: At the early stages, and we are laying the foundation right now and we anticipate a larger benefit.
Speaker Change: So kind of at the height of the pool season in Q3 and Q4.
Speaker Change: That's really helpful. Thank for that color and I guess that leads to my next question on on.
Speaker Change: Out of stocks.
Speaker Change: I'm not sure if you can help us put our arms around just the size of that issue in terms of.
Speaker Change: The ramp in out of stocks.
Speaker Change: I guess theoretically.
Speaker Change: If even if the pro customer if they need 10 item and maybe you guys are out of stock on one theoretically you can lose that entire sales. So how common is in a current like that in a typical store.
Speaker Change: And I guess Relatedly you mentioned the 26 <unk>. This year I think he mentioned each L. D can service 20 stores.
Speaker Change: Do you imagine over time.
Speaker Change: Dozens and dozens of more L F B to service the entire fleet. Thanks, so much.
Speaker Change: Thanks, John for your question first.
Speaker Change: First on in stocks.
Speaker Change: Sorry, the reliability and inventory.
Speaker Change: Availability is critical to this to this business in this category.
Speaker Change: Because it's one of the key elements of building trust with the customer and whether it be because of the length of the full season, especially if you are up in the North Sea here you have your under time pressure and the time pressure is making sure that when you have a problem you need to solve it fast. So therefore for us I just we just put a lot of focus on it.
Speaker Change: We talked about 300 basis points of improvement that we've already seen I am very pleased as to where we're at right. Now we've had never never outs are in a much better position. Those are the most highest priority in stock position, we need to have across our skus and I'm actually also pleased where we are right now as we are about to enter the fall season.
Speaker Change: So we believe that this is Chris.
Speaker Change: Critical focus area for us and provides a good opportunity to build loyalty with our customers both for the pro and the DIY.
Speaker Change: What lfc's U as they allow us to.
Speaker Change: <unk> maintained the level of depth that we need in a market.
Speaker Change: And what takes place, especially during pool season, as you get a variety of variability in demand and when you have that variability demand. It's important that it's not just centered in that pressure of that variability sits in the store if they used to sit in the market. So that the market as a team can work together to satisfy the needs of the customer.
Speaker Change: We've decided to start with 26 Lfc's accurate.
Speaker Change: We're going to capture the learnings in those critical markets, we prioritize them in the Sun belt region.
Speaker Change: Over time, we will expand to more but we want to learn from our ability to do so out of these before we announced further expansion of more lfc's, so but thanks for the question.
Speaker Change: Thank you best of luck.
Speaker Change: Yeah.
Speaker Change: Thank you. Our next question is from Sean Calvin with Bank of America. Please proceed with your question.
Speaker Change: Hi, guys. Thank you for taking my question.
Speaker Change: Just first can you walk us through the assumptions in your revenue.
Outlook it seems like pretty flat, so just anything on what you're expecting for market volumes share gain or loss on that price on equipment versus chemicals.
Speaker Change: Maybe I'll start just from a from a guy and we were very purposeful.
Speaker Change: And.
Speaker Change: And deliver it on making sure that we provided not only the Q2 guide, but also the full year guide.
Speaker Change: Q2 has referenced is one of the smallest quarters.
Speaker Change: We have and it's also a very unique quarter in that because fourth quarter. Two guys is actually a majority of our sales and volume actually come in the back end of this quarter. So I'll, let Scott talk specifically around the.
Speaker Change: The revenue in terms of the year I wanted to give you a bit of context on Q2.
Speaker Change: And why it's important for us to why we shared a Q2 guide and a full year on this question.
Speaker Change: Yes, Thanks, Jason a couple of comments on the full year guide related to sales.
Speaker Change: I think I think the important thing is is we're not expecting a significant impact from our initiatives.
Speaker Change: In the back half and really the reason for that is number one we feel really confident about these initiatives, but what's a little more uncertain. It's just the timing and the magnitude of the benefits, especially with shopping patterns and frequency of our customers and so.
Speaker Change: We're being a little careful there just to make sure that.
We do see some green shoots and as we get more traction will feel more comfortable forecasting that out. It's just early days right now and so.
Speaker Change: We kind of had that stopped going into our guidance. We also looked at just last.
Speaker Change: Last year's results and last year.
Speaker Change: Our first half of the year was down around 11% and then in the back half it improved to down and so we take that into account too we kind of look at a two year.
Speaker Change: Stacked on growth and so that add a place to play as well.
Speaker Change: So.
Speaker Change: As you think about it.
Speaker Change: The midpoint of our guide me on the surface looked a little conservative, but if you look at the high point of our guidance.
Speaker Change: It does reflect a more robust growth and.
Speaker Change: Our thinking if our initiatives take off.
Speaker Change: A little bit quicker than expected then there's possibility on the upside in the high end of the guidance.
Speaker Change: Okay got it and then chemicals are obviously very important for you guys. So how should we think about the potential impact of tariffs on that market and then do you have any exposure to imported chemicals and how does that compare to like your estimate of the industry overall.
Speaker Change: From a tariff standpoint, obviously, it's a fluid conversation right now, but our exposure from a tariff standpoint is minimal.
Speaker Change: We are domestically sourced so that is that's that's.
Therefore, the impact is as small and minimal and that we will pay attention to indirect costs when it comes to aid a.
Speaker Change: The tariff situation, but.
Speaker Change: We'll manage that and will star vendor partners to minimize the impact to the customer.
Speaker Change: Thank you. Our next question is from Ryan Merkel with William Blair. Please proceed with your question.
Speaker Change: Hey, everyone. Thanks for taking the questions I wanted to ask on gross margin you know, we had a little bit of a mess this quarter and it you know it's been a it's been a source of best for the company for a while.
Speaker Change: Should we be comfortable that you finally.
Speaker Change: Where you think you can start expanding gross margins and Scott you mentioned a few things. So can you just walk us through that again, because the guidance sort of assumes that gross margins kind of start to increase year over year in the second half and just haven't seen that in a while.
Speaker Change: Yes, sure sure Ryan.
Speaker Change: And by the way that's one of the reasons why we gave Q2 guidance and full year because there are some timing differences differences here that are important.
Speaker Change: So quickly on Q1 margin.
Speaker Change: Two main impacts number one was inventory adjustments number two was deleverage on fixed cost. So the deleverage on fixed cost that's obvious our occupancy costs don't change.
Speaker Change: Although our sales are much lower in the first half versus the back half.
Speaker Change: On the inventory adjustment side, they were higher and we have a laser focus.
Speaker Change: On our inventory right now.
Speaker Change: And the reduction of our inventory and making sure the quality of our inventory is high and so it's gotten more focus this year and so in the past I mean, we always have done inventory adjustments I would say that.
Speaker Change: We're taking a look at our inventory more frequently now and so we're making those adjustments as we go along.
Speaker Change: And so what that does is that limits the impact of those inventory adjustments because last year. They are more concentrated in the back half, especially right before physical inventory.
Speaker Change: And so I think thats, a good thing for us it but it does cause some timing differences.
Speaker Change: So as you look at the.
Speaker Change: The guidance for the full year and the implied guidance for the back half you can see pretty significant improvement in margin okay.
Speaker Change: Actually well above last year for the back half and for the full year. So I'm.
Speaker Change: All good things to do right now it gives us more visibility on our inventory.
Speaker Change: It does spread those costs out over the year versus more concentration in the back half.
Speaker Change: So let me kind of transition that conversation into <unk>.
Speaker Change: The Q2 guide.
Speaker Change: So first.
Speaker Change: First off I'll first of all if SG&A will have some some pressure with professional fees and some incentive comp accruals.
Speaker Change: Especially as we you know get.
Speaker Change: Some of these initiatives kicked off those those additional expenses will mostly dissipate in the back half.
Speaker Change: But let me kind of hit gross margin specific to the Q2 guide.
Speaker Change: So similar to first quarter. The overriding reason for the shortfall in the Q2 guide is the timing of rebates and inventory adjustments.
Speaker Change: Which as I said, both of those will be offset in the back half.
Speaker Change: And so the.
Speaker Change: The midpoint of our guide for work.
Speaker Change: For the full year will be about 70 basis points higher than last year and then if you look at the trailing.
Speaker Change: Four quarters, the margin will be about 100 basis points higher than the trailing four quarters. So first off so the timing of rebates. That's about a third of the difference and this is mainly because last year, our rebate contracts were more heavily weighted in the first half.
Speaker Change: This year, we have some new agreements and that gives us a more even spread of those rebates.
Speaker Change: More aligned with our sales cadence so the headwind that we'll see in Q2 will be a tailwind in the back half.
Speaker Change: The remainder of the margin impact in Q2.
Speaker Change: It would be distribution center costs and inventory adjustments.
Speaker Change: When you think about DC cost those are going to be higher in Q2, because Q1 was used to build inventory.
Speaker Change: Just keep in mind that we started this year with almost $80 million less in inventories in the prior year.
Speaker Change: So what that means is we were building inventory for most of Q1.
Speaker Change: And so now in Q2, we're shifting that inventory to the stores to prep for pool season.
Speaker Change: So that time window is a little bit more compressed this year, because we had to build it first and now we're shipping it and so much more activity in the distribution centers and getting that freight to the stores and so again that is more of a timing difference.
Speaker Change: And that will normalize in the back half.
Speaker Change: And then the inventory adjustment as I mentioned same type of impact in the second quarter that.
Speaker Change: That we saw in the first quarter.
Speaker Change: But that will offset in the back in the back half of the year, specifically in the fourth quarter.
Speaker Change: Got it okay.
Speaker Change: Encouraging thanks for all that and then I wanted to ask on the pro it stood out to me. It was a nice growth rate this quarter and just was there anything driving that in particular and then what's the rollout look like for serving both do it yourself and pro out of all the stores when does that happen and will it impact.
Speaker Change: This season.
Speaker Change: Yes.
Speaker Change: So thanks for that.
Speaker Change: I think from a.
Speaker Change: Gross standpoint for that because it really good focus in the quarter from the team on the pro customer and the early stages of focusing on never outs through that quarter and I'd like to say some of the in stock.
Speaker Change: <unk> said, we've been we've been seeing in the quarter.
Speaker Change: Since the end of the quarter four of last year has helped impacted so that would be a critical area of focus.
Speaker Change: In addition to focus but also having inventory in stock has been a help.
Speaker Change: As we look to the future.
Speaker Change: Things about this initiative is today in all of our thousands of stores and we do currently have pro business.
Speaker Change: Thought here is how do we make sure that we are.
Speaker Change: Leveraging the entire network of 1000 stores to be able to do so and so therefore, it's a it's a really clean focus on asset utilization around being where they are and we are where they are right. Yes, we have 80 for spring here.
Speaker Change: We're 20 miles away from 80% of the pools in America.
Speaker Change: The other part that's already being done is from a convenience standpoint is around assortment.
Speaker Change: Have not only added never out pro skus into the mix, but we've also had pro assortment breadth.
Speaker Change: That is also improving and then we're looking at the other Skus are gonna help support it and then the other piece is looking at hours of operation. So this is already in.
Speaker Change: And the progress and we do believe the benefit of this initiative and the benefit of all the initiatives.
Speaker Change: We will take place more in the third and fourth quarter.
Speaker Change: As we roll these out across the across the country. So thanks.
Speaker Change: Thanks for the question.
Speaker Change: Alright, Thanks, I'll pass it on and best of luck.
Speaker Change: Okay.
Speaker Change: Our next question is from Justin Kleber with Baird. Please proceed with your question.
Justin Kleber: Hey, good afternoon, everyone. Thanks for taking the questions just first a follow up on the pro business can you break down the 9% growth between transactions and <unk> and then and then what's your outlook assume for pro pipe excuse me pro pricing as we move.
Speaker Change: Move across the peak season this year.
Speaker Change: Yeah, Jeff I'll take the first part of that.
Speaker Change: The increase in pro is is predominantly transactions and so that's that's what's encouraging about that and so we feel like we have some good momentum there and more importantly, we have a lot more to do to reduce friction and to make sure that we're in stock for the pro.
Speaker Change: And that means having kind of those job lot quantity. So theres much more to do but we're encouraged by the early signs.
Speaker Change: And then on the I think on the pricing side for us is.
Speaker Change: When it comes to the pro.
Speaker Change: Planning on any changes right now to a pricing strategy that we've done historically, we're very focused on the fundamentals and making sure that we are.
Speaker Change: And stock available and providing the best service for the pro and that's really about the.
Speaker Change: Focus areas of fundamentals versus any other customer promotional strategy at this time.
Speaker Change: Yeah.
Speaker Change: Got it thanks for that my follow up is just on the you talked about the transformational expenses that are included in the profit guide for the full year.
Speaker Change: Scott can you size the dollar impact for us from these expenses just as we think about what maybe the right go forward EBITDA base. It should look like as we move into fiscal 'twenty six.
Speaker Change: Can't give you an exact dollar amount Justin.
Speaker Change: But what I can say is.
Speaker Change: Some of those expenses will dissipate in the back half.
Speaker Change: And I think as we get in I think the way to think about it is.
Speaker Change: If you kind of look at our run rate, especially with what I talked about with rebates and inventory adjustments.
Speaker Change: We're kind of setting.
Kind of a new normal there I think and having a more even flow of those expenses throughout the year and so.
Speaker Change: I think the cadence that we finished the year with those two big expense line items.
Speaker Change: Should be relatively consistent as we go into the next year.
Speaker Change: And then the other transformational expenses that we see.
Speaker Change: Those will dissipate a bit in the back half.
Speaker Change: And.
Speaker Change: Even even a tick lower as we enter 2026. So I think the takeaway here is if you kind of look at the construct of the back half of the year, that's implied by the full year guide.
Speaker Change: Should set us up really well, especially the margin profile going into 2026.
Speaker Change: And you know.
Speaker Change: Probably getting more traction on these initiatives should get us.
Speaker Change: A really good opportunity to start strong in 2026.
Speaker Change: Alright fair enough, thanks, guys and best of luck.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question is from David Bellinger with Mizuho Securities. Please proceed with your question.
Speaker Change: Hey, everyone. Thanks for the question.
David Bellinger: First one I just wanted to address what each growth.
Speaker Change: Within your new.
Speaker Change: So your guidance can you talk about what's embedded in there in terms of.
Speaker Change: What are you looking at in terms of wages and secondly within that do you have.
Speaker Change: Or is there any way to quantify some of these states, where youre seeing the minimum wage.
Speaker Change: Wage rate start to move higher.
Speaker Change: Yes, yes, thanks for the question.
Speaker Change: Yes, we keep an eye on states with minimum wage growth.
Speaker Change: And so that's something we will look at every year in terms of overall wage growth you know pretty moderate.
Speaker Change: Mid single, maybe a touch lower than that and so.
Speaker Change: As we've kind of distance ourselves from kind of the COVID-19 years.
Speaker Change: We're seeing a pretty nice normalization of wage rates overall.
Speaker Change: Great. Thanks, Scott and then maybe just.
Speaker Change: Bigger picture question.
Speaker Change: Jason I think you mentioned some of that square footage you made a comment earlier on the call but.
Speaker Change: At this point or have you considered looking at any type of store closure program is there any way to think about stores that are underperformers, whether free cash flow negative or just unprofitable and is that a source of potential capital unlock as you continue to pay down the step foot.
Speaker Change: Yes, thanks for the question.
Speaker Change:
Speaker Change: A taken a taken a.
Speaker Change: Strategic capital approach to this business is something I'm really pleased that the team does on an ongoing basis in terms of how they look at all the assets. So when we looked at asset utilization as a key strategic theme for us.
Speaker Change: Sort of looking at all areas.
Speaker Change: So the team has a nice disciplined approach as to how they look at the stores, how do we think about future areas of opportunity of where we could.
Speaker Change: Expands but also areas, where we may need to either move or close the store we have nothing to share at this time, but it is but it is something that we are continuously looking at and will be a key element.
Speaker Change: On either side as we look to the future about investments or changes that we make in our assets. So nothing to report at this time.
Speaker Change: Got it thank you both.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question is from Simeon Gutman with Morgan Stanley. Please proceed with your question.
Speaker Change: Hi, This is Lauren on for Simeon and our first question is just on the comp so comps inflected to positive 2%. After eight quarters of decline I guess why should the run rate. They saw you guys saw this quarter I mean that you'll be successful and you know the critical pool season, coming up and there have been false positive rates in the past.
Speaker Change: What do you see now that might be a little bit different.
Speaker Change: Yeah, I can start off on that it's a good question.
Speaker Change: A couple of things, we're seeing that is encouraging.
Speaker Change: So Jason talked about the pro business.
No big growth lever for us and we're super happy to see some positive growth there and some momentum there even before.
Speaker Change: We've kind of rolled out more initiatives to kind of spur that business.
Speaker Change: Secondarily, we noted some strength in core chemicals, and so that's kind of the milk and bread of our business and so whenever a core chemicals inflect positive.
Speaker Change: That's always a good sign for us and so we're really pleased to see that and then some of the discretionary businesses as well we've seen some improvement so.
Speaker Change: That's another indicator for us.
Speaker Change: Just kind of the health of the consumer.
Speaker Change: So our discretionary.
Speaker Change: Growth was about negative three for the quarter. It was negative 11 last year.
Speaker Change: And so when you think about hot.
Speaker Change: Hot tubs down 5%.
Speaker Change: Last year in first quarter, they were down 18% and so we have good examples of some of these discretionary cat category is doing better and so you couple that with the strength in pro and our core chemicals business.
Speaker Change: It gives us a few different areas.
Speaker Change: To be more confident about the future.
Speaker Change: Yeah, and just building on Scott's point would be.
Speaker Change: The nice green shoots around the core chemical business had mid single digits with the other pieces balancing that is the is also the non the non discretionary performance. We were at minus eight a year ago and were at plus two.
Speaker Change: This past quarter. So both of those are areas that we are looking at is green shoots I guess, a promise for the future as we start thinking about.
Speaker Change: Trends or trajectory and and you put that on top of our initiatives.
Speaker Change: To get us ready for the fall season in three sort of quarter, three and quarter four.
Speaker Change: Thanks, that's helpful and a follow up is just on the pro versus DIY segment. So it's nice to see the continued strength from pro while I think DIY still appears slightly pressured could you work out what's maybe driving the continued weakness in DIY are you maybe seeing any early signs to get back to positive growth for DIY.
Speaker Change: Yeah.
Speaker Change: Yeah. Thanks for the question.
Speaker Change: Why is it will continue to be a key focus for US I mentioned avatar just the focus on DIY.
Speaker Change: Focus on loyalty.
Speaker Change: I'm really pleased with our team's work on conversion rate the conversion rate at the store when people are coming in and I think we said in our prepared remarks.
Speaker Change: Remarks that we were up 160 basis points on conversion feel strong about that.
Speaker Change: Areas of opportunity as traffic so that's the scenario.
Speaker Change: It's going to help us in the future is definitely going to be some of the work and the focus and dedication of the team on in stocks, we're not going to disappoint a customer when they come in so that's going to help us buoy up the conversion rate.
Speaker Change: Second is.
Speaker Change: We look forward to in the next call and over the next quarter.
Speaker Change: Im talking more about the marketing initiatives that we put to look to put in place.
Speaker Change: To kick start the fall season, I'm excited about the new hire we made was Scott Davis, he's bringing a new way of thinking in terms of how do we bring marketing to this this industry and I am excited about the team working together to develop those plans to get us off to a strong start in the fall season.
Speaker Change: In a very efficient way so.
Speaker Change: With that as well and I think that's going to help us on our efforts to improve DIY traffic.
Speaker Change: Great. Thank you.
Speaker Change: Okay.
Speaker Change: Thank you. This concludes our question and answer session and today's call. You may disconnect. Your lines at this time. Thank you for your participation.
Speaker Change: Yeah.