Leslie’s reports surprise Q4 loss amid discretionary spending slump

Leslie’s, the largest direct-to-consumer pool and spa care retailer in the United States, startled investors with an unexpected loss in the fourth quarter, sending its stock tumbling 22% in after-hours trading. The retailer, which operates over 1,000 stores and a comprehensive digital platform, attributed the disappointing results to a sharp decline in discretionary spending on big-ticket items.

The company’s financial results for the quarter ending September 28 reflected an industry-wide slowdown, compounded by specific challenges in inventory and contract costs. With first-quarter fiscal 2025 guidance painting a bleak picture, Leslie’s is bracing for continued headwinds even as it positions itself for long-term growth.

Fourth-quarter performance underscores challenges

Leslie’s reported a net loss of $9.9 million for the fourth quarter, a dramatic shift from the $16.5 million profit recorded during the same period last year. Earnings per share fell to a loss of 5 cents, significantly missing analyst expectations of 10 cents. Adjusted earnings per share, which exclude one-time costs, came in at 2 cents, far below the forecast of 11 cents.

Revenue for the quarter dropped 8% to $397.9 million, reflecting a comparable sales decline of 8.3%. The company cited reduced store traffic and weak consumer demand for premium products as key factors in the slump. Gross profit fell to $143.2 million, while the gross margin narrowed to 36% from 37% last year, partly due to a $5 million expense tied to revised contract terms.

CEO outlines vision for recovery

Jason McDonell, who assumed the role of Chief Executive Officer in September, acknowledged the challenging conditions but expressed optimism about the company’s future. He noted that Leslie’s remains a trusted brand with a strong market position and highlighted its ability to adapt to evolving customer needs. McDonell emphasized that the company’s renewed focus on customer-centric strategies would pave the way for long-term growth, with a detailed roadmap expected to be shared in upcoming quarters.

Industry analysts have observed that the broader pool and spa sector has been under pressure for the past two years, with inflation and economic uncertainty dampening consumer spending on non-essential items. McDonell’s strategic focus on efficiency and customer engagement could prove crucial in navigating these turbulent times.

Full-year results reveal broader trends

For fiscal 2024, Leslie’s reported an 8.3% drop in sales to $1.33 billion, while adjusted EBITDA declined by 35% to $108.7 million. Despite the revenue decline, the company improved its cash position, with cash and cash equivalents rising to $108.5 million, compared to $55.4 million at the close of fiscal 2023.

Leslie’s also achieved significant inventory reductions, cutting stock levels by nearly 25%. This inventory streamlining contributed to improved operating cash flow, which surged to $107.5 million from just $6.5 million the previous year.

However, the company’s debt remains a concern, with funded debt at $783.7 million. Rising interest costs have also weighed on earnings, reflecting the broader impact of higher borrowing rates across the retail sector.

Grim outlook for fiscal 2025 Q1

Looking ahead, Leslie’s projects first-quarter fiscal 2025 sales between $169 million and $176 million, with a net loss of up to $41 million. Adjusted EBITDA is expected to range from a $27 million to $29 million loss, underscoring the continued challenges the company faces.

The cautious guidance signals that Leslie’s will need to navigate weak consumer demand while implementing its recovery plan. Despite the near-term hurdles, McDonell’s leadership and the company’s commitment to its core customer base could set the stage for a turnaround.

Leslie’s shares, which have already lost nearly half their value this year, closed at $2.75 in post-market trading.