Good morning, and welcome to the Fiscal 2022 Third Quarter Conference Call for Leslie's, Inc. At this time all participants are in a listen-only mode. Following the prepared remarks, management will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded and will be available for replay later today on the company's website. I will now turn the call over to Caitlin Churchill with Investor Relations. Please go ahead.

Thank you, and good morning. 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 review the cautionary statements and risk factors contained in the company's earnings press release and recent filings with the SEC. During the call today, management will refer to certain non-GAAP financial measures. A reconciliation between the GAAP and non-GAAP financial 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 Leslie's website at ir.lesliespool.com. On the call today from Leslie's, Inc. is Mike Egeck, Chief Executive Officer; and Steve Weddell, Chief Financial Officer. With that, I will turn the call over to Mike Egeck. Mike?

Thanks, Caitlin, and good morning, everyone. Thank you all for joining us. And please note that we have posted a deck on the Leslie's IR site to supplement our discussion. I'm going to discuss three things today: number one, the overview of our Q3 results and underlying performance drivers; number two, the execution challenges in one of our distribution centers that was the primary driver of our Q3 sales and margin shortfall, and the steps we have taken to correct the issue; number three, supply chain challenges and increased industry promotions, which also impacted results for the quarter. After that, Steve will review in detail our financial results and change in full year guidance. Our Q3 performance continued our streak of record results, but it fell short of our internal expectations. Our organization and leadership team fully understand that this outcome is not acceptable, and that we missed a significant opportunity to serve more customers in the quarter. There is a heightened sense of urgency and accountability across our organization, and we are hyper-focused on the actions necessary to rapidly and sustainably improve our execution. Despite our disappointment in underperforming our expectations, our year-over-year performance illustrates our continued market share growth driven by our competitive advantages in serving the aftermarket pool industry. Sales for the quarter increased 13% to $674 million with broad-based strength across our three consumer groups. Residential pool grew 7% for the quarter, PRO pool grew 17% and residential hot tub grew 94%. Comp sales increased 7% for the quarter, and the two year stack comp for the quarter was 27%. Page 15 of the supplemental deck utilizes third-party credit card data to compare our year-to-date sales performance by quarter versus our competition. As you can see from the chart, we continue to gain share. Gross profit…

Thank you, Mike, and good morning, everyone. As Mike discussed, our third quarter performance was impacted by difficult year-over-year comparisons as well as discrete execution challenges within our distribution network, which are now behind us. Despite these challenges, demand for our core nondiscretionary product remains solid, and we are focused on delivering against our updated outlook for the year. Before I discuss our outlook, I will review our third quarter and year-to-date fiscal 2022 performance. For the third quarter, we reported record sales of $673.6 million, an increase of 12.9% or $77.1 million when compared to the third quarter of fiscal 2021. Our comparable sales increased 7.4% or $44.6 million. This increase is on top of our calendar-adjusted comparable sales growth of 19.4% in the third quarter of fiscal 2021, and represents comparable sales growth on a two year stack basis of 26.9%. Our noncomparable sales increased by $32.5 million driven by four completed acquisitions and 21 new store openings in the last year. We continue to see broad-based strength across our three consumer groups in the quarter as we generated comparable sales growth of 6% for residential pool, 17% for PRO pool and 10% for residential hot tub. On a two year stack basis, we generated comparable sales growth on a calendar-adjusted basis of 21% for residential pool, 78% for PRO pool and 33% for residential hot tub. Weather for the full quarter was neutral to slightly positive, but the cadence of the start to the season impacted our performance in the Northeast. Gross profit increased 7.0% or $19.9 million when compared to the third quarter of fiscal 2021, and gross margin rate decreased by 250 basis points to 45.1% from 47.6% in the prior year. During the quarter, there were two main headwinds to gross margin rate, continued…

Thanks, Steve. I want to wrap up by saying that we acknowledge our third quarter results, reflect executional challenges that we should have been able to manage better. For our organization and leadership team, that will never be acceptable. With that being said, we want to communicate three important points. The first is that we understand what happened with our New Jersey DC, and we have taken the actions to fix it. We have also implemented plans to improve the entirety of our supply chain and its ability to support our future growth. The second is that, our year-over-year results and market share gains are evidence that the fundamental drivers of the pool industry, the durable competitive advantages of the Leslie's operating model and the effectiveness of our strategic growth initiatives remain intact. The third is that we have a long and successful history of profitable growth in the face of all kinds of macroeconomic headwinds and that we are better equipped today than we have ever been to continue that success, and win in the market. With that, I'll hand it back to the operator for Q&A.

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Thank you. And our first question is from Peter Benedict with Baird. Please proceed with your questions.

Hi, guys. Thanks for taking the questions. First, just around the increased promotional activity. Steve, I think you mentioned or Mike, that you think it's back to kind of normalized levels. But how do you -- how does that make you think about the stickiness of pricing that has lifted sales in the industry here over the last couple of years? And then the related kind of follow-up is, curious about the Trichlor inventory levels across the industry. We're seeing more promos in that area, suggests that those levels are healthy at least relative to demand. So just help us understand your thoughts around the future promotions, the stickiness of price and then a little color on Trichlor. Thank you.

Yeah, Peter. Thanks for the question. Let me kind of walk through how Q3 worked is been pretty well documented. I think it was a cold and wet start to the season, particularly in two key markets, Northeast and the West Coast. This was going on at the same time that the industry was comping the chlorine shortage news from the prior year and a relatively strong Q3 for the industry. At the same time, macro pressures intensified for the consumer and what we saw was some increased price sensitivity. So, you've got retailers coming off of a cold start to the season, trying to comp the chlorine spike from the prior year, they see a more price-sensitive customer and, yeah, we saw some more promoting in the industry in which we participated. We have a price position in the marketplace and we want to hold that price positioning. I think it's important, too, to make the distinction between promotions and the way we look at this is promotions are a measure and our way to get our share of our industry traffic. It's actually not related to inventory. Promotions are not distressed inventory markdowns. And to your question on Trichlor. Trichlor is in much, much better supply this year than it was the prior year. It's at elevated costs for us and for everyone else, but promotions do tend to focus on chemicals in the industry because they have broad use across the industry and because they are, I would say, the most effective traffic driver for us and for the industry. That being said, I would characterize the level of increased promotion, which, across the entirety of our revenue was 120 basis points, is more normalized versus the last Q3 where there was a lot of shortages of product in chemicals, particularly, and very, very little discounting.

That's helpful. I guess, my follow-up, Mike, would be as you think about next year and the price -- just the inflation levels for Trichlor and that type of thing, you've said in the past you think that those levels are unlikely to come back down. Are you rethinking that here? How should we think about Trichlor inflation and the inflation more broadly across the product portfolio for the next 12 months? Thank you.

Yeah. I'll speak to Trichlor specifically. We still think there's a lot of cost pressure on the Trichlor across the manufacturing base, particularly in North America. So, we don't see what has been established as the new retail prices coming down, but we would expect a more normalized promotional rate, which is what we believe we saw in Q3. I'll make the point too that Q3 is traditionally the most promotional quarter for the industry, really Memorial Day through the July 4. And as Steve mentioned, in the month of July we've got our preliminary results in. That promotional level has come down. Next year, I would expect Q3 to be somewhat similar. I don't think we're going to see any significant decrease in Trichlor costing. And based on that, I think the industry pricing will hold.

Got it. Thanks so much.

Thank you.

Our next question comes from the line of Ryan Merkel with William Blair. Please proceed with your questions.

Hey, guys. Good morning.

Good morning.

Good morning.

Steve, you mentioned that higher product costs were going to impact the rest of the year. I think you also said uncertain supply was going to be a factor. Can you just walk us through those again? And maybe when do you think you're going to be clear of those issues?

Sure. Happy to. Thanks, Ryan. Yeah. And again, part of the commentary was a very mixed environment. So, as we talked about some of the pressures in the Northeast in our DC, we talked about elevated receipts. When you look year-on-year from an inventory perspective, most of the inventory growth is in Trichlor as well as equipment, but not all equipment, some equipment. And when you think about the challenges we had kind of in-season making sure we stayed replenished across our network, it really related to kind of non-Trichlor chemicals. And in some cases, those are DSD going straight to stores, other cases working through our own distribution network as well. When you have shortages and a vendor does not provide product, we are going to serve our customers, even if that product we procure comes from different sources and not going to be through our traditional contracts or at traditional pricing. So, we're going to pay a premium to get those products into our stores on an expedited basis from vendors who we do not necessarily consolidate all of our spend with. We really saw that happen kind of post-Memorial Day. If you look at the quarter, when you talked about that 115 basis points of product margin pressure, I'd characterize it as most related to promotions, but some product cost, it feels like in Q4 that, as Mike just talked about, promotions, feel like they've moderated. Product costs will stay a little elevated as we stay in stock through the rest of the year. And so, when you think about longer-term and kind of working into next year and, again, not providing guidance today, but I do think that the promotional environment, if we're normalized at current levels, should moderate. And the inventory product costing, we should work through over the next couple of quarters. And as we prepare for next season, we will look at opportunities to ensure that we don't have similar issues as we did this year with outages.

Got it. That's helpful. Okay. And then my second question is just on the 4Q guide just so I understand it. It sounds like you're extrapolating what you saw in 3Q. It sounds like it might be a little conservative. We have an uncertain macro. You saw July, that sounds pretty decent. You said promotions are not getting worse. So, is the right read here that underlying industry demand is not slowing down dramatically, the industry outlook is still pretty good and you think that promotions stores that's behind you?

Yeah, Ryan. I'll take that one. I do think you described it correctly. We were pleased to see promotions stabilize in July. And when you look at industry demand, if you -- the issue we had with our DC cost us about 700 basis points of comp in our residential business. So, instead of running a 6% comp, we would have run a 13% comp. So, industry demand, we think, is very much alive and stable. The change we really saw in Q3 was, as I described before, given the slow start to the season and comping the chlorine shortage and media coverage from last year, and the consumer that blinked a little, there was some price sensitivity and the industry reacted with some promotions. It's not typically a promotional-driven industry. We don't expect it to become one and we think we saw that recovery in July.

Perfect. Thanks.

Our next question is from the line of Kate McShane with Goldman Sachs. Please proceed with your questions.

Hi. Good morning. Thanks for taking our question. I wanted to ask quickly about some of the incremental costs that you discussed, particularly around the distribution center issues. I know some are persisting into fourth quarter. Is that mostly headcount related? And given that the situation seem to be somewhat of a backup with regards to the supply chain, is that headcount being considered more temporary or is this now in the base?

Yeah. Good question, Kate, and good morning. I think the right way to think about it is, for the quarter and for Q3 as well as for Q4, it is primarily payroll, headcount related as we have more individuals to get the capacity that we need to serve both stores as well as digital demand. As we get into next year, Mike talked about setting up a different approach, particularly in a market like the Northeast where you need seven days a week, double shifts, third parties to kind of assist with the volume. So, I would characterize the spend as being reallocated most likely as we go forward. But again, if that spend stays at current levels with the incremental demand that we did not serve this year, it isn't necessarily going to be a headwind from a margin rate perspective. So, I think from a dollar perspective, again, too early to say exact, but it will be higher than previously expected going into the quarter, but it will be good spend to serve incremental demand.

Okay, thank you. And then my second question is, can you talk to ticket versus traffic during the quarter in terms of how it drove the comp?

Yeah, Kate. I'll answer that one. Good morning. The -- if you look just at our comp residential business, transactions were down just over 1%, about 1.3%, average order value, the ticket was up about 9%. Put those together and you get to our 7% comp. And I'll note again, the DC cost us about 700 basis points of comp there. So, that was a big impact. Across the total business, the transaction count was plus 3% in the quarter and the average order value was 10%. Those two combined get us to our 13% sales growth.

Thank you.

Our next question comes from the line of Liz Suzuki with Bank of America. Please proceed with your questions.

Great. Thank you. Just curious how much market share you think you could have gained if you hadn't had the issues with the Northeast DC? And then what percentage of your stores does that DC serve?

Yeah. That -- the Northeast is an outsized portion of our business in Q3 because it's a very concentrated season in the best of years, and this year was more so with the slow start. And I think the way to characterize it is $35 million, about 700 basis points of comp in our residential business would have increased the share we had as we show on page 15 by that amount.

Great. Thank you. And I'm just curious, Leslie's has obviously been around for a while, company was founded in the '60s, so this wasn't the first time you've had a cold spring. Why do you think the Northeastern DC was caught off-guard by this increase in demand as the weather warmed up?

Yeah. That's a -- well, that's a great question and it's a question that we've asked ourselves a lot internally. We -- the season got a late start. We were well positioned with inventory in the stores to start the season. The start to Memorial Day weekend was, I'm going to say, okay, a little more promotional than normal, but okay. The first week of shipping -- replenishment shipping following Memorial Day weekend, the DC had some issues. That's not unusual for a DC in ours. We have -- DCs have bad weeks. They tend to get caught up. And in this case, we saw the reverse and the performance deteriorated all the way through June. And it's a combination of a very tough staffing environment. And when you add people in shifts quickly to the situation to rectify it, which we did, you run into a lot of problems and challenges in getting the right supervisory talent to manage those additional shifts. So, it was just a -- it was a highly inefficient process. But to be clear, we should have managed it better and we should have seen it coming. It's very disappointing internally for us not to have managed that better.

Okay. Thank you.

Thank you. Our next question comes from the line of Jonathan Matuszewski with Jefferies. Please proceed with your questions.

Great. Hey, Mike. Hey, Steve. Thanks for taking my questions. First one on gross margin. With the shortfall this quarter, can you just help us think about the low end and the high end of the implied gross margin forecast in guidance? I guess, what's embedded in each of those beyond the impact of higher or lower sales? So, what does your low end and high end imply in terms of maybe promotionality in the industry from here? It sounds like maybe it stabilized in July, but are you planning for any incremental promotions in 4Q? Thanks.

Yeah. Good morning, Jonathan. I'll take the part on promos and, Steve, you can talk about the building blocks of the margin. We think promotions have settled down. We've got Labor Day weekend coming up. We expect it to be fairly normalized to next year. The second part of the product margin challenge, though, and Steve mentioned this earlier, is some unexpected short shipments from vendors on particularly specialty chemicals. That's a very active situation. We're managing it day-to-day. And I'll note that it's completely different than last year. Last year, the shortages and supply challenges were focused on Trichlor and equipment. Trichlor inventory is in good shape. Equipment inventory for the most part is in good shape. But things like shock, liquid chlorine, dry acid, algicides, we got short ship 30% to 40% from some of our proven vendors on those products. And to meet consumer demand, we've gone to the open market to purchase and that has been -- that's come in at a much higher cost. So, that pressure we see continuing into Q4 as part of the product margin. Promotions, we think, will stabilize and become less of a factor.

Yeah. And Jonathan, with respect to the margin rate change in Q4, kind of midpoint implied 250 basis point decline, which is consistent with Q3. Again, I had made a comment that a little bit different mix as we think about how it will play out in Q4 from our perspective, a little more business mix impact in Q4 given some of the M&A and the strength of the hot tub business in Q4 relative to Q3. And then when you think about what Mike just kind of walked through, promotionally, feel like it's a little less impactful, but still higher than last year. And in product -- margin related to product costs, it's really dependent on our ability to get incremental product from existing vendors. So, partially why we have the range we have is the uncertainty of when or if we get to replenish from some of those existing vendors or if we have to rely on our newfound partners or existing -- or new relationships to drive more product into the network.

That's helpful. And then my follow-up question, just in terms of the customer mix, it looks like PRO [Technical Difficulty] Curious whether you're seeing any indications of homeowners looking to engage more in DIY maintenance of their pools as maybe they tighten their house expenditure. Are you hearing that from store associates, PRO partners, anything like that presumably work to your advantage?

Yeah. Jonathan, I would say that in past macroeconomic slowdowns, there has been an uptick in DIY pool maintenance from residential consumers. I believe we would have seen that this quarter without the challenges associated with the New Jersey DC. On the PRO side, we haven't really seen any slowdown in that business. We're a much smaller player in that business to the total, so we've got lots of room to grow. And that business was all very positive. I think the only challenge we had there was similar to what Steve was mentioning. We did have some periodic shortages of supply trying to service the PRO business. But outside of that, we're very pleased with how the Affiliate program is working and the PRO initiative overall.

Thank you. Our next question comes from the line of Andrew Carter with Stifel. Please proceed with your question.

Sorry, I was on mute. Just want to make sure -- and because I'm a little confused here. So, early June, the commentary was adverse weather, which you alluded to in the late start. You then suggested that would have been a neutral to positive impact. So, to be clear, if I understand this correctly, the DC issue didn't allow you to fully capitalize on the favorability. And kind of to that end, would you have known that there were kind of issues with this DC if there wasn't a kind of a change in the end market demand that was that abrupt? And finally, I'll just ask kind of all in one. I appreciate your viewing the remainder of the network, but how can you kind of assess this risk at other locations? And could there be any stepped up investment, SG&A, CapEx, whatever, next year to fix any other deficiencies? Thanks.

Yeah. Andrew, thanks for the question. The -- when we were at the first week of June speaking to investors, like I'd said earlier, we'd come to Memorial Day weekend, it was slow, but not terrible. It was more promotional, but we had a lot of momentum in the business. The Northeast region, in particular, was outperforming at that time the rest of our store fleet. And the situation with the DC started when they had trouble fulfilling the replenishment shipments into the stores they serve that first week of June. And like we've -- like we -- I said before, and we've seen not unusual for one of our DCs to have a poor week of shipping. So, we were concerned, but not overly concerned. The challenge was there wasn't a recovery from that and the situation got worse and worse for several weeks. So, caught us by surprise, should not have caught us by surprise, should have been able to manage through it better. And as you can see in the results, it was a big hit to the quarter. In regards to the DCs, we've grown -- we'll have grown in the last two years 60%-plus. We've invested in our DCs. We need to continue to invest in our DCs. And the situation with New Jersey has put us on high alert from a learnings perspective in evaluating the balance of our network, that's for sure.

And Andrew, this is Steve. I think the other thing to think about in the Northeast, it does have the most acute change, even with a normalized cadence as you go from kind of Q2 to Q3 really kind of peeking into end of May, early June from a volume perspective. So, you don't have the same acute volume changes at other facilities. But as Mike said, we've certainly seen those facilities operate well and they may have a day or two or a week where there's challenges, but kind of pick themselves back up and continue to operate in as normal. So, as Mike said, we've talked a lot about investments in distribution and supply chain. It's part of what we've been talking about all year from an investments perspective as well. And given the pace of growth and the fact that we continue to have kind of six full line distribution centers across our network, even with the elevated sales volume, it is an opportunity for us to revisit efficiencies and opportunities to supplement in season.

Thanks. I'll pass it on.

Our next question is from the line of Peter Keith with Piper Sandler. Please proceed with your questions.

Hi. Thanks. Good morning, everyone. Just wanted to get clarity on the sales outlook for the fourth quarter. I believe you said you've reduced your prior outlook by $21 million, but at the same time, it sounds like the DC issue is now resolved. You also -- you did comment on macroeconomic challenges, which, obviously, we're aware of, but at the same time, you've talked in the past about 80% of the business being non-discretionary. So, just help me understand a little bit better about that reduced sales outlook and is there something we should be concerned about going forward?

Yeah. Good question. Go ahead, Mike.

Go ahead.

Good morning, Keith. Yeah, from an outlook perspective, so we're looking at a basic growth of 13% to 18%, comp of kind of 6% to 9%. If you think about Q3, where we were at 7%, basically midpoint of that outlook is consistent with Q3. As you pointed out, DC is behind us in the Northeast and kind of shipping to plan, which is good. But, again, given the macroeconomic uncertainty, it doesn't feel like now is the right time to basically accelerate the pace of expectations in Q4. We're pleased with July as we talked about, but I think at this point, folks feel comfortable with our current outlook, which overall for the year is 15% to 17% top line growth and comp of, call it, 9% to 11%.

Okay. And if I just look at the Q4 gross margin, so I think you also said at the midpoint, you're down 250.So it's down a similar amount as Q3. But at the same time, the promos are abating. Are you just trying to give yourself some cover here on the promos, and then this mix issue with the elevated product cost? Because it seems like the gross margins sequentially should have less pressure?

Yeah. It's different pressure. So, you talked about likely more business mix headwind in Q4, promotions less headwind and product costs more headwind is probably the right way to think about it, but it feels like consistent with last quarter is the right place to be at the midpoint.

Okay. Thank you.

The next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your questions. Q - Michael Kessler Great. Hey, guys. This is Michael Kessler on for Simeon. Thanks for adding our questions. First, I was hoping you could maybe help distinguish a bit more, I guess, between the challenges that you had with New Jersey DC, which had weather issues, the supply chain moderating at the same time coming in relative, I guess, to other regions, were there also shipment issues from vendors like across the country more widespread? And then relatedly, can you speak to just the Northeast region sales performance relative to the rest of the country and also versus your plan? Thanks.

Yeah. Sure. The combination of a late start to the season, combined with a really significant peak in receiving from vendors impacted all of the DCs. And it wasn't expected, but we were able to manage through it in all but the New Jersey DC. So there was a similar pressures, I would say, across our network, amplified in New Jersey with -- as Steve has explained a very strong peak in that region in terms of replenishment, season happens very quickly there. And with a slow start, it concentrated demand. And at the same time, we had -- it seems like most of the vendors caught up at the same time in the supply chain, and we took on those receipts, but it made for a very crowded any problematic challenge, particularly in the New Jersey DC. The Northeast region, we don't really break out comps and performance and size by region. But it was the only region in our network of seven regions that had a negative comp. And that was very, specifically, the impact of the DC that serves that region.

Got it. Okay. That's helpful. A follow-up just on margins, and starting to turn the page a little bit to next year, thinking about normalized margins for the business. So there's some moving pieces now with maybe potentially some higher costs in DCs. You have the mix shift as the [indiscernible] used to grow, maybe promotions have to be annualized at a lower rate. So can you talk about, I guess, where do you see that all normalizing in any -- I guess, on the other side, offset that are been -- from a tailwind standpoint, just as we're trying to kind of calibrate where margins are going off of this year than relative to where you were at pre-COVID.

Yes. Good question. I'll take this, Mike. We're not providing guidance for 2023 today, and we're not changing our long-term growth algorithm either. So when you think about the step back longer term, the aftermarket pool industry fundamentals remain intact. But when you think about our algorithm and how we talked about it, we have business mix headwinds. It's been there since we went public. It will continue to be as we develop relationships with new consumers and new channels. We generally drive product margins higher in each of our businesses. We do that through our director vendor relationships, which is unique in the industry relative to most of the competition. Our proprietary brand strategies, we've talked about our ability to continue to expand in that area. And then again, our vertical integration around distribution and manufacturing. So those should provide efficiencies and leverage across the business kind of year -- over the long term. And then again, expect continued occupancy leverage. So those are kind of the core drivers that continue to -- we think are going to continue to drive gross margin in the future. I think we do have some noise over the next few quarters, and we look forward to providing guidance as we get through Q4.

Yes. The only thing I would add is with a stabilized supply situation, and that's getting better, though Steve described, and it's still mixed, and a stabilized promotion situation, which will be reset more normalized. And I think we've seen that happen in the fourth quarter. We can manage margins. We can manage margins to our long-term growth algorithm. We got surprised by some factors in this quarter, and that really led to the product margin degradation that you saw.

Thank you. Our next question is from the line of Garik Shmois with Loop Capital. Please proceed with your questions.

Hi, thanks for taking my question. Just wondering how you're viewing some of your growth initiatives, the pace of the PRO conversion, acquisitions, new store openings just given the more uncertain macro.

Yes. Garik, I would say we feel very good about the PRO initiative. Like I said, comp 17% for the quarter would have been higher without some periodic shortages of product, particularly larger sizes of shock. So feeling very confident there. On the M&A side, we continue to see lots of opportunities. We're going to look to accelerate that. The residential stores that we are opening, new stores, are performing well, as is our marketing -- digital marketing efforts to underserved areas. We had talked about the file growth starting to moderate. You saw that this quarter. I also point out that this year was a very unusual year between the Texas freeze, which impacted the entire industry, and the chlorine -- the media coverage of the chlorine shortage last year, two really extraordinary events that put a lot of noise in the year with regard to consumer acquisition. But if you look at our two year stacks in the quarter, plus 14, we feel good about that, and plus 16 for the year. So bumpy ride on the consumer file growth, but believe with those events behind us, we'll get back to a steady growth in the file at a lower level. We've said 100 basis points to 300 basis points. I think that's where you'll see us next year.

Got it. Just wanted to follow up one more time on the New Jersey DC. I think you mentioned you're shifting to a seven day a week to shift a day model. I'm just kind of curious, how does that compare to before? And how universal is that model across your network?

Yes. Well, that's the model we're going to put in place across the network. We had an acute problem with a New Jersey DC, but we were running all of our DCs right at max capacity for the season. Seven day a week with a large e-commerce business like we have, I'm going to say is the norm. We're currently operating about 5.5 to six days a week. We had run second shifts in most of the DCs over the course of the season. However, it was not a seven day a week. And the challenge here is really you can add temporary DC staff, and you can train them up for a season. What we learned this season is the challenge is really around supervision, and we're going to make the investment in second shift and weekend shift supervision that will just put in place in the DCs year-round. And then they will -- they will really have their specific tasks during season.

Got it. Thanks for that.

Thank you. Our final question today comes from the line of Dana Telsey with Telsey Advisory. Please proceed with your questions. The next question is from the line of Dana Telsey. Your line is live for questions.

Hi, everyone. As you think about inventory levels, given what happened in the New Jersey DC, should we be seeing inventory levels perhaps at the end of the fourth quarter? And then the changes in product procurement that you mentioned, Mike, how much of that continues going forward? And how much of the New Jersey DC costs continue or sticky, and that's the way the business continues to operate? So how much is permanent versus how much is variable? Thank you.

Yeah. Good morning, Dana, I'll take the first part of that on inventory. As we think about year-end, I'm not going to guide to specific numbers, but we expect inventory to remain elevated. Again, the two primary areas of increase year-on-year for Q3 were Trichlor and equipment. On Trichlor, the increase is relative to last year, which was more depressed, more difficult to come by. And so we're in a much better position from a Trichlor perspective across our network, both -- all stages, raw materials, produced goods, in our DCs and in our stores. When you think of equipment, the equipment is where we've had a lot of the uncertainty around timing of supply receipt. And it does feel like that area of the supply chain is moderating. It is getting better. It has resulted in elevated levels. When you think about the nature of our inventory, it doesn't have the same level of obsolescence as many other retailers. This is a good product. And if the choice is to take inventory at a little bit higher level today, going into the end of the year and to start off next year in a better position versus try to run leaner. We will take the former in the current environment. So it's something we expect to actively manage into year-end and through next year, I don't necessarily view these levels as permanent increases. But in the current environment, it's the appropriate level of inventory.

Good morning. Dana, I apologize. I had some trouble hearing the second part of the question. I believe it was around how much of the DC -- the elevated expense in the DC would be permanent. The way I would answer that is, the DCs will be more expensive to operate on a go-forward basis, but it will also give us the increased capacity we need, and we should be able to gain leverage on the DC expense as it goes up, just through our standard growth profile.

Thank you.

That concludes our question-and-answer session. I'll turn the floor back to management for closing remarks.

Thank you, operator, and thank all of you for joining us today. We appreciate the continued interest in Leslie's.

This will conclude today's conference. You may disconnect your lines at this time. We thank you for your participation, and have a wonderful day.