Good afternoon and welcome to the First Quarter of Fiscal 2024 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, Investor Relations.

Thank you, and good afternoon. I would like to remind everyone that comments made today may include forward-looking statements, which are subject to significant risks and uncertainties that could cause the Company's actual results to differ materially from 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 are Mike Egeck, Chief Executive Officer; and Scott Bowman, Chief Financial Officer. With that, I will turn the call over to Mike. Mike?

Thanks, Caitlin, and thank you all for joining us this afternoon. Please note that we have posted our Q1 2024 earnings deck to the Leslie's IR website, and we believe referring to certain pages in that deck during our call. I'd like to remind everyone that our first quarter is historically our smallest sales quarter of the year, during which we make investments and incur costs to position the company for the upcoming peak pool season. The start of our 2024 fiscal year played out as we anticipated, and our financial results for the quarter were in line with or ahead of our expectations. Total first quarter sales were $174 million, down 11% year-over-year. Residential pool was down 10%, PRO pool was down 8% and residential hot tub was down 18%. Comp sales were down 12% year-over-year and non-comp sales contributed $3 million in sales for the quarter. Both sales and comp sales performance improved through the quarter after a soft start in October. Weather in the quarter was a 3% tailwind versus the prior year, in line with our expectations for more normalized weather in fiscal 2024, which saw traffic recover sequentially and down high single digits in Q4 to down mid-single digits in Q1. Total transactions were down 6% year-over-year and average order value was down 5% year-over-year. Average order value continues to be affected by sales of equipment and high-ticket discretionary products, including hot tubs. Total chemical sales improved to down 3%, and we saw a sequential improvement in chemical unit volume each month during the quarter. Equipment sales continued to be soft, down 18%. In total, non-discretionary product sales were down 8% versus a year ago. Discretionary product sales were down 19% and contributed about 40% of the quarter's total sales decline. Approximately three quarters of…

Good afternoon, everyone, and thank you, Mike. Before I discuss our results, I would like to introduce our new Vice President of Investor Relations, Matt Skelly. Matt is a seasoned Finance and Investor Relations professional with a career that has spanned over 20 years. We are excited to have them on board and look forward to his leadership of our Investor Relations efforts. Turning to first quarter results. Our results for the quarter were in line with or ahead of expectations, and we were pleased to see improving trends as the quarter progressed. We reported total sales of $174 million, a decrease of 11% compared to the first quarter of fiscal 2023. Comparable sales decreased 12%, but we saw sequential comp sales improvement each month throughout the quarter. Comparable sales decreased 16% on a two-year stack basis and increased 4% on a three-year stack basis. Non-comparable sales contributed $3 million in the quarter, driven by acquisitions and new store growth. With respect to trends by consumer group, comparable sales for residential pool declined 10%, PRO pool declined 8%, and residential hot tub declined 20% compared to the prior year period. On a two-year stack basis, comparable sales declined 15% for residential pool, declined 15% for PRO pool, and declined 23% for residential hot tub. These declines were in line with our expectations given the current macroeconomic environment in a cost-conscious consumer. Gross profit was $50 million compared to $65 million in the first quarter of fiscal 2023 and gross margin rate declined 450 basis points to 29%, which was in line with our expectations. Page 10 of our supplemental deck illustrates our Q1 gross margin rate bridge in more detail. During the quarter, gross margin was affected by four main factors, which we highlighted as anticipated puts and takes during…

Thank you, Scott. Before we wrap-up, I want to cover a few recent developments in our corporate ESG initiatives. In September, we published our third annual ESG report that highlighted our expanded environmental disclosures. The formation of four employee resource groups, with membership across the organization and the improvement of our MSCI ESG rating from A to AA. In addition, we were pleased to announce that Leslie's was recognized by St. Jude's Children's Hospital as their new corporate partner of the year. In December, we announced that Steven Ortega has decided not to stand for reelection as Chairman at our next Annual Meeting and that James Ray Jr. had resigned from the Board and his position as Lead Independent Director given his recent appointment as CEO for another publicly traded company. I would like to thank Steve and James for their partnership and leadership as members of the Board. On behalf of current and former Leslie's associates, I would also like to thank Steve for his nearly two decades of service to Leslie's. We wish both Steve and James well in their future endeavors. We are also pleased to appoint John Strain a 30-year veteran of retail technology and e-commerce space and current board member as Lead Independent Director and Chairman Elect in advance of our 2024 Annual Meeting. To conclude, while we still felt the effects of lingering headwinds from 2023, we delivered results that were in line with or ahead of our expectations. As we prepare for the 2024 pool season, we remain confident in the durability of our advantaged business model and the ability of our team to leverage the competitive advantages from our scale, capabilities and strategic initiatives to drive growth, long-term market share gains, and shareholder value. With that, I will hand it back to the operator for Q&A.

Thank you. [Operator Instructions] Our first question is from Ryan Merkel with William Blair. Please proceed.

Hey, everyone. Thanks for taking the question. Mike, I wanted to start-off with inventory. It looks like you've made some nice progress there. Can you just talk about the progress you've made with inventory management and why you're confident you're going to hit your targets for the year?

Yeah. Hi, Ryan, thanks for the question. I'll start, and then I'll have Scott speak to it more specifically. But I want to emphasize how pleased we are with Moyo's leadership of the supply chain in general and also with some additional hires we've made, all of which happened in March and April of last year. And since that time, that infusion of talent along with the go live of our new inventory planning systems, yeah, we've been really, really pleased with the results.

Yeah. And I'll just add on to that, Ryan, I think our inventory management has improved significantly starting in the fourth quarter, where we've reduced inventory by about $75 million. And then this quarter, another nice reduction for us. And so as we reduce inventory, it's mainly two things. it's having a good tool, which is Blue Yonder, but also having a good team behind it that enables us to be more precise on ordering product and getting it delivered to stores. And so it's really just great work by the whole team there. And for us, no reducing inventory is very important, but also in stock levels and service metrics are also extremely important. And so that's other guardrail that we look at, which has been extremely high. So we're really happy with the overall performance. And as we've kind of indicated earlier, we should be about $100 million less than our peak inventory last year, and that happens in late March, early April, and we're still confident that we can finish the year at about $50 million below the prior year.

Got it. Okay. That's great to hear. And then my second question is on chemical prices. Mike, I think you said you've seen stabilization, can you just talk about how much Trichlor prices were down in the quarter? And then how does that compare to the guidance for 2024?

Yeah. I think Trichlor was down for the quarter, both in volume and in price. It was about a 50/50 split. But versus the prior year, and I'll talk about chemical prices in total, which was about a 250 basis point headwind to sales. And that's predominantly from the price actions that we took in June of last year until we anniversary those, they'll continue to be a headwind. But when you look at chemical pricing in the industry and our pricing since those June 23rd actions, yeah, they've been very stable.

Okay. Great. I’ll pass it on.

Thanks Ryan.

Our next question is from Jonathan Matuszewski with Jefferies. Please proceed.

Hey, thanks for taking my question, and welcome, Matt [ph]. My first question is on your efforts with the PRO, right? You've been able to build some traction there. I think, penetration in terms of sales has tripled over the years. Could you just give us an update on wallet share with the PRO customers, right? Obviously, you've onboarded more PRO customers and the PRO partner program is helping to drive more frequency and purchases, but just help us understand that evolution in terms of converting PRO customers viewing Leslie's as convenient fill-in stop versus a first stop if that makes sense?

No. Absolutely, Jonathan. Thanks for the question. When we launched our Pro Partner program and our emphasis on the Pro Customer. We believe we had a structural advantage given our 1,000-plus locations. And those 1,000-plus locations give us the advantage of convenience. And our focus group work prior to initiating the program, we talked to a number of pros and they were very consistent in wanting reliability of supply, a good price, not necessarily the lowest price. And then convenience was extremely important to them, particularly to the smaller operators who don't have any inventory or what they're carrying in their track and their band. And as you mentioned, sales have almost tripled. We've been very pleased with the progress we're making there. And there's a pretty sharp distinction, as we said in the script, between the Pro Partners that we have on contract and our other Pro Customers. And really, the share of wallet is built by getting them into the Pro Partner contracts. And we had good growth in that over the last year and intend to keep that pace of growth. And the difference between the wallet share in the PRO Partners and the non-PRO Partners is considerable. It's about 2 times. So the emphasis is really going to be on using our structural advantage of -- in most locations being closest to the pools and then really doubling down on signing up PRO Partners because once we get them in the program, they performed very consistently. Q – Jonathan Matuszewski: All right. Great. That's helpful. And then maybe just a follow-up for Scott. Scott, right, historically, the revenue split has been 75% of sales in the second half of the fiscal year are there any nuances to that split for this year? If you could just kind of walk through why that split may not hold this year or if it will. Thanks.

It should be very close to that split. I indicated I believe it was on the prior call that the split that we will have by quarter this year mirrors on the first half, second half mirrors very closely what we saw in 2022. 2023 was a little bit of an anomaly, but 2022 is probably the best comparison that I think will have for this year in terms of seasonality by half. Q – Jonathan Matuszewski: Thanks so much. Best of luck

Thank you.

Our next question is from Simeon Gutman with Morgan Stanley. Please proceed. Q – Simeon Gutman: Hi, everyone. Good afternoon. You mentioned, Mike, that pricing, I think, is where you want it to be, I think at the moment can you talk about as we get to the peak season, do you think, especially since it sounds like there's some potential share loss in the number, maybe it's obscure, not sure how do you read it. But being at the industry, you think that's enough to win back market share, if that's the way that -- if you're indeed losing it, so do you need to be sharper than that, I guess, another way to ask it.

Yes. Good question, Simeon. Look, I believe we're priced appropriately, and we're priced in our historical position, right? We're above mass and home and at or just below specialty. That's worked for us for a long time to where we're at now, we'll obviously react to the market if the market goes lower. But I don't see us at this time, we need to do that. It would be reaction. It wouldn't be something we would lead. To your question on market share, though, I have to say, we were expecting a headwind on the credit card data, based on the chemical price changes. As you remember, last quarter, that basis point headwind from the chemicals more than bridged the differential in sales rate. We are frankly surprised this quarter that it didn't play out the same way. The chemical price action explained about 40% of the gap doesn't explain the rest. And it doesn't line up with our other data checks. And by that, I mean discussions with our vendors, discussions with our store managers, we use similar web for our digital traffic and all of those kind of soft, qualitative and some quantitative measures indicate that our current performance is in line with the industry. So we're a little surprised by that. The way we're thinking about it is, first quarter is our smallest quarter. It is -- we don't think it's a good idea to take that result from Q1 and extrapolate it for the year, not necessarily representative of long-term trends. We ended fiscal year '23, up 140 basis points versus the industry fiscal year '22 up 690 basis points. We feel quite confident we'll gain share this year as well, but it didn't play out in the first read from the smallest quarter of the…

Yes. Thanks for that. Something else we're thinking about the competitive backdrop, it sounds more stable. You talked about chemical pricing, and then we talked about your pricing. Is there any way -- or how do you think about gauging what you're seeing today as like a precursor for the spring, or you can't judge the last couple of months and how the spring will shape up once we get the peak selling season.

Yes. I think it's again, it's the smallest quarter, and then January is our smallest month. So we really need to get into at least February and March when some of the -- some belt markets start to percolate that we can see our first look at the velocity going into the season. But we're encouraged by the different weather forecasting, we use everything from farmers almanac to WTI to NOA to Planalytics, which is our core provider. And we're pleased to see that for the months of March, April, May, really the kickoff with the season and into June, we're seeing at least normal, if not favorable weather across most of our key markets. So I think it's a pretty good setup the pool season. The other thing to take into account is, last year, we saw evidence of people stockpiling our latest survey, which we talked about last quarter. Consumers are indicating they're not doing that. We have another survey going out this month to confirm that. But I think we see no stockpiling or significantly less. We see a good weather setup. We’re very pleased with where we are with pricing and our in-stock levels and our NPS scores are all improving. So we feel pretty good about the setup to the season. But to your point, it doesn't become -- there's not a lot of clarity around that, I would say, until March, April.

Okay. Thanks. Good luck.

Thank you.

Our next question is from Steven Forbes with Guggenheim Securities. Please proceed.

Good afternoon, Mike, Scott.

Hey, Steven.

Mike, I was wondering if you could maybe just expand on sort of your outlook for the customer file, right? Like is it too early to – if you get a good read on trends, both loyal and non-loyal on when you expect stabilization, or are you starting to see anything that would sort of support the thesis of stabilization at some point this year? I'd love to just sort of, get your most recent thoughts on thinking on the customer file and stability.

Yes. I think there's some unwinding still of some of the onetime customers that we picked up during the pandemic. I would expect next quarter's customer file to be down, not down as much as it was this quarter. And then I would think by the second half, we should flat down and start to grow again, which is reflective of our business overall. We really think that first quarter and second quarter of this year, we've got both structural headwinds and some, I'd say, kind of the final unwinding of some of the customer files that were in one time, typically in one time as Tricor buyers, frankly. And then we get back to the core of the file, which has been quite healthy. And when I think of the core file, we're really thinking about our loyalty customers. Loyalty members continue to grow. They were down 4% in the quarter, quite a bit better than the company overall. Transactions are positive, which we need to see positive transactions for our guidance to a hit. And we saw some pressure on AOV, but that was across the file and very much in line with what we've seen in other places. And that's really kind of the lack of the high ticket more discretionary equipment items and also the hot tub customers in our file.

Thanks, Mike. And just a quick follow-up. I think pro-comps, right were down 8%. Where is pro-traffic trending? And how are you sort of thinking about Pro versus residential sales for the year? Are you still sort of equivalent or similar or anything changing there?

Yes. I think pretty similar. We can't break out pro traffic specifically, right? The traffic counters in the stores count customers coming in. Feedback from our stores and from our pro wholesale representatives is that pro traffic has been very similar to residential traffic. And that would be our history as well. Traffic was down kind of mid single-digits for the quarter and the pro sales that you saw were down 8%. Again, a pretty big difference between Pro partners, who we have the contracts with. They are -- I do them similarly to our loyalty customers in our regular file. We wrap our arms around them nicely. We do a good job of explaining the benefits of the program. And we're very focused on continuing to grow the number of contract partners we have Pro partners and also the number of loyalty members

Thank you.

Our next question is from Garik Shmois with Loop Capital Markets. Please proceed.

Hi. Thanks for taking the question. I wanted to ask just around trends in the quarter that just ended. You mentioned they improved each month. Certainly, weather played a role. I don't know if you're able to parse out how much was weather in driving the improvement sequentially versus any maybe underlying improvement in trends?

Yeah. Good question, Garik. October was tough. I mean that was -- it was a tough month. And the challenge for us in Q1 is that each month of the quarter gets smaller in volume. So October is the biggest month, November smaller, December smaller in January, our smallest month of the year. Q2 is the reverse January sale month of the year, really hard to extrapolate anything that happens in January even to the quarter because March is more than 50% in the entire quarter. So October, the weather was not as favorable as it was in November and December about half is favorable. And we just saw lower traffic with about similar conversion. So I'm not sure we can explain everything that happened in October, but it was a challenging month, and we are very pleased to see November improve from there in December improve more.

Understood. Thanks for that. Follow-up question is just on hot hub sales, just given the weakness there for several quarters given the pullback in big-ticket discretionary spending. You mentioned comps are easing as you move through fiscal 2024. Just wondering how we should think about maybe the growth rate or kind of the narrowing of the declines in hot hub as the year progresses?

Yeah. We have planned the discretionary business for the year down about 10%. And that's what's built into the midpoint of our guide. We've discussed that at some of the earlier calls. The -- and hot tubs are about 75% of discretionary sales. So we need to see hot tubs turn. What gives us confidence and sparked my comments in the script is hot tub business is the one business where we have a forward order book. And at the end of the quarter, that order book was basically flat. And we need that kind of improvement from down 20% to flat to get us at or better than that down 10% for the year. So that's why we talk about encouraged -- being encouraged by the hot tub results, not for the Q1 results in terms of what was delivered and shipped, but for the formation of the order book for the balance of the year.

Understood. Thanks for that. Appreciate it and best of luck.

Thanks, Garik.

Our next question is from Andrew Carter with Stifel. Please proceed.

Hi. Thank you very much. So what I wanted to drill in on is you said that the -- regarding the product margin was down excuse me if I say the wrong number, 250 basis points, and it was almost entirely related to the timing of volume rebates. So within that, I know you took the price reductions on Trichlor. Are you saying that kind of like-for-like, you've actually kind of recovered some of the costs from vendors and you're actually cost neutral with the price decrease. Therefore, a pretty significant product margin expansion as the year goes by. Just help me parse that out. Thanks.

Yes, Andrew, the headwind from the price chem changes is about 195 basis points. It's not in the bridge because we were able to effectively mitigate that with other merchandising price cost actions and not just in chemicals across the assortments in our different product categories. So we're pretty pleased with those results. It's going to be an ongoing challenge in Q2 and into June until we wrap those price changes. But yes, you're correct. We didn't call them out because we were able to effectively mitigate the majority of them. Q – Andrew Carter: And then the second question I have, I mean, last year, you got out over your skis on pricing, didn't make an adjustment until late season. You also had the added factor content with of people had chemical sitting in their garage, you think that's unwinded. So I mean, regarding kind of getting the messaging out there, how long is the process is that to get the message back to the customers? And if you could help us out, like how often does kind of a core consumer come into Leslie’s, is it twice a season? Is it once a week? Just anything you can help us out with there? Thanks.

On average, it's about three times the season. So we should be -- by the time we lap those price changes, we should have seen most all of our account base. And then look, it's just it needs to be a steady drumbeat of messaging, reinforcing not just our pricing but also our value. I think the most encouraging thing is that we decided to take those price actions on chemicals two reasons. One, based on what we were seeing for competitive pricing, but also and importantly, our Net Promoter Scores started to dip and the driver was price perception. We've always been viewed as a premium product, premium quality at a fair price. And we started to get feedback that it was overpriced. That's not the position we want to be in. The good news in our minds, is the NPS scores on that specific pricing metric have been improving every month since. So we think we're in -- it's one of the reasons when we're talking about pricing earlier and the question from Simeon, one of the reasons we feel we're in a good spot there. But as we've talked about before, we're constantly scraping across the digital sites. We've got shoppers in market. So we're paying a lot of attention to -- definitely intend to use your phrase, not get out of our skis again. Q – Andrew Carter: Thank you very much. I'll pass it on.

Thanks, Andrew.

Our next question is from Justin Kleber with Baird. Please proceed. Q – Justin Kleber: Yes. Good evening, everyone. This is Justin Kleber. Thanks for taking the question. First one, just to clarify, Mike, the traffic comments. You mentioned an improvement to down mid-singles. Can you just help me reconcile that figure versus the transaction number you have in the deck, which showed a slight desell, if traffic is less bad, but actual transactions, I guess, got a bit worse sequentially. Is conversion the missing piece there? Or am I missing something with the numbers and not looking at apples-to-apples.

No, you're looking at it correctly. I'd kind of parse it into the year-over-year comparison and to the sequential comparison. And on a year-over-year basis, you're right, transactions are down 6%, traffic is down in that same range, conversion was basically flat. On a sequential basis, for September Q4 into Q1, we tend to have a little less conversion rate overall historically. And I think that has to do with -- you're starting to wind down out of the peak pool season. And it's just a little bit different kind of shopper coming in. So not surprised by that, but what you pointed out is absolutely correct. Higher conversion in Q4, a little higher over -- a little lower conversion in Q1, but quarter over quarter -- or excuse me, year-over-year for quarter one, conversion was flat.

Got it. Okay. Thanks for the clarification. And then, Scott, maybe a question for you on gross margin. Just wanted to walk through that positive 110 basis point inventory adjustment. I thought we really weren't going to start clawing that divot back until 4Q. So just any additional color there. As we think about 2Q, just any color on how you envision the various margin buckets playing out even if it's just directional commentary relative to 1Q? That would be very helpful.

We've just placed a very high focus on inventory adjustments in general. And so I think we're getting better at it. So I think that's one reason why it was a little bit better. I think the other thing is we did -- we spent a lot of time in Q4 just making sure that we had things cleaned up. And so there was a lot of work done, especially with bringing all of the inventory in-house. And so I think that rigor that we had in Q4 is paying off a little bit for us as well here in the first quarter. Now, when I look at Q2 margin kind of compared to Q1, I still see Q2 slightly better than Q1 in large part just because we'll have better leverage on DC costs and occupancy costs with more sales. So I think that will help the quarter. We did have some price increases in January of last year that will temper that. But even with that, I still expect Q2 to be a little better sequentially than Q1.

Got it. Thank you both. Best of luck.

This will conclude today's question-and-answer session. I would like to turn the conference back over to Mike for closing remarks.

Thank you, operator, and thank you all for joining us today, and your continued interest in Leslie's.

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.