Proximity To 80% Of US Pools Will Drive Future Customer Engagement

Key Takeaways

• Strategic focus on fundamentals and proximity to U.S. pools aims to increase revenue through higher foot traffic and sales.
  
• Improved inventory management and customer personalization efforts target better margins, retention, and earnings growth.
  
• High leverage and weak sales underscore Leslie's financial struggles, raising concerns over debt priorities, profitability, and uncertain future earnings amid a shifting macro landscape.

Catalysts

Operates as a direct-to-consumer pool and spa care brand in the United States.

• Leslie's aims to sharpen its focus on fundamentals and leverage its proximity to 80% of U.S. pools, which is expected to drive long-term profitable growth by increasing foot traffic and sales, positively impacting revenue.
  
• The company plans to enhance its loyalty program, leveraging its extensive customer data to deliver more personalized solutions, which could increase customer retention and lifetime value, impacting net margins.
  
• Leslie's is implementing a never outs inventory strategy to improve precision and availability, potentially reducing costs through better inventory management, impacting gross margins.
  
• A focus on asset utilization involves optimizing existing store and distribution center formats to drive higher organic sales and improve same-store sales, contributing to earnings growth.
  
• Leslie's prioritizes reducing debt through free cash flow generation as its primary capital allocation strategy, which could lower interest expenses and improve net earnings.

Leslie's Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Leslie's's revenue will grow by 3.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from -1.8% today to 1.9% in 3 years time.
• Analysts expect earnings to reach $28.0 million (and earnings per share of $0.15) by about January 2028, up from $-23.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.5x on those 2028 earnings, up from -16.2x today. This future PE is greater than the current PE for the US Specialty Retail industry at 16.3x.
• Analysts expect the number of shares outstanding to grow by 0.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.86%, as per the Simply Wall St company report.

Leslie's Future Earnings Per Share Growth

Risks

• The recent decline in Leslie's sales, down 8% for both the fiscal fourth quarter and year 2024, highlights continuing revenue challenges, reflecting softness in traffic and larger ticket items, which could affect future earnings.
  
• Adjusted net income for the fiscal year was a loss of $1 million, signaling profitability issues that may impede future net margins if such performance persists.
  
• The company's high leverage ratio of 6.2x, coupled with a need to prioritize paying down debt over growth investments, raises concerns about financial flexibility and potential impacts on future earnings.
  
• Leslie's limited financial guidance to only the first quarter of 2025 due to a dynamic macro environment creates uncertainty about future financial stability and revenue projections.
  
• Occupancy leverage issues, resulting in a 77 basis point decline in gross margin rate, combined with anticipated similar pressures in the first quarter of 2025, suggest ongoing challenges with maintaining or improving net margins.

Valuation

• The analysts have a consensus price target of $3.26 for Leslie's based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $4.0, and the most bearish reporting a price target of just $2.25.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.5 billion, earnings will come to $28.0 million, and it would be trading on a PE ratio of 29.5x, assuming you use a discount rate of 10.9%.
• Given the current share price of $2.04, the analyst's price target of $3.26 is 37.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.