Smart Water Tech And Calculated Expansions Set To Propel Revenue Growth

Key Takeaways

• Accelerated adoption of the AccuBlue Home device is expected to foster customer loyalty and increase both revenue per customer and net margins.
  
• Strategic expansion, including opening 15 new stores and focusing on the PRO segment, aims to drive sales growth and improve net margins through better cost and operational efficiencies.
  
• Leslie's faces risks from demand normalization, efficiency challenges, weather dependence, and economic pressures, despite potential long-term gains from expansion and tech initiatives.

Catalysts

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

• Accelerated adoption and positive customer response to the AccuBlue Home smart tech water testing device, expected to increase revenue per customer and foster customer loyalty, thereby increasing revenue and potentially net margins through higher-margin product sales.
  
• Strategic expansion into new store locations, with plans to open 15 new stores in fiscal 2024, aimed at driving sales growth in new markets and increasing overall company revenue.
  
• Enhancements in cost management and operational efficiencies, including reductions in SG&A expenses and improved inventory management, projected to improve net margins by reducing operational costs.
  
• Implementation of strategic initiatives targeting the PRO segment, including the expansion of the PRO Partner program, to boost sales in this higher-volume customer segment, positively impacting revenue.
  
• Continued focus on customer service and product availability, alongside competitive pricing and compelling assortments, expected to improve customer conversion rates and retention, thus supporting revenue growth and sustaining net margins.

Assumptions

• Analysts are assuming Leslie's's revenue will grow by 3.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.2% today to 3.9% in 3 years time.
• Analysts expect earnings to reach $58.5 million (and earnings per share of $0.43) by about October 2027, up from $3.0 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 11.3x on those 2027 earnings, down from 163.2x today. This future PE is lower than the current PE for the US Specialty Retail industry at 15.0x.
• Analysts expect the number of shares outstanding to decline by 9.49% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 10.74%, as per the Simply Wall St company report.

Risks

• The pool industry's recent period of demand normalization presents a risk to Leslie's, potentially impacting revenue and gross margin, especially if consumer interest in pool investments continues to wane.
  
• Fixed expense deleverage and discrete items negatively impacting gross margin suggest challenges in operational efficiency, which could affect net margins if not addressed.
  
• Dependence on weather conditions for sales volume, as evidenced by sales being down due to unfavorable weather, introduces uncertainty and volatility in revenue forecasts.
  
• High inflation and interest rates weighing on household spending could lead to continued weakness in large ticket category sales, potentially reducing overall earnings.
  
• The company’s strategic focus on expansion and technology initiatives, while potentially beneficial in the long term, involves execution risk that could impact short-term profitability and cash flow, particularly in a challenging macro environment.

Valuation

• The analysts have a consensus price target of $3.57 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 $4.2, 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 2027, revenues will be $1.5 billion, earnings will come to $58.5 million, and it would be trading on a PE ratio of 11.3x, assuming you use a discount rate of 10.7%.
• Given the current share price of $2.67, the analyst's price target of $3.57 is 25.2% 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.