Leslie's Q2 2025 Earnings Report

Leslie's EPS Results

• Actual EPS: N/A
• Consensus EPS: -$0.24
• Beat/Miss: N/A
• One Year Ago EPS: N/A

Leslie's Revenue Results

• Actual Revenue: N/A
• Expected Revenue: $184.92 million
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Leslie's Announcement Details

• Quarter: Q2 2025
• Date: 5/8/2025
• Time: After Market Closes
• Conference Call Date: Thursday, May 8, 2025
• Conference Call Time: 5:30PM ET

Leslie's (NASDAQ:LESL) operates as a direct-to-consumer pool and spa care brand in the United States. The company markets and sells pool and spa supplies and related products and services. It also offers various pool and spa maintenance items, such as chemicals, equipment and parts, cleaning and maintenance equipment, safety, recreational, and fitness related products. In addition, the company provides installation and repair services for pool and spa equipment. It also sells its products through e-commerce websites and third-party marketplaces. The company offers complimentary, commercial-grade in-store, water testing, and analysis services. It serves the residential, professional, and commercial consumers. Leslie's, Inc. was founded in 1963 and is based in Phoenix, Arizona.

Leslie's Q2 2025 Earnings Call Transcript

Key Takeaways

• During Q2, Leslie's sales dropped 6% YoY due to colder weather and weaker foot traffic, with residential pool sales down 9% and Pro Pool sales down 2%.
• Conversion rate improved 174 basis points year-over-year (over 450 bps post-AccuBlue), helping the company deliver adjusted EBITDA within guidance despite soft revenue.
• All 26 local fulfillment centers (LFCs) are now operational on time and under budget, driving 99% in-stock levels on critical SKUs, reducing inventory 12% and improving turns by 8%.
• Pro segment momentum strengthened, narrowing year-over-year sales decline by 700 basis points as Leslie's expanded pro contracts, enhanced marketing and leveraged faster in-store availability.
• New strategic moves include an enhanced Pool Perks loyalty program with tiered benefits, same-day delivery via Uber and a cost optimization pillar targeting $5–10 million in annual indirect procurement savings.

Presentation

[Operator]

Good afternoon and welcome to the Fiscal Second Quarter twenty twenty five Earnings Conference Call for Leslie's. At this time, all participants are in a listen only mode. Following the prepared remarks, management will conduct a question and answer session. As a reminder, this conference call is being recorded and will be available for replay later today on the company's Investor Relations website. I will now turn the call over to Elizabeth Eisleben, Senior Vice President, Investor and Public Relations.

[Elisabeth Eisleben, SVP, IR & Public Relations at Leslie's]

Good afternoon, and thank you for joining us today to discuss our fiscal second quarter that ended March 29 and the progress we're making across our strategic initiatives. I'm joined today by Jason McDonnell, our Chief Executive Officer and Tony Iskander, our Interim Chief Financial Officer and Treasurer. Following their prepared remarks, we will open the call to address your questions. Unless otherwise stated, all references to quarterly or annual performance refer to our fiscal reporting period and all references to comparisons made are versus the prior fiscal year reporting period. I'd like to remind everyone that comments made today may include forward looking statements, which are subject to risks and uncertainties that could cause actual results to differ materially from those projected or implied by the forward looking statements.

[Elisabeth Eisleben, SVP, IR & Public Relations at Leslie's]

All statements other than statements of historical facts are forward looking statements, including, but not limited to, estimate, may, could, will, believe, expect, would, consider, should, anticipate, project, plan, intend or similar words. Additional information about factors that could cause actual results to differ can be found under the caption Forward Looking Statements and Risk Factors in our most recent annual report on Form 10 ks and subsequent filings made with the Commission. In addition, during our call today, management will refer to certain non GAAP financial measures. A reconciliation between the GAAP and non GAAP financial measures is included in our press release, which was furnished to the Securities and Exchange Commission today and posted to our Investor Relations website. Now, I'd like to turn the call over to Jason. Thanks,

[Jason McDonell, CEO at Leslie's]

Elizabeth. I'm excited to have you on the team. I want to begin by thanking the entire Leslie's team for the urgency, resilience and customer first mindset they demonstrated in our second quarter. We recognize that much of the progress we're making will take time to become fully evident in our results. The amount of change we're driving across the business is significant and would not possible without the unwavering dedication across every team in our organization.

[Jason McDonell, CEO at Leslie's]

As we prepare for peak pool season, we are executing against our key initiatives that we believe will enable the successful transformation of our business. Our diligence in executing strategic initiatives is beginning to yield early improvements across the business. The team is energized as we came together to deliver bottom line results consistent with our expectations laid out last quarter, despite a softer than planned top line in the quarter. Before I turn to second quarter performance and updates on our transformation, I want to welcome Tony Iskander. Tony began working with Leslie's in late twenty twenty four as a senior finance and accounting consultant before being appointed our interim CFO.

[Jason McDonell, CEO at Leslie's]

We recognize we are at a critical time in this transformation journey, and Tony will be invaluable as we deliver against our top capital priority of debt reduction and position the company for long term value creation. We're grateful for the swift improvements Tony is driving across the organization. Keeping with the perform while we transform mindset that you've heard about on our prior calls, today, I will discuss how we performed in the second quarter, including an update on how our strategic initiatives are progressing. Then turning to Transform, I will share our next set of strategic initiatives under the three pillars we've previously outlined, including customer centricity, convenience and asset including I will then turn the call over to Tony to dive deeper into our financial performance and reaffirmed expectations for the balance of the year.

[Jason McDonell, CEO at Leslie's]

Finally, Tony will introduce a fourth pillar of cost optimization, which is all about continuous improvement and driving accelerated EBITDA growth. Starting with the second quarter performance. Sales were softer than expected with weaker foot traffic in February, driven by significantly colder temperatures than usual, resulting in a decline of 6% year over year. Looking at sales by our business units on a year over year basis, Pro Pool sales continued to outpace total company sales and were down 2%. Residential pool sales declined 9% and hot tub sales increased 4% year over year.

[Jason McDonell, CEO at Leslie's]

With that said, by leveraging the expertise of our store team and enhanced reliability, we continued to deliver positive growth on conversion rate, which improved 174 basis points versus prior year. Importantly, looking at performance after a water test is performed with our proprietary AccuBlue technology, we increased total conversion by over four fifty basis points. We believe our strategic initiatives, including in stock improvements, are showing early signs of contributions to our conversion rate, which I'll touch on in a bit. Turning to our adjusted EBITDA performance in the quarter. I am pleased with the team's ability to take action and control costs, delivering adjusted EBITDA within our guide at a loss of $36,000,000 As a reminder, the second quarter only represents approximately 13% of our annual sales.

[Jason McDonell, CEO at Leslie's]

Our ability to achieve adjusted EBITDA guidance, even with some top line softness, is a proof point of the early progress we're making as a team. Moving to our strategic initiatives, which remain centered around customer centricity, convenience and asset utilization, I want to provide updates on: one, optimizing inventory and utilizing local fulfillment centers, or LFCs two, winning in pro and three, optimizing DIY omnichannel to build loyalty. Starting first with optimizing inventory and utilizing LFCs. I'm thrilled to share that all 26 LFCs we announced last quarter are operational and were completed on time, under budget and are already having a positive impact on our customers. Importantly, by utilizing existing locations, these strategic assets required minimal capital investment, as you'll hear from Tony shortly.

[Jason McDonell, CEO at Leslie's]

Serving as mini hubs, our LFCs support our focus on precision inventory and helping to improve in stock levels. A component of optimizing inventory includes our focus on our never out SKUs that are most critical for serving both residential and professional customers. In the second quarter, we achieved more than 99% in stock levels in these never out SKUs. This is a 170 basis point improvement compared to the end of the first quarter and an impressive six twenty basis point improvement since the beginning of the year. This is a key factor in our ability to improve conversion rate.

[Jason McDonell, CEO at Leslie's]

Importantly, while improving in stock rates, we continued to reduce inventory by 12%, and inventory turns improved 8% versus prior year. By operating with a precision inventory mindset, we believe we can extend this momentum through peak pool season. As we look to the future, we believe there are additional opportunities to further optimize our inventory, which improve cash flow and support our top capital priority of reducing debt. Furthermore, we also expect our LFCs will allow us to enhance and optimize our go to market strategy in the future, inclusive of our omnichannel approach, store footprint and distribution centers. Moving to our second initiative, Grow in Pro.

[Jason McDonell, CEO at Leslie's]

Our momentum is building as evidenced in year over year improvement in Pro sales in our second quarter, which delivered a 700 basis point improvement from the 9% decline in the second quarter of the prior year. A key driver to this improvement is our team's focus on growing pro share and establishing new partner contracts across our entire footprint. We believe we will further capitalize on the significant share opportunity across our more than 1,000 stores as we improve speed, convenience and inventory availability for Pro customers. Through the rollout of personalized strategic communications to the Pro, coupled with our refreshed marketing initiatives, we believe we're taking the right steps to grow Pro heading into the pool season. Our third strategic initiative, as we discussed last quarter, is optimizing DIY omnichannel to build loyalty.

[Jason McDonell, CEO at Leslie's]

We added new functionality and capabilities to Leslie's website and our mobile app in the second quarter, which are significantly improving the user experience. In February, we launched enhanced service scheduling capabilities, enabling both store team members and customers to see estimated costs and reduce processing time, which together resulted in large increase in online service appointments. Specific to the redesigned app, it now provides an integrated platform with best in class search and shopping options. In addition, with improved speed for the customer, they are utilizing new features such as hands free voice search to easily order pool supplies. We believe these enhancements began to have an immediate impact on the DIY customer experience and strengthened Leslie's position as a trusted expert in pool care.

[Jason McDonell, CEO at Leslie's]

Now as we look forward to the balance of 2025 and strengthening our foundation for future success, I want to introduce a new set of transform initiatives that support our strategic pillars of customer centricity, convenience and asset utilization: one, building Leslie's brand two, launching our enhanced pool perks loyalty program as well as improved personalization and three, adding same day delivery capabilities. First, our team is focused on building Leslie's brand through more efficient marketing programs to help drive traffic and improve marketing spend effectiveness. Specifically, we are leveraging marketing mix modeling to ensure we optimize our investment as we reduce costs in this critical area with more efficient and higher returning marketing initiatives. With this approach, we recently launched We Are Pool People, a new marketing campaign which has been rolled out nationwide and features some of our own expert team members. We look forward to building on the strength of this campaign to increase brand awareness during our highest volume quarters.

[Jason McDonell, CEO at Leslie's]

Our second new initiative is the launch of our enhanced Pool Perks loyalty program. As the first nationwide retail pool loyalty program in America, our program is well known amongst pool owners with more than 80% of our DIY transactions are with Pool Perks members. However, this program has had minimal updates since its initial launch years ago and provides a great opportunity for us to grow with and reward our most loyal customers with enhanced benefits. We launched the new Pool Perks program in April, introducing loyalty tiers for the first time and is now integrated for customers within our mobile app. As customers grow within our loyalty tiers, they can now earn additional benefits as they increase their spend with Leslie's and trust us with a higher share of their pool care solutions.

[Jason McDonell, CEO at Leslie's]

Moving from a Perks member to a Perks Elite or our highest tier, the Perks MVP, allows customers to earn rewards faster while providing unique and curated offers. Importantly, through the introduction of loyalty tiers, we are also able to deliver cost savings for Leslie's. To further support our new Pool Parks program, we're now leveraging both zero and first party data to introduce personalization within our marketing efforts. This allows us to better serve customers by communicating more precisely. We can target DIY customers with what they need, when they need it.

[Jason McDonell, CEO at Leslie's]

A great example of this is water testing. With our proprietary AccuBlue system, we're giving customers a personalized report based on the size and composition of their pool. Utilizing their latest water test, we're able to give the customer a chemical prescription for exactly what their pool needs. This offering allows the customer to complete their basket with a total solution, helping to drive increased UPT through product bundles that include specialty and base chemicals often needed together. Through new marketing capabilities, we can now also provide offers on products we know are needed for the pool conditions, yet they have not purchased at Leslie's recently.

[Jason McDonell, CEO at Leslie's]

Building on our proprietary AccuBlue technology, our AccuBlue home system is another example of how we're delivering convenience to our customers. Since launching in May 2023, this in home technology was previously only available to purchase online, resulting in an opportunity to build awareness and expand penetration. In the second quarter, we started the rollout and are now featuring AccuBlue Home in approximately 100 stores with plans to expand nationwide. This product allows customers to see firsthand how easy it is to achieve the benefits of a clean, safe and beautiful pool with accurate water testing capabilities from the comfort of their own home. Ultimately, this system drives customer convenience while increasing their and total spend with Leslie's.

[Jason McDonell, CEO at Leslie's]

Finally, our third initiative is another great example of our commitment to customer convenience. With this focus, I want to highlight the addition of same day delivery capabilities, which we believe will improve asset utilization and enhance our ability to serve customers faster. Knowing our proximity to pools is a great competitive advantage, we first began to improve our competitive position through the addition of strategically located LFCs. These have allowed us to improve our inventory availability and speed to serve the customer. I'm pleased to announce that we've recently signed an agreement with Uber to launch same day delivery services across our store network for Pro and DIY customers.

[Jason McDonell, CEO at Leslie's]

I'm excited to launch same day delivery with Uber this summer as it will further bolster our focus on customer centricity, convenience and asset utilization with an omnichannel total solution approach and further differentiating Leslie's in the market while driving cost optimization. As we move forward, we are reimagining Leslie's core value proposition. We aren't just looking at Leslie's as 1,000 stores and a network of distribution centers. Rather, Leslie's is a dynamic network that can respond quickly to any customer need by leveraging our differentiated assets, and we believe we can do this better than anyone in the industry. I am committed to optimizing our entire asset footprint to ensure we're strengthening Leslie's for the customers today and building the company for long term profitable growth.

[Jason McDonell, CEO at Leslie's]

I will now turn it over to Tony to discuss performance in the quarter, provide our outlook for the second half of the year and introduce our cost optimization pillar. Tony?

[Tony Iskander, Interim CFO & Treasurer at Leslie's]

Thank you, Jason, and good afternoon. I'm excited to be part of the team reshaping our operational efficiency to deliver improved financial performance. I've had the pleasure of getting to know the Leslie's team and have been impressed by their dedication and commitment towards improving our financial future. Turning now to financial performance in our second quarter, sales were $177,100,000 compared with $188,700,000 in the second quarter of the prior year, which was primarily driven by weaker foot traffic as Jason discussed. Gross profit was $43,900,000 compared with $54,300,000 in the prior year. Gross margin was 24.8% compared with 28.8% in the prior year.

[Tony Iskander, Interim CFO & Treasurer at Leslie's]

Approximately half of the decline in rate was driven by an increase occupancy costs. The balance of the decline was driven by mix, rebate overlap and lower volume. As a reminder, the rebate overlap is versus the prior year quarter, which we expect to be a benefit in the fourth quarter. SG and A was 92,300,000 compared with $84,900,000 in the second quarter of the prior year and as a percent of net sales was 52.1%. The increase in both dollars and rate was primarily the result of increased labor costs inclusive of executive transition expenses and professional fees.

[Tony Iskander, Interim CFO & Treasurer at Leslie's]

As part of our commitment to pay down debt, we are focused on working capital and increasing cash generation. As Jason mentioned, inventory optimization is a key priority to improve working capital. Leveraging improved analytics and our inventory management tool, we once again reduced inventory compared to prior year and ended the quarter at $335,100,000 approximately 12% lower compared with the same quarter last year. Importantly, we expect to reduce inventory by at least $15,000,000 at the end of twenty twenty five versus prior year with further optimization in 2026. Our team is working diligently on detailed plans to significantly reduce inventory, which directly supports our top capital priority of debt reduction and we expect to share more with you in the future.

[Tony Iskander, Interim CFO & Treasurer at Leslie's]

Year to date, we reduced borrowings on our secured term loan by $27,000,000 to $756,700,000 We had $101,500,000 outstanding on our revolving credit facility at the end of the second quarter, which we expect to repay in full during our third quarter. As discussed last quarter, the majority of our products are sourced domestically, limiting our tariff exposure. Based on what we know today, on an annualized basis, we estimate our total tariff exposure to be approximately 10,000,000 to $12,000,000 in product costs. As part of our inventory optimization efforts, we believe we will mitigate a large portion of this impact in 2025 by utilizing inventory on hand. We expect to fully offset any impact in the current year through strategic pricing actions to maintain margin rate.

[Tony Iskander, Interim CFO & Treasurer at Leslie's]

As we begin peak full season, we remain confident in our team's ability to deliver against our previously provided guidance ranges, which we reaffirm today. While we are not providing quarterly guidance, I want to provide some color as it relates to the back half of the year. As we saw in the second quarter, we expect continued impacts from mix shift as well as higher labor related expenses year over year. Additionally, the headwinds we faced in the fourth quarter twenty twenty four related to rebates will be a tailwind in the fourth quarter of this year. Finally, we are reducing our previously communicated full year capital expenditure expectations by $5,000,000 and now expect to spend $30,000,000 to $35,000,000 This reduction is a result of lower than planned investments required to complete our first twenty six LFCs as well as detailed capital project reviews that prioritize the highest return initiatives.

[Tony Iskander, Interim CFO & Treasurer at Leslie's]

Reducing debt and improving our working capital continues to be one of our highest priorities, and I want to provide more details on the fourth pillar of transformation that Jason introduced earlier regarding cost optimization. Through our cost optimization pillar, we are driving efficiency across the organization with continuous improvement mindset to deliver accelerated EBITDA. This includes a comprehensive review of our cost structure. We have already identified areas within the business of annualized cost savings of approximately $5,000,000 to $10,000,000 primarily within indirect procurement costs. We expect the bulk of the savings in 2026.

[Tony Iskander, Interim CFO & Treasurer at Leslie's]

With an unrelenting focus on improving the fundamentals of the business, we see potential to optimize through the continued evaluation of all core and non core assets. We believe this allows us to improve the underlying business performance and deliver against our top capital priority of paying down debt. In summary, we recognize the critical point we are at today. I want to reinforce our commitment to delivering continuous improvement in our business to drive EBITDA growth as well as improved cash flow to pay down debt and help position Leslie's for a stronger financial future. With that, I will turn the call back to Jason.

[Jason McDonell, CEO at Leslie's]

Thanks,

[Jason McDonell, CEO at Leslie's]

Tony. As you can see, Leslie's continues to move forward on our transformation journey, while putting the customer at the center of everything we do. We recognize the importance of focusing on the fundamentals retail, while executing our key initiatives to deliver incremental improvement every day. Our team remains committed to driving accelerated EBITDA growth and working capital improvement to support our top capital priority of paying down the debt. I'm proud of how our team is working together to lead this positive change, and we look forward to sharing further updates on the progress we're making.

[Jason McDonell, CEO at Leslie's]

With that, we will open up the call to address your questions. Operator?

[Operator]

You. Our first question is coming from Jonathan Mataszewski of Jefferies. Your line is open.

[Jonathan Matuszewski, Senior Vice President at Jefferies]

Great. Good afternoon and thanks for taking my question. My first one was just on the competitive landscape. Jason, maybe you could kind of put this quarter's comp sales performance into context versus some of your pool supply retail peers. I imagine the broader landscape was impacted by weather just like Leslie's, but any more data points you can share in terms of kind of your performance versus the industry and any comments on market share? Thanks so much.

[Jason McDonell, CEO at Leslie's]

Yes. Thanks for the question, Jonathan. Well, specifically, I'd say from a total business standpoint is our prior quarter from a top line standpoint was obviously impacted by weather. Specifically in January, February, we saw a comeback there in March. Specific to a share number, I don't we don't quite have that as a specific share calculation as the category splits across our competition is a bit unique.

[Jason McDonell, CEO at Leslie's]

Certainly, we have different competition in chemicals that we do in parts versus equipment versus seasonal items such as flotation items for your pool. That said, to give you perspective on how I think we're doing in the marketplace competitively, I would say, let me break it out between Pro and DIY. I feel very good about the progress we're making in Pro. We talked about the strong Pro performance in quarter one. That continued versus our average in quarter two.

[Jason McDonell, CEO at Leslie's]

And I feel like we're in a gaining share position there. And that is attributed to the clear focus that our team is having across the network from a pro standpoint. If you remember from the last call, we talked about Leslie's Pro stores and we had 100. And we said, no, we're going to change the mindset here at Leslie's and we are going to make sure that all 1,000 stores are thinking about the pro customer. And that's what I feel is taking place here at Leslie's.

[Jason McDonell, CEO at Leslie's]

Not only are we adding pro contracts, but also we've adjusted the assortment in our stores to make sure it fits both Pro and DIY. We are also making sure that we're delivering on the in stocks because I know from my past is that when winning with a Pro really talks about speed and reliability matters the most. And then we're putting specific marketing investments. And then the addition of LFCs gives our customers a reliable place to know that within a district they have a place they can go because it acts like a hub. So that'd be the first comment there, Jonathan.

[Jason McDonell, CEO at Leslie's]

The second part would be when you look at more of like a DIY or residential, I would say that that's work that we're focused on. And we have opportunity there. And that's why we have put together a variety of initiatives to drive that change and that trajectory change on the business and improvement in DIY or residential. So we have a variety of initiatives that we have brought forward, some that we can build on from last time, which are around in stocks as well as around some of the changes and upgrades we're making to our mobile app and our website. But then we have the exciting new additions we're bringing to the lineup for Leslie's that's to engage a customer, whether that be the marketing program, the new marketing program we have in the marketplace, whether it be the fact that we've made the marketing more efficient from the standpoint of deleveraging marketing mix modeling to connect, our announcement of the new loyalty program with a personalization engine where we can really bring personalized offers to customers.

[Jason McDonell, CEO at Leslie's]

We've taken past innovation like AccuBlue Home, and now we're going to expand it and obviously push it through the stores. And then the recent announcement that we just made on this call around the addition of Uber and same day delivery options for this summer. I feel like we're transforming in the right direction, and I feel like we have definitely opportunities for growth.

[Jonathan Matuszewski, Senior Vice President at Jefferies]

That's really helpful. And just a quick follow-up on pricing. Tony, I think you referenced some strategic pricing increases ahead. I was hoping if you could just expand a little bit more there, whether that's across chemicals and equipment, whether that's just kind of tariff impacted SKUs and any idea in terms of kind of the blended price hike that you're planning that's embedded in guidance? Thanks so much.

[Tony Iskander, Interim CFO & Treasurer at Leslie's]

Yes. Thanks for the question, Jonathan. The real simple answer is we're only going to take pricing to offset any impacted products by tariffs. And as a reminder, the tariffs on an annualized basis is less than 1% of our total sales. So we don't expect that we're going to take pricing or need to take significant pricing.

[Jonathan Matuszewski, Senior Vice President at Jefferies]

Thank you.

[Operator]

Thank you. Our next question is coming from Simeon Gutman of Morgan Stanley. Your line is open.

[Lauren Ng, Analyst at Morgan Stanley]

Hi, this is Lauren Ng on for Simeon. We wanted to first ask about the comp weakness in Q2. Aside from the weather impact and traffic, is there anything else about maybe the underlying fundamentals of the business that are relating to this comp weakness? Thank you.

[Jason McDonell, CEO at Leslie's]

Hey, thanks for the question. Appreciate that. We've done some work from an analytic standpoint on leveraging data tools on the weather trends that took place in January, February. We would actually we looked at it and said it actually would show that if the weather wasn't as the impact, we would have hit the center of the guide in terms of what we had in top line. So that was that's one piece of information.

[Jason McDonell, CEO at Leslie's]

The other piece of information that makes me feel good about where we're headed both in the future, but also its impact in the quarter, is the work that I'm seeing out of the team on conversion rate. And the work on conversion rate, we've consistently seen improvement on that. So from a conversion rate standpoint, we mentioned in the quarter that we were up 174 basis points in conversion rate. And I would say that that's directly attributable to some of the early actions that I wanted to put in place at the start, which was making sure that we improved our in stocks. So we developed a program called the Never Out program, and that Never Outs really drove focus on our most important SKUs, which we're now at well over 99%.

[Jason McDonell, CEO at Leslie's]

And candidly, we're at over 600 basis points higher from the start of that year. So that's impacting our conversion rate. The other part is the quality of our team members when it comes to expertise. We're seeing conversion rates also strong there as well, especially after a water test. We're seeing a massive increase of well over 600 basis points in conversion rate.

[Jason McDonell, CEO at Leslie's]

So from an underlying mechanics, would say I'm really pleased with where the team is going. And this area around focus on fundamentals, which is something I've shared in the prior call, is really the standard that we're setting the team to as well as how and also how they're delivering. So thanks for the question.

[Lauren Ng, Analyst at Morgan Stanley]

Thank you. And my follow-up is just on the inventory purchases. Curious if you're acting more defensive for the second half of twenty twenty five. Over the last few years, the slow start to spring did not result in pent up demand and a stronger selling season. How do you plan for a scenario in which trends maybe stay more depressed?

[Jason McDonell, CEO at Leslie's]

Well, thanks for the question. One of the I guess for the last two quarters, I've shared three key pillars that were very key to what we were talking about. And then Tony has added one here, right, in terms of today, in terms of cost optimization. They were and are customer centricity, convenience and asset utilization. On the prior calls, mentioned this concept of asset utilization, and it was around a precision inventory mindset.

[Jason McDonell, CEO at Leslie's]

And it was so we feel good that at the same time that we can improve the end stocks and get the results that I just mentioned in the prior question. But at the same time, we feel like there's an opportunity to drive continuous improvement by leveraging some of the technology and assets that we have around how to even get more efficient by reducing or optimizing that level of investment and working capital. So it's sort of it's a combination of being focused on the fundamentals of excellence as well as driving inventory optimization. And really, it's because we're focused on working capital. And we want to make sure that we're driving improvement in working capital so that we can use those dollars to pay down the debt.

[Tony Iskander, Interim CFO & Treasurer at Leslie's]

Yes. Let me add one thing to that. One of the things that we have the benefit of is we have as we continue with this inventory optimization, that's going to actually allow us to mitigate a lot of the impact from tariffs this year as we continue to work down existing inventory that we already have on hand.

[Lauren Ng, Analyst at Morgan Stanley]

Great. Thank you.

[Operator]

Our next question is coming from Steve Forbes of Guggenheim. Your line is open.

[Steven Forbes, Senior Managing Director Equity Research at Guggenheim Securities]

Good afternoon, Jason, Tony. Tony, I wanted to maybe start with the cost optimization pillar. I appreciate the guidance around indirect spend. But we often get asked sort of about the expense ratio itself, how it's evolved over the past ten, twenty years. And arguably, what's the right way to think about reframing the opportunity as you guys go about this cost optimization pillar.

[Steven Forbes, Senior Managing Director Equity Research at Guggenheim Securities]

So I don't expect you to maybe give us other buckets of opportunity, but like any way to help frame how you guys see the progression of the expense ratio in the most optimal state over the next couple of years here?

[Tony Iskander, Interim CFO & Treasurer at Leslie's]

Yes. Thanks, Steve. Appreciate the question. So a couple of things. So I'm still fairly new in role, although I've been on ground for some time.

[Tony Iskander, Interim CFO & Treasurer at Leslie's]

And as I've gotten into financials, we've identified this cost optimization pillar where we know we can find 5,000,000 to $10,000,000 and it's predominantly indirect spend. We're going to continue to focus on other areas as we really dive into asset utilization, like we mentioned in our prepared remarks, as well as other areas of business where we can take out excess cost. But right now, this is where we are headed. This is our newest initiative or pillar, and we feel confident delivering that to you next year.

[Jason McDonell, CEO at Leslie's]

And building on that, the part that I think is also because you asked the question around how to frame. And I would say we're looking across the entire asset base in terms of how we're looking for optimization. One of the things that I'm pleased with that the team did extremely well was the implementation of our local fulfillment centers or LFCs. We put those in the market the marketplace quickly for a couple of reasons.

[Jason McDonell, CEO at Leslie's]

One is because it's the right thing to do by the customer, right, to make sure that we can backstop and make sure that we have the in stocks ready from a customer standpoint, so to meet their needs, especially in peak pool season. The other part that it does is it allows us to drive cost efficiency because then from an inventory standpoint, we can start to pull inventory out of the stores. At the same time, it allows us to look at our entire network and then try to find optimization. So I think my comment here would be the frame would be indirect costs like Tony mentioned as well as we'll look at the entire asset base and see if there's further optimization and continuous improvement we can bring to Leslie's to accelerate EBITDA going forward.

[Tony Iskander, Interim CFO & Treasurer at Leslie's]

Yes. So Steve, we look forward to sharing more in the future. What we know is we can't cut our way to savings and growth. We are going to continue to do this in a very methodical and strategic way.

[Steven Forbes, Senior Managing Director Equity Research at Guggenheim Securities]

I appreciate that and look forward to, I guess, future updates. And then maybe just a quick follow-up on the business as it stands. I think another question we sort of field is sort of on channel mix changes. And it's been a while since we've got an update on channel mix. The reason I ask is that it sort of has implications maybe on what buckets you go after, right, in the cost optimization plan.

[Steven Forbes, Senior Managing Director Equity Research at Guggenheim Securities]

So is channel mix something e commerce versus brick and mortar something that you guys can provide us or reframe for us as well?

[Jason McDonell, CEO at Leslie's]

Yes. I think the first thing that I would say would maybe I'll share with you, building off to your prior question you asked about the framing of how maybe how we think about it, I'll build that into this one, is for me, I look at from a total channel standpoint, I look at it as an omnichannel mindset is sort of how we're approaching this. So for me, the concept of asset utilization across this network is really about how do I how do us and the team use an omnichannel mindset when it comes to engaging leveraging our stores, which is why we just announced the integration of Uber and same day delivery as well as how do we use e commerce as a really efficient fulfillment location at the store level. So we're thinking about this from a total network standpoint across the piece, across the channels. We're going to therefore, leveraging e commerce and omnichannel with our residential business is key.

[Jason McDonell, CEO at Leslie's]

And then how do we use those assets to win in pro is an opportunity for us. So obviously, we're trying to grow all those channels in terms of our business portfolio.

[Steven Forbes, Senior Managing Director Equity Research at Guggenheim Securities]

Thank you.

[Operator]

We'll move next to David Bellinger of Mizuho. Your line is open.

[David Bellinger, Director & Senior Analyst at Mizuho Financial Group]

Hey guys, good afternoon. Thanks for the question. First one on the in stocks being up materially, it seemed like that did not get reflected in the comp sales number for Q2. So is that something that's coming, something that we should see in the go forward results? And do you have any details you can share on maybe some of the early tests with the LFCs, some of those markets that went live, if there was a commensurate pickup in sales growth?

[Jason McDonell, CEO at Leslie's]

Yes. Thanks for the question. Yes, I would say on the in stock performance in terms of its impact, our challenges in quarter two were from a traffic standpoint were really weather related. So I'll go back to that. The linkage to in stock improvement is I can see it in conversion rate.

[Jason McDonell, CEO at Leslie's]

So when we have the products available, it's just the opportunity to convert those shoppers both online because you have it in stock, but also in stores because you have it in stock. And I know that the Pro is really critical for this. And that's why the connection point to the LFCs is so key on the second question you asked because from an LFC standpoint, you get when you are more reliable and you have the in stock potential, you can capitalize more business, especially on the pro side. It's early stages on the LFC side in terms of specifically equating the sales. We knew that when the LFCs were being put in place, I was we were going to have an opportunity to see that mostly get its impact in the peak season because that's when you're we are going to see potential constraints because of the size of the peak through the summer months.

[Jason McDonell, CEO at Leslie's]

That being said, I was in an LFC last week, and the example I would give you would be the LLC is doing what it's supposed to be doing, which is when I talked to Engie in the store, and we had a conversation about the impact that an LLC can have on a market. So just as a refresher, these LFCs act like mini hubs. They surround 20 other stores that are sort of kindred stores to then connect it to those to that LSC. So there was a store not far away that they had an order for three pumps, and that store didn't have three pumps. But Angie and the LFC had the extra pumps.

[Jason McDonell, CEO at Leslie's]

So we were able to complete that sale on that day. Historically, that might have been a challenge for Leslie's, but not on that day for Angie. So that's the type of benefit that we expect to see going forward, and we're looking forward to see those results through the summer and the peak summer months, especially engaging our DIY customer, but especially our Pro.

[David Bellinger, Director & Senior Analyst at Mizuho Financial Group]

Got it. That's very helpful. And then just a follow-up on one of the prior questions, just on the e commerce percentage of the business and the digitally initiated sales. So you're now partnering with Uber. What pushed you to make that move?

[David Bellinger, Director & Senior Analyst at Mizuho Financial Group]

Is that something that consumers are asking for? And is this equally as important on the pro side as the DIY side?

[Jason McDonell, CEO at Leslie's]

Yes, great question. Thank you for that. When about the last couple of quarters, we talked about the first two pillars. The first two pillars are customer centricity and convenience. And the reason why those were put at the center there was a reflection on truly understanding the consumer and the customer on what this category and what our business is all about.

[Jason McDonell, CEO at Leslie's]

And for us, the want, we've really learned what is the pool. The need is to keep your pool operational. And when you're dealing with a customer and a need, the importance of speed and convenience becomes paramount. And it's why we put customer centricity and convenience as the top two pillars there is because we knew we needed to deliver the customer, and we're putting the customer at the center of everything we do. So for me, I to move our company from fulfilling customers' needs not in days.

[Jason McDonell, CEO at Leslie's]

I wanted to convert it to minutes and hours. So that's a critical item for us, and that's why we pushed to have Uber same day at the same time. The other part of it, it has another benefit in addition, is instead of shipping products across the country to fulfill an e commerce order, we can do it locally. And if we do that locally, we can also drive additional cost savings into the system. So not only do we provide the benefit to the customer in regards to speed to solve that need, but we also have found a way through this fulfillment mechanism to also save cost, which also fits in the cost optimization pillar that Tony mentioned earlier.

[David Bellinger, Director & Senior Analyst at Mizuho Financial Group]

Very good. Thanks for the thorough responses, Jason. Appreciate it.

[Jason McDonell, CEO at Leslie's]

Yes. Thank you.

[Operator]

Our next question is coming from Justin Kleber of Baird. Your line is open.

[Zachary Beeck, Equity Research Associate at Baird]

Hey, guys. This is Zach Beck on for Justin. Thank you for taking our questions. First one, maybe on top line guidance. Just curious what you guys are seeing so far in Q3 that gives you the confidence to reiterate your full year sales outlook.

[Zachary Beeck, Equity Research Associate at Baird]

And then maybe how are you thinking about revenue seasonality in the second half of the year? Any color on Q3 versus Q4, recognizing that Q4 benefits from the extra week?

[Jason McDonell, CEO at Leslie's]

Yes. Thanks that question. Before addressing the quarter to date number, I think it's important for me to describe the uniqueness of this quarter. We are about 50% through this entire quarter in days, okay? And what's unique about this quarter in terms of the pool business and the pool business at Leslie's, when I look at the past two years of performance, we still have well over 70% of our sales still to come in expected volume. So for me to give an early look at the core performance is a bit premature because there's so much sales still to come. But also, we still have a lot of our sales balance of years still to come. Our first two quarters and first half of the year only represented over just over 25% of our entire sales year. So we still have a lot of sales yet to come.

[Jason McDonell, CEO at Leslie's]

That said, on your question, I would say, I'm really pleased with the team in terms of their focus and efforts. I've talked about the conversion rate improvements that I believe are sustainable on the business because of our in stock performance as well as the quality and care that our team members provide in the field. We've also been making sure that we're set up for pool season by bringing a variety initiatives to the forefront so that we can connect with our customers. I'm looking forward to seeing the impact of our new DIY loyalty program. That loyalty program was just brought forward, and we are now tiering that program to engage people more throughout the tiers.

[Jason McDonell, CEO at Leslie's]

And we also built a personalization engine where we're going to send them notes on not only to push them up through the tiers that will help our Leslie's loyalty, But also, we're going to give them personalized messages around things that they should buy or maybe they haven't bought at Leslie's. So it's really leveraging the data, the zero party data they've given us as well as leveraging some first party for us to win. So looking forward to seeing what the future holds here in our peak season as we set up for a strong season at Leslie's.

[Zachary Beeck, Equity Research Associate at Baird]

Great. Thanks, Jason. Maybe one more on the implied second half gross margin inflection. I know you guys mentioned the Q4 tailwind related to the timing of rebates, but I guess how much is dependent on hitting the top line guide you guys have out there versus maybe cycling some of your recent temporal pressures? Thank you.

[Tony Iskander, Interim CFO & Treasurer at Leslie's]

Yes, I'll take that. So a couple of things. So this quarter, we had primarily seen as the decline from what I call two main buckets. One is really driven by the mix of lower volume and then which is inclusive of that rebate headwind that we mentioned in our prepared remarks. That was approximately 100 basis points.

[Tony Iskander, Interim CFO & Treasurer at Leslie's]

That will come back in the fourth quarter. And so we feel confident with that. The other was that gives us confidence is just what Jason mentioned earlier around a lot of our key pillars around customer centricity and convenience, lot of the new initiatives that we've launched. And while it's still early, we do view them as promising. So while we are still focused and we do believe we are going to achieve our guide, we are focusing on delivering on that commitment.

[Jason McDonell, CEO at Leslie's]

And the only other piece I would add to that would be I'm really proud of the team in terms of our quarter two performance. We experienced the softness in weather. And with that, the team was team banded together around the focus to ensure that we are delivering our commitment and our guide in the second quarter as we did as we delivered our EBITDA guide.

[Zachary Beeck, Equity Research Associate at Baird]

Great. Thanks, guys. I'll pass it on.

[Elisabeth Eisleben, SVP, IR & Public Relations at Leslie's]

All right. Thank you all for joining us today. That's all the questions we have. But you've heard a lot of updates. We're really excited about what's going on at Leslie's.

[Elisabeth Eisleben, SVP, IR & Public Relations at Leslie's]

And we look forward to continuing to increase transparency, and take you along this journey with us. So thank you for your time today. Look forward to talking soon.

[Operator]

This does conclude today's conference. You may now disconnect your lines. And everyone have a great day.

Participants

Executives

• Elisabeth Eisleben, SVP, IR & Public Relations
• Jason McDonell, CEO
• Tony Iskander, Interim CFO & Treasurer

Analysts

• Jonathan Matuszewski, Senior Vice President at Jefferies
• Lauren Ng, Analyst at Morgan Stanley
• Steven Forbes, Senior Managing Director Equity Research at Guggenheim Securities
• David Bellinger, Director & Senior Analyst at Mizuho Financial Group
• Zachary Beeck, Equity Research Associate at Baird