Pool products retailer Leslie’s (NASDAQ:LESL) fell short of the market’s revenue expectations in Q3 CY2024, with sales falling 8% year on year to $397.9 million. Next quarter’s revenue guidance of $172.5 million underwhelmed, coming in 3.4% below analysts’ estimates. Its non-GAAP profit of $0.02 per share was 82.1% below analysts’ consensus estimates.

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Jason McDonell, Chief Executive Officer, said, “Our fourth quarter results were in line with our revised expectations on the top-line, and we saw strong performance in our Pro segment with some continued softness in store traffic and larger-ticket and discretionary categories. Profitability was affected by deleverage from the sales decline and a one-time contract item, though we have remained disciplined on SG&A expenses.”

Company Overview

Named after founder Philip Leslie, who established the company in 1963, Leslie’s (NASDAQ:LESL) is a retailer that sells pool and spa supplies, equipment, and maintenance services.

Specialty Retail

Some retailers try to sell everything under the sun, while others—appropriately called Specialty Retailers—focus on selling a narrow category and aiming to be exceptional at it. Whether it’s eyeglasses, sporting goods, or beauty and cosmetics, these stores win with depth of product in their category as well as in-store expertise and guidance for shoppers who need it. E-commerce competition exists and waning retail foot traffic impacts these retailers, but the magnitude of the headwinds depends on what they sell and what extra value they provide in their stores.

Sales Growth

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years.

Leslie's is a small retailer, which sometimes brings disadvantages compared to larger competitors that benefit from economies of scale.

As you can see below, Leslie’s 7.5% annualized revenue growth over the last five years (we compare to 2019 to normalize for COVID-19 impacts) was tepid.

This quarter, Leslie's missed Wall Street’s estimates and reported a rather uninspiring 8% year-on-year revenue decline, generating $397.9 million of revenue. Company management is currently guiding for flat sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 4.7% over the next 12 months, a slight deceleration versus the last five years. This projection is still commendable and implies the market is baking in success for its products.

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Store Performance

Number of Stores

A retailer’s store count influences how much it can sell and how quickly revenue can grow.

Leslie's sported 1,000 locations in the latest quarter. Over the last two years, it has opened new stores quickly, averaging 1.8% annual growth. This was faster than the broader consumer retail sector.

When a retailer opens new stores, it usually means it’s investing for growth because demand is greater than supply, especially in areas where consumers may not have a store within reasonable driving distance.

Same-Store Sales

The change in a company's store base only tells one side of the story. The other is the performance of its existing locations and e-commerce sales, which informs management teams whether they should expand or downsize their physical footprints. Same-store sales provides a deeper understanding of this issue because it measures organic growth at shops open for at least a year.

Leslie’s demand has been shrinking over the last two years as its same-store sales have averaged 9.9% annual declines. This performance is concerning - it shows Leslie's artificially boosts its revenue by building new stores. We’d like to see a company’s same-store sales rise before it takes on the costly, capital-intensive endeavor of expanding its store base.

In the latest quarter, Leslie’s same-store sales fell by 8.3% year on year. This decrease represents a further deceleration from its historical levels. We hope the business can get back on track.

Key Takeaways from Leslie’s Q3 Results

We struggled to find positives in these results as all key metrics along with its outlook missed Wall Street’s estimates. The stock traded down 19.9% to $2.82 immediately following the results.

Leslie’s earnings report left more to be desired. Let’s look forward to see if this quarter has created an opportunity to buy the stock. If you’re making that decision, you should consider the bigger picture of valuation, business qualities, as well as the latest earnings. We cover that in our actionable full research report which you can read here, it’s free.