💥Treading Water💥

Retail is a tough place to be these days.

⏩One to Watch: Leslie’s Inc.⏩

Leslie’s Inc. ($LESL) (“Leslie’s” or the “company”) is an AZ-based pool supplies retailer, offering (i) chemicals, (ii) equipment, and (iii) giant floaties, and offering services, such as (a) equipment installation, (b) repairs, and (c) water testing; it sells directly to consumers and to professional pool operators via 1k+ brick-and-mortar locations across the U.S. and its e-commerce site and app.

The company has been popular amongst the PE set for more than three decades. Philip Leslie and Raymond Cesmat launched Leslie’s in ‘63 in the Los Angeles area (buying your pool cleaner from “Cesmat’s” just wasn’t as appealing). In ‘87, Hancock Park Associates (“Hancock Park”) bought Leslie’s following a dispute between the founders that led to a forced sale. Hancock Park raised nearly $20mm of debt to support the $23mm LBO. Leslie’s went public at a $28mm EV in ’91 before Hancock Park, alongside Leonard Green & Partners L.P. (“Leonard Green”), took the company private again in ’97 at a $140mm EV. Leonard Green held on, at least in part, for the next two decades. In ’10, CVC Capital Partners (“CVC”) acquired a majority stake from Leonard Green. In ’17, that consortium of investors fully exited, selling Leslie’s to L Catterton and GIC, which then took the company public in ’20 at a $4b EV. L Catterton and GIC have since exited.

Why all the PE interest? Well, besides Wall Street’s love for a good pool party …

Source: Tenor

… Leslie’s offered a compelling roll-up opportunity in a market with strong recurring revenue.

“Swimming pool” may scream “discretionary,” but once a pool is installed, owners are more or less obligated to maintain it, and more than 80% of Leslie’s sales are for maintenance products. The market was also somewhat shielded from Amazon ($AMZ) (and the like), because regulations around the shipment of hazardous materials (e.g., pool chemicals) effectively forced consumers to pick up necessary supplies at brick-and-mortar locations.

Leslie’s has long been the largest player (bigger than the next 20 competitors combined) in this highly fragmented market, largely due to an acquisition tear. Leslie’s had 259 stores in 27 states at the end of ’96, before Leonard Green took the company private in mid ‘97; it grew to 645 stores across 35 states by the time of CVC’s investment in ’10. Under CVC’s stewardship, Leslie’s 645 locations swelled to nearly 900 in ‘17. L Catterton and GIC grew it further to 934 locations before the Oct ’20 IPO. As a result of this expansion, Leslie’s had grown revenue every year for 56 years at the time of the IPO.

Post-IPO, Leslie’s continued to grow its topline in ’20, ’21, and ’22, buoyed by a wave of new pools built during the COVID-19 pandemic. Despite the pool construction boom, the COVID era was not without its challenges: supply chain disruptions caused industry-wide shortages of Trichlor, the go-to for sanitizing residential pools, and sparked panic buying. At first, Leslie’s seemed to navigate these challenges swimmingly (😉) by leveraging its scale and direct supplier relationships to secure a more consistent supply of key products than its competition. The shortages combined with general inflation to push up pricing, which Leslie’s was able to pass through to consumers.

But Leslie’s began to slip in 3Q22. After initially raising full year guidance on the 2Q22 earnings call, the company dropped it back down after a rough 3Q22. The company was caught off guard in 3Q22 when bad weather in the Northeast caused a later-than-expected spike in consumer demand at the same time as a backlog of vendor shipments arrived all at once at Leslie’s New Jersey distribution center. This explanation from management led Bank of America analyst Liz Suzuki to ask on the 3Q earnings call:

“I'm just curious, Leslie's has obviously been around for a while, company was founded in the '60s. So this wasn't the first time you've had a cold spring.

Why do you think the Northeastern DC was caught off guard by this increase in demand as the weather warmed up?”

CEO Mike Egeck’s long spiel of a response offered little clarity. “DCs have bad weeks,” he posited, and “it’s a combination of a very tough staffing environment.” Combined with what? He doesn’t say.

Despite the distribution center issues in 3Q22, Leslie’s managed to close out ’22 with Revenue, Gross Profit and Adj. EBITDA all at record highs. The company believed its execution problems were behind it and that the (pool) party would carry on. In its 4Q22 earnings presentation, Leslie’s provided ’23 guidance of Revenue +2%, GP +2%, and Adj. EBITDA +1%.

Leslie’s went into ‘23 focused on bolstering its supply chain and distribution network to meet its higher demand projections. It prepared for the ’23 pool season by contracting supply of key materials and increasing inventory levels, hoping to solve the stock-out problems that had caused it to miss out on sales in ’22.

How did it go?

Source: GIPHY

Riiiiiiiiiigght.

Source: Company Filings, PETITION LLC

Source: Company Filings, PETITION LLC

Source: Company Filings, PETITION LLC

FY23 Revenue fell 7% YOY to $1.5b, with same store sales down 11%. FY23 Gross Profit was down 19% YOY to $548mm with 535bps of margin contraction YOY. FY23 EBITDA declined a whopping 43% YOY to $168mm with margins contracting 710bps YOY.

On the 4Q23 earnings call, Egeck blamed the decline in sales on (i) the weather, (ii) increased consumer price sensitivity, and (iii) consumers stockpiling chemicals after three years of supply shortages.

The post-pandemic boom may have less of sustainable step-up in demand from new pool construction and consumers’ “increased attention to safety and sanitation” than the company had been touting, and more of, well, panic buying and hoarding after multiple years of supply shortages. By the time Leslie’s was trying to fix its supply shortages, pool owners had already solved the problem for themselves. Gross margins suffered as storage and distribution costs increased — the company had so much excess inventory that it had to pay for third-party storage, which further increased transportation costs and inventory shrinkage.

The company also found that it could no longer push pricing on increasingly sensitive consumers and ultimately lowered prices on chemicals in June ’23. Pool owners reduced their discretionary purchases and equipment purchases, causing the product margins to suffer due to lower manufacturing rebates. Makes you wonder about those who hadn’t been stockpiling chemicals but were hosting kids pool parties anyway. 🤮

Lower sales of course meant lower operating leverage too.

Finally, the company flagged in its ’23 10-K and on its 4Q23 earnings call that it had identified two material weaknesses in internal controls over financial reporting, one related to vendor rebates and the other to the performance of inventory … never a good sign for an increasingly troubled company. These were flagged again in the ’24 10-K despite the company’s earlier announcement that they would be rectified in ’24.

So suffice to say that ‘23 was a tough year for Leslie’s, but Egeck insisted that these were “temporary challenges,” “transitory headwinds,” “specific to this fiscal year.”

Leslie’s went into ’24 with tempered expectations for Revenue (flat to down 3% YOY) and plans to reduce inventory levels by ~20%. It projected that Adj. EBITDA would be up between 1% and 13% YOY, albeit off a significantly lower base.

All of which set up nicely for another belly flop.

Source: Tenor

The Board of Directors cut Egeck loose in Aug ’24, after Leslie’s had another poor showing in 3Q24, again blamed on weather, and slashed FY24 guidance. (Note Leslie’s has a 9/30 fiscal year end). The Board replaced Egeck with Jason McDonell, a former executive at Advance Auto Parts Inc. ($AAP) and PepsiCo Inc. ($PEP), in Sep ’24.

FY24 Revenue, Gross Profit, and Adj. EBITDA were all down off the low base of FY23 results. Revenue declined 8% YOY to $1.3b, with same store sales down 9%. Gross Profit decreased 13% YOY to $477mm, with margins contracting 200 bps. Adj. EBITDA fell a further 35% to $109mm, with margins contracting 340bps.

The drop in Adj. EBITDA sent total leverage soaring from 2.7x at FYE22 (9/30/22) to 7.2x at FYE24 (9/30/24) and 7.7x at the end of 1Q25 (12/31/25). The Company has a $250mm Bank of America-agented revolver due Apr ’29, $40mm of which was drawn at 1Q25. (The company typically draws on its revolver during 1H as it builds inventory ahead of “pool season” in 2H). It also has a $757mm S+275 term loan due Mar ’28, which achieved the ignominious distinction of being the fourth worst performing leveraged loan in the month of March (down nearly 14% from roughly 85c on the dollar to approximately 74c on the dollar). The descent continued in April as the term loan dropped another 8.5% to ~68c in the first week of April. It remains there as of April 21, 2025 which means we’re catching cooperation agreement vibes.

The stock has been steadily declining for years and has been trading below $1 for the last month:

Source: Google. Brutal. The stock is down 72.9% YTD and the market cap sits just around $115mm. Callback to the EV upon acquisition above 👆.

This week BofA Securities analyst Shaun Calnan “has significantly reduced the price target for Leslie’s from $1.40 to $0.55, maintaining an Underperform rating on the company's shares,” citing anticipated contractions in renovation and remodel spending, concerns over slower new construction activity, and potential impacts from tariffs. The market is “very bearish”:

Source: Fidelity

Rightfully so.

McDonell’s turnaround strategy is centered around improving customer loyalty, inventory management, and asset utilization to drive organic sales growth. McDonell was upbeat as he explained his plans on the recent earnings calls, but projected FY25 would be flat on the top line and bottom. McDonell noted that he did not expect much of a direct impact from President Trump’s tariffs because the majority of the company’s key products are already manufactured in the U.S.

Source: Leslie’s. Show your patriotism for the low price of $23.99!

As noted above, the majority of the company’s sales take place during “pool season” (2H, Apr-Sep), so we’ll be watching the coming quarters closely to see whether Mr. McDonell is executing on his big turnaround strategy.

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⚡Update: The Children's Place Inc ($PLCE)⚡

We’ve covered The Children’s Place Inc. ($PLCE) a lot since Saudi Arabia-based Mithaq Capital (“Mithaq”) took over the reins:

💥BFX. PLCE.💥

💥Manufacturing Something Other than Cars💥

💥Funding Secured💥

💥Viva Enviva Drama! Viva NJ!!💥

💥Child's Play💥

And along this ride, we’ve learned a few things about Mithaq:

📍They’re hardcore value investors who treat Benjamin Graham’s texts as gospel.

📍They hate earnings calls and have completely refused to conduct any since taking control.

The only way now we can get a look behind the curtain is through annual shareholder letters. Luckily for us, PLCE just reported 4Q’24 earnings and released a corresponding annual letter.

Source: GIPHY

For 4Q’24, PLCE booked net sales of $408.6mm, a 10.2% YoY decline, and a comparable retail sales decline of 15.3% YoY. Gross profit increased $17.7mm from 4Q’23 to $116.6mm, boosting gross margins to 28.5% from 21.7% in 4Q'23. PLCE also generated $6.8mm in operating income and a net loss of $8mm or $0.62/share.*

And for FY’24, PLCE reported net sales of $1.4b, a 13.5% decline, and a comparable retail sales decline of 13.4%. Gross profit increased $14.2mm from FY’23 to $459.5mm, boosting gross margins to 33.1% from 27.8% in FY’23. PLCE generated $13.7mm in operating income and a net loss of $57.8mm or $4.53/share.

All the above highlights Mithaq’s plans for the struggling retailer — boost profitability even if it comes at the expense of declining sales. Mithaq has implemented initiatives like increasing the minimum order size required for free shipping and even criticized PLCE’s previous marketing/promotion efforts:

“In recent years, TCP has heavily relied on promotional strategies to grow its digital presence and market share. However, this heavy reliance has not only eroded profit margins but has also significantly altered customers’ perceptions of both The Children’s Place and Gymboree brands. While there have been gains in our average unit retail, I believe that TCP has unintentionally cultivated behavioral habits among customers that encourage shopping during clearance and promotional events, shaping a perception that could undermine our core brand identity. We have taken steps to optimize our promotion strategy, including redesigning banners on our website and in our stores, as well as changing the visual appearance and feel of our website from that of a ‘hard discounter’ to a value brand where customers can find great designs at value prices.”

And Mithaq believes part of this rebrand also lies in a revamp of the brick and mortar stores:

“Historically, TCP stores were a key entry point for first-time shoppers. The reduction in our physical store locations has impacted traffic and first-time purchases, shifting the burden to digital acquisition. Fewer in-store visits mean fewer opportunities for cross-selling and basket-building, traditionally strong drivers of incremental revenue at TCP. Coming out of the pandemic, we doubled down on e-commerce, which has helped sustain sales. TCP has a 54.5% e-commerce penetration as a percentage of retail sales in FY2024, which means we rely more heavily on paid digital marketing to drive customer acquisition, engagement and retention. However, as online competition has grown, advertising on social media platforms has become more expensive, which may erode margins. In contrast, store sales remove these extra costs and serve as a cost-effective marketing tool, creating sensory experiences that can encourage impulse purchases and first-time purchases. While e-commerce is a TCP strength, it also places TCP in a highly competitive and cost-intensive battle. In the absence of strong product differentiation, loyalty programs, or pricing advantages, maintaining healthy long-term margins in e-commerce is challenging.”

To put it lightly, this approach is pretty against the grain. While most brick and mortar retailers have leaned heavily into ecommerce, Mithaq thinks they can achieve higher profitability by investing in a more premium, experiential shopping experience. And to accomplish this, PLCE plans to open 15 new stores for FY’25 across both the Gymboree and The Children’s Place brands.

Not sure about you guys, but that sounds like a whole lot of capex spend.

Source: GIPHY

As of February 1, 2025, PLCE had $5.3mm in cash and $85.5mm available in liquidity through its revolver and a yet-to-be used Mithaq credit facility.** On the other side of the balance sheet, there was $245.7mm outstanding under the revolver, $78.6mm outstanding in an interest free unsecured subordinated promissory note extended by Mithaq (the “initial Mithaq term loan”), and $90mm outstanding in a SOFR+4% unsecured subordinated term loan also extended by Mithaq (the “new Mithaq term loan”).

The cap stack changed slightly on February 6, 2025 when PLCE closed on a $90mm rights offering (priced at $9.75/share) that commenced in December ‘24. Mithaq participated in the offering and accumulated an additional 6.7mm shares, paying $5mm in cash and $60.2mm outstanding under the initial Mithaq term loan. Given the significant cancellation of indebtedness under the initial Mithaq term loan, PLCE only received ~$29.8mm in gross cash proceeds, 80% of which is slated to prepay amounts owed under the revolver.***

Pro forma the rights offering, PLCE has ~$222mm outstanding under the revolver, $18.4mm outstanding under the initial Mithaq term loan, and $90mm outstanding under the new Mithaq term loan.

The dilution from the rights offering and the 4Q’24 earnings results were not well received:

Source: Google

But as Mithaq’s Chairman, Turki Saleh A. AlRajhi, said in his first shareholder letter:

“I am certain we will experience agonizing periods. Mr. Market will swing TCP’s share price up and down from time to time and I hope that shareholders can weather with us through thick and thin.”

Everyone might be happier if Mithaq just took this thing private.

*The company closed 16 stores for 4Q’24 but also opened their first location in two years - a Gymboree branded store. There were 495 locations open as of February 1, 2025.

**Of the $85.5mm in availability, PLCE can draw $40mm from the Mithaq credit facility that carries an interest rate of SOFR+5%.

***Mithaq now owns ~62.2% of PLCE’s common stock, up from 54.8%.

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📚Updated List of Resources!📚

Source: Substack AI. Query: “Nerd reading books”

We have recently updated our compiled list of a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. We’ve added:

• No More Tears: The Dark Secrets of Johnson & Johnson by Gardiner Harris.

• How Not to Invest by Barry Ritholtz.

We also did some research on talked-about books covering the topic of trade and these are some books that came highly recommended (caveat: we have not read them so caveat emptor!):

• Why Politicians Lie About Trade by Dmitry Grozoubinski.

• Trade Wars are Class Wars by Michael Klein and Michael Pettis.

• Misadventures of the Most Favored Nations by Paul Blustein.

• Kicking Away the Ladder: Development Strategy in Historical Perspective by Ha-Joon Chang.

• No Trade is Free by Robert Lighthizer.

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📤 Notice📤

William Guerrieri (Counsel) joined McDermott Will & Emery LLP from White & Case LLP.

🍾Congratulations to…🍾

Deloitte Transactions and Business Analytics LLP (Ryan Maupin) for securing the financial advisory mandate on behalf of the official committee of unsecured creditors in the OTB Holding LLC (a/k/a On the Border Mexican Grill & Cantina) chapter 11 bankruptcy cases.

Pachulski Stang Ziehl & Jones LLP (Bradford Sandler, Cia Mackle, Maxim Litvak, James Walker) for securing the legal mandate on behalf of the official committee of unsecured creditors in the AFH Air Pros LLC chapter 11 bankruptcy cases.

Province LLC (Paul Navid) for securing the financial advisory mandate on behalf of the official committee of unsecured creditors in the AFH Air Pros LLC chapter 11 bankruptcy cases.

Schwartz Law PLLC (Samuel Schwartz, Athanasios Agelakopoulos) and Womble Bond Dickinson US LLP (Matthew Ward) for securing the legal mandate on behalf of the official committee of unsecured creditors in the BLH Topco LLC (Bar Louie) chapter 11 bankruptcy case.