Sink or Swim: Leslie’s $LESL

For the last article, I owe you 5 pushups and 13 sit ups. As a quick reminder, for the month of January, I will do 1 pushup for every restack and 1 sit up for every like that each writeup receives. If the combined number of likes and restacks reaches certain milestones, it will create a narrowing window of intermittent fasting.

As I reflect on the different market segments that I am prioritizing for 2025, I can’t help but shake the feeling that my consumer discretionary companies are a bit weak. Not my paywalled writeup, obviously, but the rest of them. I have half a mind to aggregate and review all the past consumer discretionary writeups to see if any have improved, or if there are some that standout.

Consumer Discretionary Writeups:

Cracker Barrel (CBRL)

JAKKS Pacific (JAKK)

DoubleDown Interactive (DDI)

Solo Brands (DTC)

Lifeway Foods (LWAY)

Malibu Boats (MBUU)

Gravity Co (GRVY)

EZCORP (EZPW)

One Group Hospitality (STKS)

Beyond Inc (BYON)

Kohl’s (KSS)

Sportsman’s Warehouse (SPWH)

And the Muddling Midcaps:

Newell Brands (NWL)

Advance Auto Parts (AAP)

Goodyear Tire (GT)

Foot Locker (FL)

As I search for new consumer discretionary names to satisfy the nagging sensation in the back of my mind that these are just not good enough, I am starting to wonder if I need to sift through my own tailings for opportunities that I missed, or situations that have improved. Until then, I’m going to muddy the waters by writing about a new consumer discretionary name that is interesting, but I’m not sure how it holds up against the rest.

Allow me to introduce you to Leslie’s (LESL), the only nationwide retail pool supplies store. There are over a thousand of these in strip malls all across the USA. In the Sunbelt, they have a location within 10 miles of 88% of all swimming pools, and nationwide, they have a location within 20 miles of 80% of all swimming pools. While Pool Corporation (POOL), a wholesaler, has long been a favorite of Warren Buffett devotees, Leslie’s is their much worse little brother.

Pool cleaning and maintenance is one of those last bastions of entrepreneurship, similar to landscaping, where small proprietors build a clientele of customers, and private equity hasn’t attempted to roll them all up yet. Those small proprietors, and the DIY homeowners who are too cheap to hire them, stop by Leslie’s to get their chemicals and parts at a strip mall near you.

The best things that I can say about Leslie’s is that they are cheap, and at just about breakeven for the trailing twelve months, they aren’t an imminently melting ice cube. The debt burden, while large, has just been refinanced out to 2028, so there is no near term maturity wall. The interest rate is floating, currently at 8.11%, and the Fed is in a cutting cycle. The great thing about being in the swimming pool business is that the recurring nature of the revenue could, in theory, allow for a high multiple. It works for POOL, it could someday work for LESL too.

The obvious bad things about Leslie’s is that they are at negative shareholder equity, and have been since their IPO in 2019. Putting a silver lining on an negative raincloud, tangible book value has increased since 2019 from negative $880 million to negative $177 million. That’s an increase in book value of $700 million in five years for a company with a market capitalization of $405 million. If that performance was maintained, increasing book value by $140 million a year, that would be a 34.5% yield at current prices. This thing is about as value degen as it gets. At least they aren’t diluting, share count is down about 4.5% in the last four years.

Leslie’s has a new CEO, Jason McDonell, and as of the last earnings call, he was on the job for 80 days. McDonell spent four years at Advance Auto Parts (AAP), which is not an amazing signal because AAP was struggling during those years. But McDonnell was the Chief Marketing Officer, in charge of the online omnichannel rollout, which from my time looking into AAP, was allegedly relatively well done. Before that he spent 21 years at PepsiCo. On the earnings call, McDonell laid out Leslie’s turnaround strategy. In a lot of ways, the turnaround strategy was similar to Mary Dillon’s at Foot Locker, just focus on the basics of retailing, and optimize the loyalty program, but I believed Mary Dillon more when she was pitching it. It’s really too early to tell if Jason McDonell is the right CEO for the job.

Not only does Leslie’s have a new CEO, Leslie’s is a 60 year-old company and they don’t have any C-suite executives that worked for the company before 2023. While details are scarce, it appears that with the retirement of the previous CEO at age 65, Leslie’s underwent a total management team refresh as well as a change of about half of their board of directors. In the worst interpretation, rats abandon a sinking ship, but in the best interpretation, Leslie’s was apparently in need of a refresh, and old age provided the opportunity.

If Jason McDonell doesn’t move fast and break things, odds are good that we are entering into boom times as deregulation and the AI data center buildout stimulate the economy. If interest rates fall, there could be some pent up demand from people who want to install new hot tubs, or even swimming pools. One of my former students owns a company that builds swimming pools in the Tampa area, and his revenue has tripled over last year, even with high interest rates. With the stock market up 25% a year for two years, Baby Boomers have money to spend, and water aerobics is about all they can manage for exercise.

Leslie’s is not really a growth story at the moment, they are only projecting opening three new stores in 2025, out of over 1,000. For comparison, Portillo’s is projecting increasing restaurant count by 11% this year. Time will tell if the new management team focuses on aggressive growth. But even without robust growth, a healthier consumer could bring Leslie’s back to their prior peak revenue, in 2022 they did $1.5 billion of revenue and had $159 million of net income. In the trailing twelve months those numbers are $1.3 billion of revenue, and a $22 million loss, but with depreciation they had positive free cash flow, increased cash on hand, and even paid down the tiniest smidgen of their long term debt.

Interest expense on that $770 million of long term debt is up from $30 million in 2022 to $70 million in the trailing twelve months, thank you Jerome Powell. While this expense is burdensome, any cyclical recovery in the economy will easily push Leslie’s back into the black. But without some efficiency gains or growth from management, paying down debt organically could easily take five years. Management’s only guidance on capital allocation is that they will priotritize paying down the debt going forward.

Leslie’s is 25% owned by a Ariel Investments, LLC, who just last quarter increased their ownership stake by another 10 million shares, up to 46 million today. Whale Wisdom estimates their average acquisition price at around $7.50 a share, and LESL trades at $2.19 today. I would hope that they are helping to manage the turnaround, but they are not an activist fund, and they do not have any board representation. At the very least, they would be unlikely to accept a buyout offer at current prices which are significantly below where Leslie’s could trade within a couple of years with either the benefit of cyclicality, or operational efficiency.

Leslie’s currently trades at a price to sales ratio of 0.30x, and while I normally argue that a company will return to 1.0x price to sales, due to the debt burden, that might be more than two years away. In the nearer term, a rerating to 0.50x price to sales and a return to $1.5 billion of revenue would imply a share price of $4.05. In the much longer term, POOL trades at a price to sales ratio of over 2.50x, due to the desirability of their stable revenue from pool maintenance. While Leslie’s might never reach those heights, they could trade at a price to sales ratio of 1.50x within the next five years, and by that time, management could have bought back a few more shares as well. Not only does Leslie’s have a history of doing share buybacks, but the CEO is from AAP, and in that sector with Autozone and O’Reilly, share buybacks are the preferred capital allocation policy. A price to sales ratio of 1.50x, a return to past peak revenue, and a few share buybacks along the way would lead to a five year price target of $12.85, more than a 5x from the current share price.

Leslie’s (LESL) $2.19: $4.05 by the end of 2026 from cyclical tailwinds only

Leslie’s (LESL) $2.19: $12.85 by the end of 2029 if management executes well