10-K: Leslie's Reports Significant Losses, Downgraded Credit Ratings

Leslie's, Inc. reported a substantial net loss of $237.0 million for fiscal 2025, alongside declining sales and a goodwill impairment, leading to credit rating downgrades and planned store closures.

Summary

• Net loss significantly widened to $237.0 million in fiscal 2025, compared to a net loss of $23.4 million in fiscal 2024 and a net income of $27.2 million in fiscal 2023.
• Sales decreased by 6.6% to $1,241.9 million in fiscal 2025 from $1,330.1 million in fiscal 2024, primarily due to reductions in traffic and lower transaction volume.
• Comparable sales decreased by 6.8% in fiscal 2025, following an 8.8% decrease in fiscal 2024 and an 11.0% decrease in fiscal 2023.
• Gross profit declined to $439.6 million in fiscal 2025 from $476.8 million in fiscal 2024, with gross margin decreasing by 40 basis points to 35.4%.
• Selling, General and Administrative (SG&A) expenses increased by $6.0 million (1.4%) to $425.7 million in fiscal 2025, driven by higher compensation, professional fees, direct store expenses, and IT spend.
• An impairment charge of $183.8 million was recorded in fiscal 2025, including $180.7 million for goodwill and $3.1 million for underperforming store assets.
• Adjusted EBITDA decreased by $47.4 million to $61.4 million in fiscal 2025, down from $108.7 million in fiscal 2024.
• The company plans to close approximately 80-90 underperforming U.S. stores and one distribution center by the end of the first fiscal quarter of 2026, expecting one-time costs of $12.0 million to $20.0 million.
• Credit ratings were downgraded by Moody's to Caa3 (from Caa1) and S&P Global Ratings to B(from B) during the quarter ended October 4, 2025.
• A 1-for-20 reverse stock split was effected on September 26, 2025, with trading on a split-adjusted basis commencing September 29, 2025.
• Material weaknesses in internal control over financial reporting related to inventory and asset impairment processes were identified and remain unremediated as of October 4, 2025.
• Legal proceedings include a class action complaint for federal securities law violations and three derivative actions, all alleging false or misleading statements by the company and former executives; motions to dismiss are pending.

Sentiment

Score: 2

Explanation: The company reported a substantial net loss, declining sales, and a significant goodwill impairment. Credit ratings were downgraded, and material weaknesses in internal controls persist. While there are strategic initiatives and positive employee engagement, the severe financial underperformance and operational challenges indicate a very negative outlook.

Positives

• The company successfully regained compliance with Nasdaq's minimum bid price rule following a reverse stock split.
• Voluntary turnover rates for corporate employees (18%) and non-corporate roles (23%) are noted.
• Employee engagement increased by 3% since the last survey, and leadership effectiveness scored 87% favorable.
• 86% of team members feel clear on the company's goals, objectives, and strategy, a 2% increase from the prior survey.
• The company continues to invest in digital transformation, including a newly launched same-day, on-demand delivery partnership in Phoenix with plans for sustainable nationwide expansion in FY 2026.
• The Pool Perks loyalty program was redesigned with loyalty tiers to increase engagement and transaction spend.
• The company maintains a strong market-leading share of residential aftermarket product spend and a physical network larger than its 20 largest competitors.
• Interest expense decreased by $7.5 million in fiscal 2025 due to lower interest rates and a reduced Term Loan balance.

Negatives

• Net loss significantly increased to $237.0 million in fiscal 2025 from $23.4 million in fiscal 2024.
• Sales decreased by 6.6% in fiscal 2025, driven by reductions in traffic and lower average order value.
• Comparable sales decreased for the third consecutive year, falling 6.8% in fiscal 2025.
• Gross margin decreased by 40 basis points to 35.4% in fiscal 2025, primarily due to deleverage on occupancy costs.
• SG&A expenses increased by 1.4% in fiscal 2025, contributing to reduced profitability.
• A substantial impairment charge of $183.8 million was recorded in fiscal 2025, reflecting declines in operating results and market capitalization.
• Adjusted EBITDA decreased by $47.4 million in fiscal 2025, indicating a significant decline in operational profitability.
• Credit ratings were downgraded by both Moody's and S&P, signaling increased financial risk.
• The company identified continued material weaknesses in internal control over financial reporting related to inventory and asset impairment processes.
• Cash and cash equivalents decreased by $44.2 million in fiscal 2025, with net cash provided by operating activities falling from $107.5 million in fiscal 2024 to $8.8 million in fiscal 2025.
• The company plans to close 80-90 underperforming stores and one distribution center, indicating operational challenges and expected one-time costs.

Risks

• Inability to achieve comparable sales growth could materially adversely impact profitability and performance.
• Past growth may not be indicative of future growth, and the company may not be able to acquire new consumers or retain existing ones.
• Failure to successfully manage inventory to match consumer demand could lead to decreased profit margins or lost sales.
• Loss of key members of management or failure to attract, develop, and retain highly qualified personnel could adversely affect the business.
• Significant dependence on the ability to meet labor needs, with competition for non-entry-level personnel and high turnover rates in entry-level positions.
• Exposure to legal or other proceedings, including class-action allegations, which could have a material adverse effect.
• Disruptions from natural disasters, extreme weather (including climate change), public health issues, geopolitical events, and macroeconomic crises could negatively impact demand and supply chain.
• Highly competitive and fragmented industry, subject to regional preferences and competition from mass merchants, online platforms, and suppliers.
• Demand for products and services may be adversely affected by unfavorable economic conditions, including high interest rates, inflation, and recession fears.
• Adverse developments in the housing industry could slow new pool and spa installations, impacting demand.
• Consumer attitudes towards pool chemicals for environmental or safety reasons could affect demand.
• Quarterly results of operations can fluctuate significantly due to seasonality and weather conditions.
• Adverse developments in the financial services industry could affect access to capital and increase borrowing costs.
• Maintenance of cash balances exceeding federally insured limits poses a risk of loss if banking institutions fail.
• If online systems do not function effectively, operating results and e-commerce growth could be adversely affected.
• Limitations or restrictions on the ability to sell via online platforms could harm profitability.
• A significant disturbance or breach of technological infrastructure could adversely affect financial condition and operations, and compromise confidential information.
• Improper activities by third parties and other security threats may result in future intrusions or compromises of networks and payment systems.
• Acquisitions of other companies or technologies may fail to result in commercial products, divert management attention, or dilute stockholders.
• Changing consumer preferences and demographic shifts could impact demand for pool and spa care products.
• Inability to effectively manage and sustain future growth or scale operations could harm operating results.
• Failure to streamline operations effectively, including store closures, may adversely affect business and financial condition.
• Aspirations and disclosures related to sustainability matters expose the company to risks affecting reputation and performance.
• Accidents related to the packaging and storage of hazardous chemicals could subject the company to liability and increased costs.
• Increased regulatory oversight on product assortment could increase cost of goods sold and reduce competitive pricing power.
• Product supply disruptions or increased raw material costs (e.g., granular chlorine compounds) could adversely affect profitability.
• The commercial success of planned or future products is not guaranteed.
• Product recalls or voluntary market withdrawals could significantly increase costs, damage reputation, and disrupt business.
• Ineffective inventory management could adversely affect profitability.
• Significant interruption to distribution center operations could affect timely product distribution.
• Failure to obtain favorable purchase terms with manufacturers could adversely affect operating results.
• Product quality, warranty claims, or safety concerns could impact sales and expose the company to litigation.
• Non-compliance with employment, environmental, health, transportation, safety, and other governmental regulations could result in fines or increased costs.
• Inability to adequately protect intellectual property rights could harm competitive position or incur significant enforcement expenses.
• Infringement or misappropriation of others' proprietary rights could lead to liability for damages.
• Substantial indebtedness could adversely affect financial condition and ability to operate, react to changes, or pay debts.
• Inability to generate sufficient cash flow to service debt obligations.
• Restrictive covenants in credit facility agreements may restrict business strategies, and failure to comply could accelerate debt obligations.
• Incurrence of substantially more debt could further exacerbate risks associated with leverage.
• Stock price may be volatile or decline regardless of operating performance, resulting in substantial losses for investors.
• An active trading market for common stock may not be sustained.
• Future sales of common stock by existing stockholders could cause stock price to decline.
• Transactions by principal stockholders, officers, or directors involving common stock may adversely affect stock price.
• No intention to pay dividends for the foreseeable future.
• Anti-takeover provisions in charter documents and Delaware law could make an acquisition more difficult.
• Exclusive forum provisions in the certificate of incorporation may discourage lawsuits against directors and officers.
• Increased costs as a result of being a public company and management time devoted to compliance.
• Inability to remediate material weaknesses in internal control over financial reporting could harm business and stock price.

Future Outlook

The company aims to drive sustainable growth and profitability by optimizing marketing strategies to acquire and reactivate consumers, increasing loyalty membership penetration, expanding product and service offerings, and growing its share in the professional market. It plans to enhance convenience through localized fulfillment, ensuring high in-stock rates for essential SKUs, and accelerating omnichannel transformation with expanded same-day delivery options. The company also intends to continue disruptive innovation in water testing and maintenance prescriptions, including expanding the AccuBlue Home program. Remediation of internal control weaknesses is anticipated to be completed during fiscal year 2026.

Management Comments

• Our well-balanced leadership team is comprised of leaders with experience in the pool and spa care industry as well as recent hires who bring new perspectives and capabilities to Leslies from a variety of sectors.
• Our leadership team is firmly committed to executing our strategic vision and, driving increased traffic and conversion; and focused on creating long-term shareholder value.
• We believe we have significant opportunity to acquire new residential consumers and reactivate lapsed residential consumers, which we plan to do by executing on our optimized marketing strategy.
• Our newly launched same-day, on-demand delivery partnership, which we expect to expand beyond our trial markets in FY 2026, represents our increasing focus on meeting pool owners and pool pros wherever they are as quickly and helpfully as possible.
• We believe there is opportunity to drive even greater retention and engagement with our customers and all pool and spa owners. We plan to do this by more actively leveraging our consumer and service professionals databases to personalize each users experience with targeted messaging and product recommendations.
• We believe there is an opportunity to introduce a full service, connected home solution that effectively automates pool maintenance, including actively monitoring our consumers water, diagnosing, developing, and prescribing a treatment plan, and delivering to their home the assortment of products needed to maintain a clear, safe, and beautiful pool.
• We intend to remediate these material weaknesses as soon as possible, and we believe the measures described above will help remediate the material weaknesses and strengthen our internal control over financial reporting. We anticipate that our remediation activities will be completed during fiscal year 2026.

Industry Context

The company operates in the $15 billion U.S. pool and spa care aftermarket industry, which is characterized by its scale, historical predictability, and growth outlook, driven by routine maintenance needs of millions of installed pools and spas. The industry is fragmented, with competition from regional and local independent retailers, home improvement retailers (e.g., Home Depot, Lowe's), mass-market retailers (e.g., Walmart, Costco), and specialty e-commerce operators (e.g., Amazon, eBay). The company positions itself as the largest direct-to-consumer brand with a nationwide physical presence and integrated digital platform, offering proprietary products and services like AccuBlue water testing. The business is highly seasonal, with sales and earnings concentrated in the warmer months, and is susceptible to weather conditions and broader economic factors like interest rates and inflation.

Comparison to Industry Standards

• The company's market-leading share of residential aftermarket product spend, based on 2024 industry analyst reports, indicates a strong competitive position against a fragmented market of over 10,000 smaller, local independent competitors and larger mass-market retailers.
• The physical network of over 1,000 retail locations is larger than the sum of its 20 largest competitors, providing a significant proximity advantage, with locations within 20 miles of 80% of pools in the country and nearly 90% in the Sunbelt.
• The company's proprietary AccuBlue system for in-store water testing and AccuBlue Home app-enabled device are noted as pioneering innovations, positioning it as a trusted water treatment service provider, which differentiates it from competitors who often lack specialized expertise or comprehensive service offerings.

Management Changes

Corporate Governance

Legal Proceedings

• A class action complaint for federal securities law violations was filed on September 8, 2023, against the company, its former CEO, and former CFO, alleging materially false and misleading statements regarding financial guidance, business operations, and prospects. A motion to dismiss was granted on July 14, 2025, allowing the plaintiff to file a second amended complaint, which was filed on August 13, 2025. A new motion to dismiss is pending.
• Three derivative actions were filed on March 13, 2024, March 14, 2024, and December 17, 2024, against current and former officers and directors, alleging similar wrongdoing to the securities class action. The Arizona actions have been consolidated, and all derivative actions are stayed pending the decision on the motion to dismiss in the securities class action.
• The company disputes all allegations of wrongdoing and intends to vigorously defend itself in these matters. Due to the early stage of these proceedings, the potential range of loss cannot be reasonably estimated, but management believes the ultimate liability will not have a material adverse effect.

Related Party Transactions

• The company pays management, monitoring, consulting, advisory, and similar fees to any Investor (Sponsor and other equity owners) in an aggregate amount not to exceed the greater of $5,000,000 and 2.50% of Consolidated Adjusted EBITDA per Fiscal Year, plus indemnification obligations and expenses.
• Payments are made to Vault Co., a Sponsor-associated business consulting firm (Consulting Firm), for services separate from management agreements, including pricing, procurement, lean manufacturing, e-commerce, or similar consulting services, at prevailing market rates or more favorable terms.

Stakeholder Impact

• **Shareholders**: Significant net losses, declining sales, and a goodwill impairment are highly negative. The reverse stock split and credit rating downgrades may further erode investor confidence and share value. Legal proceedings add uncertainty and potential financial liability.
• **Employees**: Planned closure of 80-90 stores and one distribution center will result in job losses. Management changes and ongoing remediation of internal control weaknesses may create uncertainty, though employee engagement is reported to have increased.
• **Customers**: Store closures may reduce physical access for some customers. Investments in omnichannel strategy, including same-day delivery and the AccuBlue Home program, aim to improve customer convenience and engagement.
• **Suppliers**: Declining sales and store closures could impact order volumes. The company's vertically integrated supply chain and strong supplier relationships are noted, but potential supply disruptions remain a risk.
• **Creditors**: Credit rating downgrades increase the cost of borrowing and reflect higher risk. Substantial indebtedness and declining cash flow from operations raise concerns about the company's ability to service its debt obligations.

Next Steps

• Complete the closure of approximately 80-90 underperforming U.S. stores and one distribution center by the end of the first fiscal quarter of 2026.
• Expand the same-day, on-demand delivery partnership beyond Phoenix across Arizona in fiscal 2026, with plans for sustainable nationwide expansion thereafter.
• Continue to enhance the design and execution of existing controls and create new controls to remediate material weaknesses in internal control over financial reporting, with anticipated completion during fiscal year 2026.
• Defend against the pending motion to dismiss the second amended complaint in the class action lawsuit.
• Address the derivative actions, which are currently stayed pending a decision on the motion to dismiss in the securities class action.

Key Dates

Recommendation

The company's financial performance is severely deteriorating, evidenced by a substantial net loss of $237.0 million, a 6.6% decline in sales, and a 6.8% drop in comparable sales in fiscal 2025. The significant $183.8 million goodwill impairment charge reflects a fundamental decline in business value. Credit rating downgrades by both Moody's and S&P indicate increased financial risk and higher cost of capital. Persistent material weaknesses in internal controls over financial reporting raise concerns about financial integrity and operational efficiency. While strategic initiatives are underway, the immediate outlook is dominated by severe financial underperformance, operational restructuring (store closures), and ongoing legal challenges. These factors collectively point to significant downside risk for the stock.

Keywords

Pool and Spa Care, Retail, Omnichannel, Chemicals, Equipment, Services, SEC Filing, 10-K, Financial Performance, Net Loss, Sales Decline, Goodwill Impairment, Credit Rating Downgrade, Store Closures, Reverse Stock Split, Internal Controls, Liquidity, Debt, Risk Factors, Corporate Governance, Legal Proceedings, AccuBlue, Pool Perks