DEF: Leslies, Inc. Proposes Governance Reforms Amid Control Issues

Leslies, Inc. seeks shareholder approval for board elections, auditor change, executive compensation, and governance amendments while addressing material weaknesses in internal controls and underperforming incentive metrics.

Summary

• Shareholders are asked to vote on the election of four directors, the ratification of Grant Thornton LLP as the independent auditor, an advisory vote on executive compensation, amendments to remove supermajority voting requirements, and the adoption of an amended omnibus incentive plan.
• The company is in the process of declassifying its Board, with all directors expected to stand for one-year terms starting from the 2027 Annual Meeting.
• Grant Thornton LLP has been selected as the new independent auditor, replacing Ernst & Young LLP, which had issued adverse opinions on the company's internal controls for fiscal years 2024 and 2025.
• Material weaknesses in internal control over financial reporting related to inventory and asset impairment processes were identified for fiscal year 2025, with the inventory control weakness not yet remediated.
• Executive compensation for fiscal year 2025 resulted in a total annual cash bonus payout of only 20.5% of target due to significant underperformance against Adjusted EBITDA and Sales goals.
• Performance Stock Units (PSUs) for both the fiscal year 2024 (covering 2024-2025 performance) and the first tranche of fiscal year 2025 (covering 2025 performance) were forfeited due to not meeting performance thresholds.
• The proposed Amended and Restated 2020 Omnibus Incentive Plan seeks to increase the share reserve by 566,135 shares, bringing the total available for equity awards to 1,198,949 shares, and extends the plan's term.

Sentiment

Score: 3

Explanation: StockSavvy.ai views this filing negatively due to persistent material weaknesses in internal controls, significant underperformance against financial targets for executive compensation, and substantial underwater equity awards, which collectively signal operational and financial challenges.

Positives

• The Board is committed to maintaining a strong governance framework, promoting independent judgment, accountability, and long-term value creation.
• The company is declassifying its Board, moving towards annual election of all directors by 2027, which is generally considered a good governance practice.
• A proposal to remove supermajority voting requirements, replacing them with majority voting standards, enhances shareholder influence and board accountability.
• Employee engagement survey results from August 2025 showed a 3% increase in active engagement and an 87% favorable score on overall leadership effectiveness.
• Management has made substantial progress in remediating the vendor rebate process material weakness identified in prior fiscal years.
• All non-employee directors are independent, and only independent directors sit on Board committees, reinforcing strong oversight.
• The company maintains rigorous stock ownership guidelines for executives and directors and prohibits hedging or pledging of company stock, aligning interests with shareholders.

Negatives

• The former independent auditor, Ernst & Young LLP, issued adverse opinions on the company's internal control over financial reporting for both fiscal year 2025 (inventory and asset impairment processes) and fiscal year 2024 (vendor rebate and inventory processes).
• The material weakness related to inventory control was not remediated as of October 4, 2025, despite management's efforts.
• A new material weakness was identified in fiscal year 2025 related to the design and operation of controls over goodwill and other long-lived asset impairments.
• Fiscal year 2025 Adjusted EBITDA ($61.4M actual vs. $114.0M target) and Sales ($1,241.9M actual vs. $1,357.0M target) performance resulted in only a 20.5% payout of the target annual cash bonus.
• Performance Stock Units (PSUs) for both the fiscal year 2024 (two-year period) and the first tranche of fiscal year 2025 were forfeited due to not meeting performance thresholds.
• The company's stock price of $1.55 as of January 28, 2025, is significantly lower than the weighted average exercise price of outstanding options ($394.35) as of October 4, 2025, indicating substantial underwater options.

Risks

• Material weaknesses in internal control over financial reporting, particularly concerning inventory and asset impairment processes, could lead to material misstatements in financial statements.
• The company operates in a dynamic competitive environment, requiring rigorous oversight of strategy and risk to maintain market position.
• Reliance on a competitive industry and geography for employee talent necessitates competitive compensation packages, including equity awards, to attract and retain key personnel.
• Forward-looking statements involve inherent risks, uncertainties, and other factors that could cause actual results to differ materially from expectations.
• Historical, current, and forward-looking environmental and social-related statements may be based on developing standards, evolving internal controls, and assumptions that are subject to future change.
• Cybersecurity threats are an ongoing risk that the Board actively oversees, requiring continuous management and mitigation strategies.

Future Outlook

The company aims to continue driving profitable growth with a clear customer focus, enhance efficiency while investing in people and infrastructure, prudently manage risk, and create long-term shareholder value. Management anticipates completing remediation activities for internal control material weaknesses during fiscal year 2026. The proposed increase in the equity incentive plan shares is expected to fund equity compensation needs for approximately two to three years.

Management Comments

• "The Board's primary responsibility is to provide rigorous oversight of management and to act in the best interests of the Company and you, our valued shareholders." (John Strain, Chairman)
• "The Board's priorities have not changed: maintaining a strong governance framework that promotes independent judgment, accountability, and alignment with long-term value creation for our shareholders." (John Strain, Chairman)
• "We established a clear vision for Leslies to be pool owners' One Stop for Pool Care with key pillars of performance as a foundation." (Jason McDonell, CEO)
• "Our priorities remain clear: Driving profitable growth with clear customer focus and disciplined execution; Driving efficiency while maintaining appropriate investment in our people, systems, and infrastructure; Managing risk prudently while preserving financial flexibility; and Creating long-term shareholder value aligned with the interests of our customers, employees, and communities." (Jason McDonell, CEO)
• "Our leadership team is committed to executing with urgency and precision, balancing short term actions and outcomes with long term results." (Jason McDonell, CEO)

Industry Context

StockSavvy.ai notes that Leslies operates in the $15 billion U.S. pool and spa care industry, characterized as a fundamentally attractive retail category due to its scale, historical predictability, and growth outlook. The company's market-leading share in residential aftermarket products and extensive physical network position it strongly against competitors. The emphasis on non-discretionary products (over 85% of assortment) provides resilience in varying economic conditions. The strategic focus on digital omnichannel capabilities and proprietary water testing (AccuBlue) aligns with broader retail trends towards integrated customer experiences and data-driven services.

Comparison to Industry Standards

• The company's voluntary turnover rates (18% corporate, 23% non-corporate) should be benchmarked against industry averages for specialty retail and service sectors to assess competitiveness in human capital management.
• The 3% increase in active employee engagement and 87% favorable leadership effectiveness score are positive internal indicators but would benefit from comparison to industry-specific employee satisfaction benchmarks.
• The company's burn rate of 1.65% (three-year average) and fully diluted overhang of 9.1% (increasing to 13.8% with new shares) for its equity incentive plan should be compared to peer companies in the specialty retail sector to assess potential shareholder dilution. For example, a typical healthy burn rate for mature companies is often below 2%, while for growth companies it can be higher. Overhang levels vary, but 13.8% could be considered moderate to high depending on the growth stage and industry.
• The significant underperformance against Adjusted EBITDA and Sales targets for executive incentive plans suggests a need for improved operational execution or more realistic goal setting compared to industry peers.

Management Changes

Corporate Governance

Related Party Transactions

• Stephen Ortega, son of former Chairman Steven Ortega and a former employee (Category Director), earned approximately $134,000 in compensation in fiscal year 2024 and $142,000 in fiscal year 2025. He was also granted restricted stock units (3,600 RSUs in FY2024, 7,992 RSUs in FY2025, pre-reverse stock split). His compensation is consistent with other employees of the same level.
• Stambrisk Consulting LLC, co-founded by former Interim CFO Tony Iskander, was paid approximately $357,000 in fiscal year 2025 for finance and accounting consulting services. This transaction was reviewed and approved by the Audit Committee.

Stakeholder Impact

• Shareholders: Potential for increased influence through the removal of supermajority voting, but also potential dilution from the expanded equity incentive plan. Significant underperformance in financial metrics and internal control issues could negatively impact shareholder value.
• Employees: High employee engagement and leadership effectiveness scores indicate a positive internal culture. The equity incentive plan aims to attract and retain talent.
• Customers: The company's vision to be 'One Stop for Pool Care' and focus on water treatment expertise (AccuBlue) aims to enhance customer experience and loyalty.
• Management: Executive compensation is tied to performance, but recent underperformance has resulted in lower payouts and forfeiture of PSUs, aligning consequences with results.
• Regulatory Authorities: The change in auditor and ongoing remediation of material weaknesses in internal controls are critical for compliance with SEC and Nasdaq requirements.

Next Steps

• Shareholders are scheduled to vote on five proposals at the Annual Meeting on March 24, 2026.
• Management anticipates completing remediation activities for internal control material weaknesses during fiscal year 2026.
• The company intends to file a registration statement on Form S-8 for the new incentive plan shares in Q2 or Q3 of calendar year 2026, if the plan is approved.
• The Board and management team will review voting results and shareholder feedback after the annual meeting to inform strategic planning and oversight.
• The next say-on-pay advisory vote is expected to occur at the 2027 Annual Meeting.
• The Board will be fully declassified by the 2027 Annual Meeting, with all directors standing for election for one-year terms.

Key Dates

Recommendation

The company is addressing significant corporate governance issues by declassifying its board and proposing to remove supermajority voting, which are positive steps for shareholder rights. However, the persistent material weaknesses in internal controls, coupled with substantial underperformance against key financial targets and the forfeiture of executive performance awards, indicate ongoing operational and financial challenges. While the long-term strategy in an attractive industry is sound, the immediate execution and control issues warrant a cautious "hold" stance until there is clear evidence of sustained financial improvement and full remediation of internal control deficiencies. The significant gap between option exercise prices and current stock price also suggests a long road to recovery for existing equity incentives.

Keywords

Pool and spa care industry, SEC filing, Proxy statement, Corporate governance, Internal controls, Executive compensation, Shareholder meeting, Board declassification, Supermajority voting, Omnibus incentive plan, Financial performance, Adjusted EBITDA, Sales performance, Risk management, Sustainability, Human capital management, Auditor change, Material weakness, Equity awards, Stock options, Restricted stock units, Performance stock units, Related party transactions, Ariel Investments