Leslie’s (LESL) is in the pool business which has been getting a major COVID-driven bump in demand this year as people have shifted spending from travel to their back yards and in some cases, pools. The current range is $14-16.

Investors are aware of the trend and many have enjoyed the outperformance of stocks like Pool Corp (POOL) which has grown revenue steadily over the past few years from $2.36B in 2015 to $3.2B in 2019. Growth has accelerated this year and is expected to come in around $4.2B. Margins are expanding at the same time, leading to profit growth of 30%. POOL is trading in line with that at 30x earnings.

Pool Corp is in the wholesale segment of the pool industry whereas Leslie’s is at the retail end of the market. The investment case is based on them executing better at the consumer level with more marketing and a focus on customer acquisition. The point being that pools require ongoing supply and maintenance which means something on the order of a $24K LTV for the pool supply company.

Historically Leslie’s has grown via acquisition and now has a large retail presence. In the past, they have really been more of a passive distributor and as they added retail locations their revenue grew consistently. They were similar to a company like West Marine (acquired for $338M back in 2017 by private equity firm Monomoy Capital Partners). With sales at West Marine indicated to be $675M there’s no doubt the partners there will be watching this deal closely.

The company has been around for decades in one form or another and after all the acquisitions are blended in and no-doubt massaged carefully they can boast a very long-term track record of top-line growth.

For the IPO Leslie’s is spinning their story more as a consumer brand. For the first time, they want to leverage their presence with better marketing and in-store services like their new “AccuBlue” in-store testing devices. It’s surprising to see how little Leslie’s has spent on this in the past given the LTV shown above.

The crux of the growth story will depend on how well the company can transition from being a passive distributor to a consumer-focused services company. We’re reminded of the old saw – “Culture eats strategy for breakfast.” Management has initiated a top-down strategy and added to the team – but the rank and file number in the thousands and so far do not seem to be highly aligned and engaged with the company “mission.”

Pool supply companies typicaally serve a geographical area and there is limited competition (except now online sales are now a thing.) It’s inherently a local business. Most customers would rather pay a service provider than go to the store. Leslie’s is also trying to go after the “Pro” segment with services and bulk supplied aimed at the professional maintenance market.

We’ve heard from at least a couple of our subscribers that their experiences with this company have been less than stellar. Of course that’s anecdotal but there is a substantial base of company reviews on Glassdoor which don’t paint an encouraging picture of how effective the new strategy will be.

Thanks to COVID the company does have a favorable market in which to execute but it’s worth noting that the management of Pool Corp recognizes the same near-term demand surge but comments that it doesn’t really change the long-term outlook for the industry. It’s still going to be good but the current demand may normalize over the next year or two.

And how will the company balance between the opportunity to spend more to acquire long-term customers versus expectations of maintaining and/or expanding operating margins? So far operating margins have been flat to slightly down. If marketing spend is set to increase then investors will be eager to see a further acceleration of top-line growth.

Valuation and Stock Conclusion

From a valuation standpoint, the proposed market value at the middle of the range will be $2.8B (using 186.6M shares). That puts the valuation at about ~3x sales making it a reasonable comparable versus POOL which is at 4x.

The company forecasts ~$184M in ADJEBITDA on ~$1.1B in revenues this year. Using that as a proxy for earnings we’d get a 15x multiple – again a good compare versus POOL at 30x although Leslie’s is growing slower and their margins are flatter.

The company has meaningful debt of $1.2B which adds substantially to the EV. They plan to reduce debt post-offering with a target of $635M of net debt post-IPO.

There’s also going to be a large “overhang” of shares for sale as the PE firm Catterton will still own 78% of the company post-IPO with 146M shares they will be looking to sell into the markets when lockup agreements expire.

We know from current syndicate chatter that the deal is likely to “work” in terms of getting priced and open but at this point we’d suggest taking a pass on this one until we see how management executes and the lockup expires.

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