Q4 2025 Earnings Call: Contradictions Emerge on Supplier Support, Inventory Management, and Pricing Strategy

Date of Call: None provided

Financials Results

• Revenue: $389.2M in Q4, down 2.2% YOY (vs $397.9M in Q4 FY2024); note FY2025 was a 53-week year adding ~$18.3M to Q4 revenue
• EPS: Net loss $17.54 per diluted share in Q4 (vs net loss $1.07 per diluted share prior year); adjusted EPS $0.09 in Q4 (vs $0.47 prior year)
• Gross Margin: 38.6% in Q4, up from 36.0% in prior year

Guidance:

• Fiscal 2026 sales guidance $1.1B–$1.25B and adjusted EBITDA $55M–$75M.
• CapEx expected $20M–$25M; midpoint assumes positive free cash flow.
• Close ~80–90 stores (annual sales impact ~$25M–$35M) to yield ~$4M–$10M annual EBITDA improvement.
• Price investments on core chemicals (starting Q2) expected to reduce product gross margins ~100–150 bps.
• SKU reduction >2,000 and inventory cleanup $20M–$40M with one-time 100–200 bps gross-margin headwind.
• Targeted net run-rate EBITDA benefit ~$7M–$12M when fully annualized.

Business Commentary:

• Sales and Market Share Loss:
• Leslie's experienced a 2.2% decline in net sales for Q4 2025, compared to the prior year, with same-store sales decreasing by 6.8%.

• The market share loss was primarily due to competitive pricing on key items and a tough macroeconomic environment, which led to a 160,000 decline in residential customers.

• Price Optimization and Financial Strategy:

• The company is focusing on a targeted pricing strategy, aiming to be 'everyday value priced' in its market, with expected gross margin impacts of 100 to 150 basis points.

• This strategy aims to improve the price value perception with customers, supported by cost optimization efforts and vertical integration in key value items like chlorine tabs.

• Store and Asset Optimization:

• Leslie's plans to close 80 to 90 underperforming stores, impacting sales by approximately $25 million to $35 million, but expected to generate a net EBITDA improvement of $4 million to $10 million annually.
• This move is part of a broader strategy to enhance fixed cost structure and improve asset utilization by optimizing distribution centers and inventory.

• Financial Position and Outlook:
• The company ended FY 2025 with $752 million of net long-term debt and ended the year with $208 million in inventory, a decrease of 11% year-on-year.
• For FY 2026, Leslie's expects sales of $1.1 billion to $1.25 billion and adjusted EBITDA of $55 million to $75 million, assuming no additional impacts from macroeconomic conditions or weather patterns.

Sentiment Analysis:

Overall Tone: Neutral

• Management announced a $184M goodwill impairment and Q4 net loss of $162.8M ($17.54/sh), but also delivered adjusted EBITDA of $45.2M, detailed a multi-pronged turnaround (pricing, store/DC optimization, SKU cuts) and provided FY2026 guidance of $1.1B–$1.25B sales and $55M–$75M adjusted EBITDA, signaling decisive remediation.

Q&A:

• Question from Justin Kleber (Baird): Are supplier partners fully supporting your turnaround efforts—are you getting the right allocation of product at normal payment terms?
  Response: Yes—vendor partners are supportive; in-stock rates have improved over 400 bps and SKU rationalization improves forecasting and supplier collaboration.

• Question from Justin Kleber (Baird): At the midpoint of your EBITDA guide, how much do you expect to convert into free cash flow this year?
  Response: No formal free-cash-flow guide provided, but the company expects free cash flow positivity at the midpoint of the fiscal 2026 plan.

• Question from Jonathan Matuszewski (Jefferies): Where is the most pricing opportunity—chemicals vs equipment—and will price investments return Leslie's to historical parity or a more value-oriented positioning?
  Response: Primary focus is on key value chemical items (notably chlorine tabs via vertical integration); strategy is to be everyday value priced—comparable to specialty and slightly ahead of big-box—by investing in targeted price reductions.

• Question from Jonathan Matuszewski (Jefferies): Given price investments, is EBITDA margin expansion driven by SG&A rationalization with gross margin down year-over-year?
  Response: Yes—the guide includes a 100–150 bps gross-margin headwind from pricing, which management plans to offset partially via freight/occupancy improvements and SG&A reductions, yielding modest EBITDA expansion.

• Question from David Bellinger (Mizuho Securities): The $25M–$35M revenue impact from closing 80–90 stores implies low AUVs—are there more closures possible and is there a larger subset still below company average?
  Response: The announced closures address the majority of unprofitable 4-wall stores (low-AUV); further closures remain possible if sales deteriorate, but the current tranche removes the largest unprofitable subset.

• Question from David Bellinger (Mizuho Securities): You lost ~160K retail customers—where did they go and how much will targeted marketing and price investments cost to win them back?
  Response: About 80% of the 160K net lost customers are switchers and Pool Perks members; the company will use precision, redeployed marketing (no incremental spend in the guide) with targeted offers to efficiently recover them.

• Question from Lauren Ng (Morgan Stanley): Can you comment on competitive dynamics in Q4 and how you view competitive positioning for 2026?
  Response: Q3 had aggressive competitor pricing due to excess supply that carried into Q4; Leslie's reacted with competitive pricing and saw sequential improvement and will sharpen focus on key value items to regain share.

• Question from Lauren Ng (Morgan Stanley): Assessment of the strategic-pillar framework—what's gone right vs wrong and implications for 2026?
  Response: The pillar framework unifies the organization; execution on convenience and asset/cost optimization is underway, but the main shortfall was price-value in residential traffic, so 2026 focus is investing in value to rebuild traffic and share.

Contradiction Point 1

Supplier Support and Inventory Management

It involves the level of support received from supplier partners, which directly impacts inventory management and the company's ability to meet customer demand, reflecting on its operational efficiency.

Are your supplier partners supporting your turnaround efforts? Are you receiving adequate product allocation to serve customers? Are you receiving products under normal payment terms? - Justin Kleber (Baird)

20251203-2025 Q4: Jason McDonell: \...We have an increase of over 400 basis points improvement in our in-stocks across the network." Jeffrey White: "The SKU optimization and rationalization help us provide better forecasts to vendors. - Jason McDonell(CEO), Jeffrey White(CFO)

How do you reconcile your guidance with recent traffic improvements? - Justin E. Kleber (Baird)

2025Q3: We have seen a significant improvement in our in-stock levels and we are back to pre-pandemic levels. That allowed us to increase our promotional activity. - Jason B. McDonell(CEO & Director)

Contradiction Point 2

Price Investment Strategy

It involves the company's pricing strategy, which directly impacts revenue and competitive positioning.

Where do you see the most opportunity between chemicals and equipment pricing? And will price investments restore historical parity or shift to a value-oriented approach? - Jonathan Matuszewski (Jefferies)

20251203-2025 Q4: The focus is on key value items, predominantly in chemicals. - Jason McDonell(CEO)

Which segment, chemicals or equipment, offers the greatest growth potential? And will these pricing investments restore historical pricing parity, or does this signal a shift to a value-based strategy? - Jonathan Matuszewski (Jefferies LLC, Research Division)

2025Q4: Price optimization is focused on key value items, with an emphasis on chemicals. - Jason McDonell(CEO)

Contradiction Point 3

Sales Performance in Sunbelt Markets

It involves the sales performance in Sunbelt markets, which are typically less affected by weather conditions, impacting regional sales strategy and overall market outlook.

How did sales perform in Sunbelt markets with less weather impact? - Justin E. Kleber (Baird)

20251203-2025 Q4: Sales in Sunbelt improved compared to the North. - Jason McDonell(CEO)

How do recent traffic improvements align with your guidance? - Justin E. Kleber (Baird)

2025Q3: Sales in Sunbelt improved but we didn't gain share in the Sunbelt. - Jason B. McDonell(CEO & Director)

Contradiction Point 4

Sales Outlook and Market Share

It highlights differing expectations regarding sales trends and market share, which are critical for assessing the company's strategic positioning and growth prospects.

How much of this year’s EBITDA guide can be converted into free cash? - Justin Kleber (Baird)

20251203-2025 Q4: At the midpoint of the guide, we're assuming free cash flow positivity for the year. - Jeffrey White(CFO)

What supports your confidence in maintaining the full-year sales outlook? - Zach Beeck (Baird)

2025Q2: Despite January-February weather impacts, most sales still to come. Focus remains on conversion rate improvements and new customer initiatives like the loyalty program and personalized marketing. - Jason McDonell(CEO)

Contradiction Point 5

Inventory and Supply Chain Management

It involves differing views on the company's ability to manage inventory and supply chain, which are crucial for operational efficiency and customer satisfaction.

Are your supplier partners supporting your turnaround efforts? Are you getting the right product allocation to serve customers at normal payment terms? - Justin Kleber (Baird)

20251203-2025 Q4: Yes, our vendor partners have been great partners with us. We have an increase of over 400 basis points improvement in our in-stocks across the network. - Jason McDonell(CEO)

Are you reducing inventory purchases for H2 2025? - Lauren Ng (Morgan Stanley)

2025Q2: We're improving in-stocks without increasing inventory, optimizing for precision inventory mindset. - Jason McDonell(CEO)