Wall Street Awaiting Pool Firm’s Big Splash : Recreation: Leslie’s Poolmart hopes ’94 is the year the specialty supplies retailer will live up to analysts’ earnings expectations. But much depends on the weather.

Leslie’s Poolmart has had a credibility problem. Blame it on bad weather, company executives say.

Never mind that the nation’s largest specialty pool supplies retailer has had 31 consecutive years of increasing sales; that its profits have grown for each of the last four years, and that it stepped up its aggressive growth plan and doubled its number of stores since it sold stock to the public in April, 1991.

Still, the Chatsworth company has been a disappointment to investors. For two years after its initial stock offering at $11 a share, Leslie’s didn’t meet analysts’ earnings projections. By mid-1992, its stock had sunk to $5.

The trouble was, Leslie’s Chief Executive Brian McDermott said, the sunny analysts’ earnings forecasts didn’t account for unusually cool weather in much of the country during the peak swimming pool season in the summers of 1991 and 1992. As a result, Leslie’s sales and earnings fell about 5% short of what had been expected.

But 1993 was a good year for the company--with hot, swimming pool weather last summer--so Leslie’s profit rose 41% to $3.04 million, while sales grew 25% to $120 million. And comparable store sales averaged gains of 12% for the year. At the end of the year, however, Leslie’s stock was at $8.75, still underwater from its initial stock offering price.

“We have achieved the vast majority of what we said we were going to achieve,” said McDermott. But he now takes care to warn that “things don’t always go right.”

Could 1994 be the year that Leslie’s Poolmart gets some respect on Wall Street?

Perhaps. But in a sign that Leslie’s continues to swim against waves of skepticism, Morgan Keegan & Co. on Wednesday dropped Leslie’s from a “focus list” that the Memphis investment firm’s retail brokers use to make stock recommendations. Morgan Keegan took the step because of recent gains in Leslie’s stock and worries about the company’s usual seasonal fluctuations, Morgan Keegan analyst Tammira M. Kuntz said.

That day, Leslie’s stock price fell $1 a share. The stock closed Monday at $11.25.

Even analyst Seth Feinstein, at the investment firm Crowell, Weedon & Co. in Los Angeles, who said he’s “excited” by Leslie’s prospects, hasn’t recommended the company’s stock. “If I recommend a purchase, I’m putting my neck on the line,” he explained, and Leslie’s has had “a habit of disappointing Wall Street.”

But Feinstein and other analysts remain upbeat about Leslie’s and its goal of becoming the Home Depot of pool supplies.

Leslie’s has opened 25 new stores this year, bringing the total to 183, and plans to add another 40 next year. The stores are spread across the country, but about half are in California and Texas. By the end of the decade, it hopes to have 500 stores nationwide.

Analyst Kuntz expects Leslie’s earnings to jump 52% this year, to $4.6 million. “There are no other nationwide players” in the pool supply business, she said. “The opportunity is huge.”

In the past year, Leslie’s has also rejiggered its prices and product mix. The stores carry about 3,000 pool-related items, from chlorine--which accounts for one-quarter of sales--to $1,000 pool heaters and $700 filter systems. Leslie’s also sells pool covers, life vests, snorkels and toys.

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McDermott said the company has reduced inventory costs by simplifying the way products are arranged in stores. Chlorine, for instance, is now centralized in one or two locations instead of five. That has allowed Leslie’s to introduce new products, including popular pool cleaning items and Speedo-brand goggles and fins. It is now testing Speedo swimwear in some stores.

And because Leslie’s sees its biggest competition coming from Home Depot and other mass merchants, rather than small pool supply shops, it has adopted an “everyday low price” strategy. A year ago, it cut prices on certain products by an average of about 10%, undercutting even some of the mass merchants and warehouse chains.

The price cuts didn’t hurt the company’s profit margins much, largely because Leslie’s buys in bulk, and therefore more cheaply than its rivals. Also, Leslie’s keeps a lid on its costs by mixing and repackaging chemicals itself, and manufacturing some products such as plastic pool covers.

“We felt sure if we could be the real price leader and make sure our customers know that, we could take volume away from everyone else in the industry, including the mass merchants,” McDermott said.

Leslie’s is also increasing marketing efforts to commercial pool owners, such as schools, community centers and hotels. That category accounts for nearly one-third of the nation’s pools, but only about 8% of Leslie’s sales last year.

A catalogue that Leslie’s sends to 3.3 million customers is another source of possible growth, McDermott said. Besides trying to boost mail-order sales, which produced only 8% of Leslie’s sales in 1993, the company is using its database to target advertising and pinpoint new store locations. Jim McCloskey, editor of the trade magazine Pool & Spa News, said the mailing list gives Leslie’s the unique advantage when entering new markets of being “recognized as a national brand.”

Yet the potential for a highly specialized retail chain to have mass-market appeal remains unknown, McCloskey said. It’s possible that as Leslie’s expands “they’re going to be getting into markets that are less desirable.”

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And when a company is aggressively building while cutting prices, missteps can be costly, as Leslie’s learned last year. A new computer system bungled communications between stores and the corporate office, and didn’t account for sales and inventory properly. Leslie’s hired a new chief information officer, who worked out the bugs, but not before the company spent an extra $1 million tracking store information manually.

McDermott said he’s now devoting his attention to controlling Leslie’s fast growth. The 37-year-old executive was part of an investor group that acquired Leslie’s in 1988 for $17.5 million.

The sale was the culmination of a feud between Leslie’s co-founders, Raymond Cesmat and Philip Leslie. Cesmat wanted to sell; Leslie did not. So Cesmat got court approval to dissolve Leslie’s Poolmart and then sell it, and Phil Leslie was ousted. For a few months, the company was in chaos as many employees sided with Phil Leslie and refused to work.

Eventually Leslie’s recovered. Two years ago, it acquired Sandy’s Pool Supply, a 20-store North Hollywood chain that was half-owned by Phil Leslie, for about $2 million.

Although McDermott won’t rule out more acquisitions, his priority is opening new stores, which can be done for a relatively cheap $100,000 apiece.

And while he pursues his fast-growth plan, McDermott keeps an eye on weather reports. He even admitted to consulting the Farmer’s Almanac, but said he’s looking into ways to get more accurate and detailed weather forecasts.

“If it’s the worst weather in 10,000 years, we’re not going to hit the numbers that are expected of us,” he said. But he added, “We will still be an extremely profitable company.”