Bond Buyers Keep Leslie’s In the Swim
Leslie’s Pool Mart has long understood the ebb and flow of the pool industry, where spring and summer quarters are usually money makers and fall and winter ones are not.
But the stock-buying public was less quick to catch on, causing shares of the pool-supply chain from Chatsworth to flounder for six years on Wall Street before management took the company private again in 1997.
In lieu of securities proceeds, the company floated $90-million worth of bonds two years ago to finance its ongoing growth campaign. But in contrast to the chilly reception on Wall Street, those same notes, which pay annual interest of 10.375%, now have a par value of about 1.05, meaning bonds purchased two years ago for $100 now sell for $105.
Analysts and company officials are quick to point out that investor perceptions aside, Leslie’s has been a strong performer throughout the ‘90s--even during the recession that ravaged pool builders and some maintenance companies earlier this decade.
The company’s sales have grown more than 10% annually in each of the past five years, from $142 million in 1994 to $253 million for the latest reporting year. And with the exception of 1995, its earnings before interest, taxes, depreciation and amortization also grew each year by similar rates.
The company has opened 185 new stores in the past four and half years, doubling its total during that period to 365 outlets in 30 states, said company Chief Executive Officer Brian McDermott.
Despite the strong numbers, Leslie’s was a tough sell to investors for most of the six years it was publicly traded, he said.
“We went public at a time when we were beginning a very aggressive growth process,” McDermott said. “We felt it would be helpful to be a public company, having access to not only the capital, but the status associated with that as well. But the reality was, we had never accessed the capital markets after our initial offering. We were also a tough company for the market to understand. We’re very seasonal.”
Indeed, “seasonal” is a word that comes up often among analysts who covered Leslie’s when it was publicly traded and among those who now cover its bonds.
“The stock never really appreciated the way [management] felt it should or shareholders felt it should, so the stock was very inexpensive,” said Seth Feinstein, an analyst who used to cover Leslie’s stock for Crowell Weedon & Co. “It’s a very seasonal business.”
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But the steadiness of seasonality, coupled with the reality that homeowners must maintain their pools regardless of the economy, are the same factors that make bond buyers confident Leslie’s will be able to meet its debt obligations, said Pat Iossa, an analyst who covers the company’s bonds for B.T. Alex Brown.
“A lot of growth in their business comes from opening new stores, but the baseline for this company is that people have to maintain their pools,” he said. “The bulk of their business is chemicals and parts. Three-quarters of their business is this recurring revenue stream. If recession hits, you have to maintain your pool. Of course, there’s also great seasonality, since the summers are where you make the bulk of your money.”
Founded in 1963, Leslie’s had nearly $253 million for the fiscal year that ended Oct. 3. The company, with about 2,000 year-round employees (the numbers go up in summer) sells pool chemicals and cleaning equipment as well as pool-oriented safety, fitness and recreational gear.
Although the company recently launched a retailing Web site-- www.lesliespool.com--Iossa doesn’t think it will dramatically impact revenues.
“I think it’ll help,’ Iossa said. “It will give them another revenue source. But I don’t know that pool supplies are necessarily something that someone wants to order over the Internet.”
McDermott expressed optimism about the Web site, but also downplayed its potential impact on revenues in the short-term.
“It’s up and working, but I think we’ll see that develop and change quite a bit over the next year,” he said. “You get up and figure out what the customers are interested in, then you react.
“But we are seeing a lot of new customers over the Internet--not people who typically shopped through the stores or our mail-order division. It does seem to be a new site for customers, and the average size of transaction also tends to be larger.”
And while the model of steady growth tempered by seasonality may have received a tepid response the first time on Wall Street, McDermott did not rule out another stab at a public offering in the future.
“It is certainly possible that we will go public again,” he said. “That’s going to be a function of our opportunities versus our needs or our resources. If we did consider it again, we’d be a more mature company and a little better than we were the first time around. I think we would certainly try to get the best sponsorship we can in the investment banks and analysts. I also think we could do a better job of building analyst support in an effort to educate people.”
