Leslie's, Inc. Q2 FY2026 earnings call

Core Transformation Progress & Strategic Pillars

• Management confirms the company's four-pillar transformation plan (customer centricity, convenience, asset utilization, cost optimization) is delivering measurable results across revenue, adjusted EBITDA, and customer growth, after underperformance in 2025.
• The 2026 priority of reducing customer churn (which caused net residential customer loss in 2025) is off to a strong start, with broad-based growth across new, retained, and reactivated customers.

Customer-Centric Pricing & Marketing Initiatives

• The targeted price drop initiative launched across Sunbelt markets in March 2026 (focused on core pool chemicals) received strong positive customer feedback, driving double-digit transaction growth, a 350 basis point conversion improvement, and double-digit growth in in-store 10-point water testing.
• An integrated, data-driven marketing campaign leveraging zero-party customer data and marketing mix analytics targeted existing customers and lapsed reactivations across digital and direct mail channels. In-store value messaging and category navigation signage were refreshed to improve shopping ease and highlight new pricing.
• A new tiered seasonal value product line, anchored on opening price points for discretionary seasonal goods, launched late in Q2 and is already resonating strongly with customers to drive larger purchase baskets.

Organizational Restructuring

• The new unified market leadership field organization is fully operational, integrating retail stores, service, commercial, and trade operations under local management, with a new store-level compensation plan that incentivizes cross-channel sales growth and local market ownership.
• Extensive localized in-person training programs have been rolled out in key markets to elevate associate product expertise and improve consultative customer engagement, supporting continued strong Net Promoter Scores (NPS).

Convenience Expansion

• The nationwide rollout of same-day delivery via Uber was completed in Q2, joining the existing buy online, pick up in store (BOPUS) service which continues to see strong adoption and acts as a key in-store traffic driver.

Network & Asset Optimization

• All 80 planned store closures for FY2026 are complete, with customer transfer rates to remaining stores and digital channels exceeding expectations; 85% of closed-store customers were reached via multi-channel outreach to retain their business. The program is expected to deliver $4 million to $10 million in annualized net EBITDA benefit, despite a $25 million to $35 million annual net sales impact from closures.
• Wind-down of the Illinois distribution center is complete, and the company now operates an optimized 5-distribution-center network (Texas, Florida, Kentucky, California, New Jersey), delivering annualized cost and inventory efficiency savings.
• Inventory optimization efforts reduced total inventory by more than 20% YoY to $262.4 million, while in-stock rates for key SKUs reached all-time highs.
• SKU rationalization is on track: removing 2,000 low-volume long-tail SKUs from e-commerce and distribution-center-fulfilled marketplace offerings is expected to deliver $4 million to $5 million in annualized EBITDA improvement while strengthening the core product portfolio.

Financial Performance Highlights

• Gross profit margin expanded 410 basis points YoY to 28.9%, driven by higher sales volume leverage, lower distribution and occupancy costs, and reduced inventory reserves from improved inventory health.
• SG&A decreased 0.1% YoY to $92.2 million, representing a 220 basis point improvement as a percentage of sales, as lower labor and store costs offset higher technology and marketing investment for the price drop initiative.
• Adjusted EBITDA improved $9.2 million YoY to negative $26.8 million; net loss was $52.5 million, compared to a $51.3 million net loss in Q2 FY2025.

Overall Q2 FY2026 net sales increased 4.3% year-over-year to $184.7 million, with comparable total company sales (excluding closed stores) up 6.6%.

• Residential Retail: Strong overall performance, with double-digit transaction growth and a 350 basis point conversion rate improvement following the March price drop initiative; strong demand was seen for sanitizers, shock, and specialty chemicals, partially offset by softness in equipment, cleaning, maintenance, and safety/solar categories (the latter due to lapping a 2025 Q2 clearance event). Total residential customer count grew 8% YoY, with mid-single-digit growth in new and retained customers, and over 25% growth in reactivated lapsed customers.
• Pro (Trade/Commercial) Business: Revenue grew approximately 5% YoY, driven by improved value offerings on core items, product availability, and a simplified trade program with streamlined enrollment and refined category pricing. No revenue contribution percentages by segment were provided in the transcript.

Management reaffirmed its full fiscal year 2026 guidance with no upward or downward revisions:

• Full year net sales guidance maintained at $1.1 billion to $1.25 billion
• Full year adjusted EBITDA guidance maintained at $55 million to $75 billion
• Full year capital expenditure guidance maintained at $20 million to $25 million, focused on store and distribution center maintenance and productivity investments
• Management expects full year 2026 to generate positive free cash flow
• The pricing strategy is expected to impact annual gross margins by 100 to 150 basis points
• Annual expense reduction initiatives are expected to deliver $7 million to $12 million in annual recurring cost savings, with benefits beginning to accrue in the second half of 2026
• Inventory optimization is expected to result in a one-time 100 to 200 basis point reduction to annualized gross margins, impacting Q3 and Q4 2026
• SKU rationalization is expected to deliver $4 million to $5 million in annualized EBITDA savings
• Combined initiatives are expected to drive a $5 million to $10 million improvement in full year 2026 EBITDA, as some savings are reinvested in the price drop strategy
• Management is actively evaluating capital structure opportunities with incumbent lenders and third-party providers to fund incremental growth initiatives and shorten the path to profitability

Forward-looking statements are explicitly noted to be subject to significant risks and uncertainties that could cause actual results to differ materially from current expectations, with detailed risk factors available in the company's recent SEC filings. No additional specific operational or financial risks were discussed in the transcript.

Q: The Q2 2026 gross margin is the second quarter's highest level since 2023, driven by factors including occupancy savings, distribution cost improvements, and inventory reserve adjustments. How sustainable are these gains, what is the gross margin outlook for the second half of 2026, and what gross margin expansion levers exist for 2027 beyond sales volume leverage? / A: The largest driver of Q2 gross margin improvement was lower occupancy costs from network optimization, which will continue to support gross margin going forward. The inventory reserve adjustment was a one-time, immaterial contribution that will not repeat. Ongoing direct cost optimization work with vendors to improve the company's cost portfolio will continue to flow through to product margins as new cost levels average in, creating room for continued gross margin improvement in the back half of 2026 and into 2027.

Q: Given the strong early performance of the $25 million price drop investment, does management plan to increase this investment amount? Will the price drop initiative be expanded to the equipment category, and has equipment demand picked up following recent severe weather in the South and Southeast? / A: Management will continue to evaluate opportunities to expand the everyday value pricing program to additional categories, after the initial launch focused primarily on core chemicals which delivered very strong results. Most equipment products have vendor-imposed minimum advertised price (MAP) protection that prevents the company from adjusting pricing independently, so future expansion will focus on other categories where price adjustments can be both competitive and margin-accretive.