The past six months have been a windfall for Leslie’s shareholders. The company’s stock price has jumped 309%, hitting $7.41 per share. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Leslie's, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Leslie's Will Underperform?
We’re glad investors have benefited from the price increase, but we don’t have much confidence in Leslie's. Here are three reasons why LESL doesn’t excite us, plus one stock we’d rather own.
1. Shrinking Same-Store Sales Indicate Waning Demand
Same-store sales is an industry measure of whether revenue is growing at existing stores, and it is driven by customer visits (often called traffic) and the average spending per customer (ticket).
Leslie’s demand has been shrinking over the last two years as its same-store sales have averaged 5.8% annual declines.
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Leslie's, its EPS declined by 34.5% annually over the last three years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Leslie’s $1.09 billion of debt exceeds the $16.92 million of cash on its balance sheet. Furthermore, its 18× net-debt-to-EBITDA ratio (based on its EBITDA of $59.63 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Leslie's could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Leslie's can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Leslie's falls short of our quality standards. Following the recent rally, the stock trades at 24.5× forward EV-to-EBITDA (or $7.41 per share). This multiple tells us a lot of good news is priced in - we think there are better stocks to buy right now. Let us point you toward our favorite semiconductor picks and shovels play.
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