Leslies Inc Aktie

Good afternoon, and welcome to the Fiscal Second Quarter 2026 Earnings Conference Call for Leslie's. [Operator Instructions]. As a reminder, this conference call is being recorded and will be available for replay later today on the company's website.

I would like to remind everyone that comments made today may include forward-looking statements which are subject to significant risks and uncertainties that could cause the company's actual results to differ materially from management's current expectations. These statements speak as of today and will not be updated in the future if circumstances change. Please review the cautionary statements and risk factors contained in the company's earnings press release and recent filings with the SEC.

During the call today, management will refer to certain non-GAAP financial measures. A reconciliation between the GAAP and non-GAAP financial measures can be found in the company's earnings press release, which was furnished to the SEC today and posted to the Investor Relations section of Leslie's website at ir.lesliespool.com.

On the call today is Jason McDonell, Chief Executive Officer; and Jeff White, Chief Financial Officer. With that, I will turn the call over to Jason.

Good afternoon, and welcome to the Fiscal Second Quarter 2026 Earnings Conference Call for Leslie's. [Operator Instructions]. As a reminder, this conference call is being recorded and will be available for replay later today on the company's website.

I would like to remind everyone that comments made today may include forward-looking statements, which are subject to significant risks and uncertainties that could cause the company's actual results to differ materially from management's current expectations. These statements speak as of today and will not be updated in the future if circumstances change. Please review the cautionary statements and risk factors contained in the company's earnings press release and recent filings with the SEC.

During the call today, management will refer to certain non-GAAP financial measures. A reconciliation between the GAAP and non-GAAP financial measures can be found in the company's earnings press release which was furnished to the SEC today and posted to the Investor Relations section of Leslie's website at ir.lesliespool.com.

On the call today is Jason McDonell, Chief Executive Officer; and Jeff White, Chief Financial Officer. With that, I will turn the call over to Jason.

Good afternoon and thank you for joining us today to discuss our second quarter fiscal 2026 results. I'm pleased to report that our comprehensive transformation plan to position Leslie's for sustainable, profitable growth delivered results, in our Q2 performance demonstrates that the strategic actions we've implemented worked on multiple levels.

Compared to last year, in the second quarter, we delivered overall revenue growth of 4.3%, a comparable sales increase of 6.6%, improved year-over-year adjusted EBITDA by 26% and registered total customer count growth of 8%. We have strong conviction in our long-term business model and the strategic initiatives we have underway from executing our pricing strategy, reactivating customers, enhancing our store operations, continuing our cost optimization and improving our asset utilization, all of which we believe will drive meaningful margin expansion, sustainable revenue growth and enhanced shareholder value over time.

We entered 2026 with a clear goal to reduce customer churn, which was a significant driver of a net loss of residential customers in 2025. I'm pleased to say we're off to a great start with broad-based customer growth in the second quarter. What's particularly encouraging is the mid-single-digit growth we're seeing across both new and retained customers and greater than 25% growth in reactivated customers who are those that didn't shop with Leslie's last year, but did shop with us in the period between 2021 and 2024.

These customer statistics became even more pronounced as we capitalized on favorable weather with the launch of our Price Drop initiative in the Sunbelt markets in March. While we have many critical weeks ahead as the peak pool selling season kicks into high gear, I'm very pleased with the customer feedback on our Price Drop initiative, our strong Q2 revenue and gross margin improvement and our team's relentless focus on cost optimization to fund these customer-facing investments.

We are fundamentally reimagining how Leslie serves our customers and communities, creating a more efficient business model in the process. As we have mentioned for multiple quarters, customer centricity, convenience, asset utilization and cost optimization are the core strategic pillars supporting our comprehensive transformation plan. We're rebuilding Leslie's as America's one-stop for pool care. Leveraging our competitive advantages and taking decisive action in areas where performance has fallen short.

We are focused on improving Leslie's value proposition through a combination of our Price Drop campaign, targeted marketing efforts to reactivate lapsed customers and enhance service levels at our stores. These efforts successfully drove customer growth during the quarter and improved margins.

Our new pricing strategy is designed to drive traffic, increase conversion rates, and build customer loyalty by improving our pricing on key items while maintaining the high quality our customers expect from Leslie's. These targeted objectives were achieved in quarter 2 as we launched Price Drop in March. The response from customers was positive. Our retail stores experienced double-digit increase in transactions and more than a 350 basis point improvement in our overall conversion rate.

Customers also leveraged our proprietary 10-point water testing system with double-digit growth in water tests conducted in quarter 2 compared to a year ago. We are supporting the Price Drop launch with a comprehensive integrated marketing campaign. This campaign leverages our zero-party data to target core Leslie's customers and bring back those that have lapsed.

Leveraging marketing mix analytics. We then strategically prioritize the marketing mediums from digital media to targeted direct mail to engage our customer base and drive the best return on investment. Adding to our targeted marketing, we also elevated the in-store value messaging and refreshed our category and navigation signage for greater ease of shopping. The elevated value messaging includes prominent Price Drop signage strategically placed throughout the store to ensure customers immediately recognize the value we're delivering. While the refreshed category navigation signage showcases our broad assortment.

To further expand our value proposition beyond improved pricing on core chemicals, we've developed an exciting seasonal product line anchored on opening value price points. Launched late in Q2, this tiered value-priced assortment across a broad range of our discretionary seasonal products is resonating strongly with customers and will help us build baskets throughout the pool season.

To support our price investment and integrated marketing plan, we are pleased to share that our restructured field organization is now operational. This is a market leadership model, integrating stores, service, commercial and trade operations under a unified local management. We also changed our compensation structure at the store level. This new monthly compensation plan is focused on their sales growth and incentivizes the team to take ownership of their ZIP code on sales across service, Pro Trade, commercial and retail stores.

The restructuring also accelerates our customer-centric strategy by combining our customer data with local market leadership giving managers the tools and authority to capture growth opportunities among thousands of pool owners. To further support the field organization, we've also implemented extensive training to strengthen customer engagement and organization success.

In partnership with select vendors, we've rolled out localized in-person training programs across key markets, elevating product expertise and enabling more effective consultative selling experience. In Q2, we continue to see strong NPS scores as our store associates are supporting and representing the compelling customer value proposition at Leslie's.

This new program is designed to build local customer relationships, drive transaction growth while maintaining our consultative selling approach. Going into peak season, our field teams are aligned, accountable and ready to continue to help customers with all their pool care needs.

As part of our integrated customer-centric approach, we continue to focus on convenience. At Leslie's, we offer buy online, pick up in store or BOPIS and same-day delivery through Uber. We're seeing strong growth in adoption of our BOPIS service, which serves as a key traffic driver to our stores and creates a valuable opportunity to engage with our customers.

In quarter 2, we also completed the nationwide rollout of our Uber delivery platform, providing same-day delivery on a wide range of products. We are pleased with the initial results and look forward to being more convenient for customers for this pool season.

In addition to our residential customers, we're also seeing success growing our PRO business, which increased approximately 5% during the quarter. Our PRO customers are responding to our improved value offerings on core items as well as the availability of the products they need. In Q2, we simplified our trade program by refining pricing across all categories and streamlining enrollment, which is improving the PRO customer experience. In parallel, we enhanced our internal processes and targeted outreach to drive improved customer engagement with our PRO customers.

Now an update on our network optimization initiatives. We remain confident in an annualized net EBITDA benefit of $4 million to $10 million despite an annual sales impact of approximately $25 million to $35 million from the 80 stores that we have closed in fiscal 2026. What's particularly encouraging is the favorable customer transfer rates we're seeing to both existing stores and our digital channels, which are exceeding our expectations. We had valuable zero-party data with over 85% of our customers' information that has enabled us to reach out to customers of closed stores and invite them to visit another nearby store or our digital assets.

We are leveraging precision marketing to reengage lapsed customers and deepen loyalty with our core base while educating both of them on the full breadth of our product and our service portfolio available through leslies.com and our mobile app. This local multichannel outreach spanning digital marketing, direct mail and outbound calling ensures customers remain connected to our brand and aware that nearby stores stand ready to meet all their pool care needs.

Turning to our distribution network. We have largely ceased operations at our Illinois facility and has successfully transitioned to a 5-distribution-center network for the 2026 pool season. We now operate distribution centers in Texas, Florida, Kentucky, California and New Jersey. Our network optimization is yielding annualized savings and inventory efficiencies and we will continue evaluating future opportunities to drive further network improvements.

As mentioned, we have continued our focus on inventory optimization and improving inventory turns. In Q2, we reduced inventory by greater than 20% in the quarter and are still delivering above target in-stock performance overall and on our Never Out SKUs.

In another part of our focus on asset utilization, our SKU rationalization strategy is on track and goes beyond simple SKU elimination. We're strategically reshaping our assortment to maximize profitability and customer value. By removing 2,000 long-tail SKUs from our e-commerce and marketplace offerings fulfilled through our distribution centers, we are confident we can deliver approximately $4 million to $5 million in annualized EBITDA improvement, while simultaneously strengthening our product portfolio.

In summary, our Q2 results demonstrate the strategic actions we're taking are working on multiple levels: revenue growth, EBITDA improvement and broad-based customer growth. By delivering greater value while managing costs effectively, we believe we are fundamentally transforming Leslie's operations for long-term profitable growth. Grounded in our 4 strategic pillars: customer centricity, convenience, asset utilization and cost optimization, we are restoring Leslie's as America's trusted one-stop destination for pool care.

With that, I will turn it to Jeff for a more detailed review of our second quarter results. Jeff?

Thank you, Jason. I'll begin my remarks today with a review of our second quarter financial results then move to our liquidity and capital allocation plans, and finally, review our outlook for 2026.

Net sales for the second quarter increased 4.3% to $184.7 million compared to $177.1 million in the second quarter of the prior year and ahead of our expectations. Sales through our retail stores were strong with notable strength in residential and PRO, especially in March and across the Western United States. Comparable total company sales, which removes closed stores increased 6.6% in the second quarter compared with the same time period of fiscal year 2025.

We saw strength in sanitizers in shock and specialty chemicals in conjunction with the launch of our Price Drop campaign slightly offset by softness in equipment, cleaning and maintenance. We also saw expected softness in safety and solar as we anniversaried a clearance event in the second quarter of last year.

Gross profit margin for the second quarter was 28.9% versus 24.8% in the prior year period, driven by leverage of higher sales volumes. Margin expansion was also supported by favorable distribution and occupancy costs as well as reductions in inventory reserves, reflecting continued improvement in overall inventory health.

SG&A for the second quarter decreased $0.1 million or 0.1% to $92.2 million compared to $92.3 million in the second quarter of the prior year due to lower labor costs and store costs partially offset by higher technology and marketing spend as we invested incremental dollars on a year-over-year basis in conjunction with the launch of our Price Drop campaign.

While the year-over-year difference is small, this represents an over 220 basis point improvement as a percentage of sales. Net loss for the second quarter was $52.5 million compared with a net loss of $51.3 million in the second quarter of the prior year. Adjusted net loss in the second quarter was $50 million compared with an adjusted net loss of $48.3 million in the second quarter of the prior year.

Adjusted EBITDA for the second quarter improved $9.2 million to negative $26.8 million compared with negative $36.1 million in the second quarter of 2025. This improvement was driven primarily by higher sales volumes and improved pricing during the quarter as well as lower distribution and occupancy costs and lower SG&A expenses.

Inventory at the end of the quarter was $262.4 million compared to $335.1 million at the end of the second quarter of 2025 due to inventory optimization initiatives and store closures. Despite a favorable year-over-year inventory reduction of 22%, in-stocks on key products remain at all-time highs. Capital expenditures for the second quarter were $9.5 million compared to $11.2 million in the second quarter of the prior year, primarily relating to maintenance of our stores and distribution centers.

Regarding liquidity, we ended the quarter with $99 million of outstanding borrowings on our line of credit versus $101.5 million in the prior year. We also had $753 million of long-term debt. As of quarter end, we had approximately $97.1 million of availability from cash on hand and borrowings available under our line of credit facility.

We remain focused on executing and delivering on our initiatives and continue to expect our pricing strategy to impact annual gross margins by 100 to 150 basis points. Our store optimization strategy to have an annual net sales impact of $25 million to $35 million and generated a net EBITDA improvement of $4 million to $10 million annually.

As of note, we have completed our store closure plans for the year and do not anticipate any additional closures for the balance of fiscal 2026. We continue to expect our expense reduction initiative to drive $7 million to $12 million of annualized savings with benefits starting to be realized in the second half of 2026. Furthermore, we anticipate our inventory optimization strategy to result in a onetime reduction of approximately 100 to 200 basis points to annualized gross margins. We expect this impact to occur in our Q3 and Q4 periods. And finally, our SKU rationalization initiative to generate $4 million to $5 million in EBITDA savings by optimizing our product assortment over time.

Combined, these initiatives should drive a $5 million to $10 million improvement to EBITDA in fiscal 2026 as we reinvest some of the savings back into our Price Drop strategy. We remain confident in our ability to drive sales and traffic by delivering the right product in the right place at the right time and at the right price for our customers. We have identified significant cost savings opportunities across our operations that will strengthen our financial position. Consistent with our historical performance, we expect to generate the large majority of our sales and earnings in the second half of the year due to the seasonal nature of the business.

In fiscal 2026 which is a 52-week year compared to a 53-week year in fiscal 2025, we are reiterating our guidance of sales of $1.1 billion to $1.25 billion and adjusted EBITDA of $55 million to $75 million. We continue to expect CapEx to be in the range of $20 million to $25 million in 2026 as we focus on maintenance and productivity investments as well as providing positive free cash flow for fiscal year 2026.

We continue to evaluate capital structure opportunities and are actively working with our incumbent lenders as well as third-party capital providers to finance a series of incremental initiatives that could further accelerate our growth and shorten the path to profitability. The company has ample liquidity and is well positioned to capitalize on the 2026 pool season.

In closing, we are executing with focus, growing sales, driving transaction volume, expanding profitability and preserving financial flexibility. Our priorities are clear, and we believe these actions will support shareholder value over the long term.

I will now turn the call back over to Jason for closing remarks.

Thanks, Jeff. Our comprehensive transformation plan is delivering measurable results. Q2 performance demonstrates that our strategic actions are working. We delivered revenue growth, significantly improved adjusted EBITDA and achieved total customer count growth with particularly strong momentum in reactivated customers. Our strategic initiatives advance with both urgency and discipline in Q2.

The Price Drop initiative launch drove traffic and customer growth, along with improved gross profit performance, while our cost optimization and asset utilization actions continue on schedule. We've completed our store optimization, optimized our DC network and our SKU rationalization is strengthening both profitability and inventory productivity.

Most importantly, we're rebuilding customer relationships through improved value, enhance convenience and the consultative expertise that has always been Leslie's competitive advantage. While we have many critical weeks ahead as peak season accelerates, the early Q2 success of our customer-facing investments funded by operational efficiencies, validates our strategic direction. We remain committed to transparent communication as we execute Leslie's transformation, restore sustainable profitable growth and rebuild stakeholder confidence through disciplined execution and measurable results.

Before we open the call to your questions, I want to express my sincere appreciation to our Leslie's team members across the country. for their outstanding commitment during this transformational period. Your adaptability and determination in executing our strategic initiatives have been exceptional. The progress we're making from the successful launch of our Price Drop initiative, to the completion of our store optimization program is a direct result of your hard work and dedication to serving our customers.

I also want to thank our vendor partners for their continued collaboration and support as we strengthen Leslie's competitive position. Finally, to all our stakeholders. Thank you for your ongoing support and confidence in our team's ability to execute this transformation. Together, we are building a stronger, more customer-focused Leslie's positioned for sustainable growth.

Operator, we're now ready to open the lines for questions.

[Operator Instructions]. Our first question is from Jonathan Matuszewski with Jefferies.

Great, and thanks for the update and nice to see the comp inflection. I guess my question is on gross margin. So this result puts you at the highest gross margin for a second quarter since 2Q of '23, I believe, which is impressive. Can you talk to the sustainability of some of these drivers like savings in occupancy and DC costs? And then the inventory reserve adjustment, a lot of moving pieces here. So as we put them all together, just hoping for a clearer view of how you see gross margin trending in the second half? And I guess looking beyond the second half, maybe if you could just talk to some of the levers for gross margin expansion into 2027 that you're excited about beyond potential leverage from higher sales volume.

Jonathan, this is Jeff. I'll take that. It's a good question. As we look at what really contributed to gross margin, I would say one of the largest drivers was the improvement in occupancy costs. So as I think about that, that is something that we can continue to leverage and make sure that helps gross margin going forward.

We did have some onetime adjustments, the difference in the inventory reserve that as we continue to get healthier and more productive with our inventory, those types of adjustments are going to be onetime or so. We'll not tremendously material for the quarter. It is something that contributed.

Overall, we did see overall improvement though in our product margin. And those are, as we think about some of the cost initiatives that we undertook going through the direct cost process, making sure that we're really working with our vendors to optimize our cost portfolio there. As we continue to work through the flow of goods. And on an average cost basis, we see those efforts flow through. There's room for continued improvement as we move through the back half of '26 and continuing move into 27.

Our next question is from David Bellinger with Mizuho Securities.

I apologize if I missed this earlier, but maybe 2 questions together. Can you talk about the Price Drop? I think you had marked about $25 million for price investments earlier in the year. Is there any thinking of increasing that number just given the performance you've seen to date.

And then second, is there any way you talk about the equipment category with the Price Drop there? Is that a business that's picked up post some of these storms that affected parts of the South and Southeast?

Yes. Great question. As we think about the Price Drop, we're going to continue to look at areas of opportunity for us to expand the everyday value pricing and what categories we can move that into as we rolled it out in March, it was heavily primarily focused on our core chemicals and our chemical categories, which is where we saw really good strength as we continue to move through and find opportunities, depending on market conditions, we'll look at other areas of opportunity.

In terms of equipment, the one thing I'll note there is a lot of that product is MAP protected. So it's hard to move on price there because you do have that MAP protection. And ultimately, the price in the market is set by the vendors. So we'll look for areas of opportunities in other parts of the business where we can be competitive, but still be margin accretive as we further progress down the path on our Price Drop initiative.

Thank you. This does conclude our question-and-answer session as well as today's conference. We thank you again for your participation, and you may now disconnect your lines.

Good afternoon, and welcome to the Fiscal First Quarter 2026 Earnings Conference Call for Leslie's. [Operator Instructions] As a reminder, this conference call is being recorded and will be available for replay later today on the company's website.

I would like to remind everyone that comments made today may include forward-looking statements, which are subject to significant risks and uncertainties that could cause the company's actual results to differ materially from management's current expectations. These statements speak as of today and will not be updated in the future if circumstances change.

Please review the cautionary statements and risk factors contained in the company's earnings press release and recent filings with the SEC. During the call today, management will refer to certain non-GAAP financial measures. A reconciliation between the GAAP and non-GAAP financial measures can be found in the company's earnings press release, which was furnished to the SEC today and posted to the Investor Relations section of Leslie's website at ir.lesliespool.com. On the call today is Jason McDonell, Chief Executive Officer; and Jeff White, Chief Financial Officer.

With that, I will turn the call over to Jason.

Good afternoon, and thank you for joining us today to discuss our first quarter fiscal 2026 results.

As we begin 2026, our unwavering commitment to become America's one-stop shop for pool care drives every action we're taking to position Leslie's for a return to sustainable profitable growth. We see a clear opportunity as we execute our comprehensive transformation plan. We are working diligently to turn around and transform this business with focus on our customer value proposition and rightsizing our operations through cost optimization and better asset utilization.

Before I dive in, I wanted to point to our earnings press release in which we reaffirmed our full year guidance for net sales at $1.1 billion to $1.25 billion and adjusted EBITDA in a range of $55 million to $75 million. To start quarter 2, we are seeing encouraging momentum with positive comparable store sales in January. This momentum, coupled with the progress we're making on our transformation initiatives, gives us confidence in our team's ability to execute and deliver on our commitments in the upcoming pool season.

As we move into the 2026 pool season, we are implementing a pricing transformation initiative that is a strategic decision to improve pricing for our customers on key items. We have identified that our pricing was often out of step in the market, contributing to our net loss of 160,000 residential customers this past fiscal year. We have been conducting price testing during the off-season period, measuring lift performance across various segments, and the results have given us confidence to move directly to national implementation. The renewed strategy will be supported by our new low prices, same great quality integrated marketing campaign launching this pool season.

Our pricing strategy is designed to drive traffic, increase conversion rates and build customer loyalty. Our field organization will capitalize on this opportunity by focusing on basket size growth with the improved pricing on key value items through the integration with our proprietary 10-point water testing system and our in-store consultative approach.

In partnership with our vendors, we've made significant investments in associate training and development programs to enhance their customer engagement capabilities, which are essential for successful basket building and sustained customer relationships. Our new low prices, same great quality campaign will also be powered by an integrated marketing plan that combines digital media with other precision targeted outreach.

We will deliver personalized messages about our new pricing offer to both active and lapsed customers by mining of our existing Pool Perks loyalty database that has captured customer information from over 85% of our transactions. We have conducted extensive testing to inform this targeted approach and we'll continue leveraging marketing mix modeling to optimize campaign effectiveness and return on investment.

Let me go a little deeper on our customer transition and retention efforts. As I mentioned, we had a net loss of 160,000 customers in 2025. Double-clicking on this net loss, the most significant driver was customer churn. Through a combination of our renewed price strategy, a revitalized targeted marketing approach and our store-level pool expertise, we are planning to grow our active customer file in 2026 and beyond. Although we see a clear opportunity to garner new-to-file customers, reengaging lapsed customers remains our greatest opportunity for growth over the near term by optimizing our marketing spend to mid- and lower funnel with a targeted approach.

Now an update on our store optimization initiative, which we announced last quarter. A comprehensive review of our entire asset base led to the decision to close 80 underperforming locations. Our team completed approximately 80% of these closures in less than 7 days after we made our announcement last quarter. This accelerated time line was made possible through meticulous planning, strong cross-functional coordination and the dedication of our field teams who manage this complex process while maintaining service to our customers. The speed of execution not only minimized business disruption but also allowed us to capture cost savings more quickly than projected, providing immediate benefit to our financial performance.

As we discussed on our Q4 call, despite an expected annual sales impact of approximately $25 million to $35 million, the financial benefits of our store optimization strategy are expected to yield an annualized net EBITDA improvement of $4 million to $10 million once fully completed by the end of Q2 2026. We have implemented a comprehensive customer transition strategy to retain relationships despite physical store closures.

Utilizing our Pool Perks loyalty program, we deployed targeted marketing to reach affected customers. We are providing personalized offers to visit nearby Leslie's locations as well as reminding customers to access our full portfolio of products and services through our online platform and mobile app. Building on this foundation, we are expanding our localized marketing efforts through digital channels, direct mail and phone calls to remind customers that other nearby stores can help them with their pool care needs. We will continue to engage customers from closed stores on how Leslie's can meet their needs throughout the upcoming pool season.

Complementing our store optimization efforts, we've simultaneously streamlined our distribution footprint to create a more efficient and cost-effective supply chain network. In Q3 last year, we successfully closed our Denver warehouse and seamlessly shifted volume to other distribution centers, reducing annual cost by approximately $500,000 while maintaining service levels.

As we transition to a more efficient 5 distribution center network in 2026, we are on track with the planned closure of our Illinois facility, which will drive an additional $500,000 to $1 million in annual savings and further reduce our system-wide inventory levels while maintaining strong and improved in-stock levels. The Illinois location was primarily focused on e-commerce fulfillment.

Our optimized network will enable us to fulfill e-commerce orders closer to our customers in regional DCs and supporting BOPIS capabilities at store level, thereby lowering shipping costs and significantly improving delivery speed across our digital platforms.

In addition, we are continuing our focus on customer convenience with the further expansion of our Uber partnership. We have completed the rollout in Arizona and California, and we'll be rolling out our Uber delivery platform across the United States ahead of the pool season. Uber same-day delivery is Leslie's next step on delivering added convenience for our customer.

Aligned with our asset utilization and operational efficiency priorities, our SKU optimization initiative remains on track. As we outlined in our Q4 call, we will have successfully reduced our SKU count by more than 2,000 SKUs entering the 2026 pool season, primarily eliminating long-tail items from our e-commerce and marketplace offerings fulfilled through our distribution centers. The reduction allows us to focus our assortment on our highest value inventory items that drive the majority of our sales. We believe the strategic SKU rationalization will enable us to simplify our go-to-market solutions and streamline operations while delivering the targeted $4 million to $5 million in annualized EBITDA improvement we projected.

And finally, as we discussed on our Q4 call, we successfully implemented a significant restructuring of our field organization. We moved away from the siloed approach that historically separated our stores, service, commercial and trade operations and implemented a market leadership model that integrates all these functions under unified local management. This structure gives managers clear ownership of specific markets and ZIP codes, enabling deeper customer relationships across all touch points, stores, services and digital channels.

We're implementing ZIP code ownership with incentives for managers who build their business and customer relationships in their territories. These programs are designed to drive transaction growth and higher order values while maintaining our consultative selling approach. The restructuring also accelerates our customer-centric strategy by combining our customer data with local market leadership, giving managers the tools and authority to capture growth opportunities amongst thousands of pool owners.

In summary, we have made meaningful progress on our transformation plan during Q1. We continue executing fundamental changes to how we operate and serve our customers, focused on delivering improved value while maintaining our competitive advantages as the industry leader.

Our strategic initiatives are advancing with urgency and discipline. We're excited about our pricing investments and targeted marketing efforts, while our cost optimization and asset utilization actions are proceeding on schedule. We remain committed to transparent communication as we work to restore Leslie's to sustainable profitable growth and rebuild stakeholder confidence through disciplined execution.

Now for a brief update on our Q1 results, which were largely in line with our internal top line and adjusted EBITDA expectations. We saw top line net sales of $147 million. When reviewing this result, it is important to keep in mind last year's onetime impacts resulting from the hurricane benefit, the meaningful impact from the shift in comparing a 52-week year to last year's 53-week year and the closure of 80 stores.

When it comes to profitability, we surpassed our internal plan with disciplined cost control and efficient implementation of our initiatives. As I mentioned in my opening comments, we are reaffirming our full year outlook for both net sales and adjusted EBITDA, anchored on our confidence in our strategic direction and the continued progress across our key transformation initiatives.

With that, I will turn it to Jeff for a more detailed review of our first quarter results. Jeff?

Thank you, Jason. I'll begin my remarks today with a review of our first quarter fiscal results, then cover our liquidity and capital allocation plans and finally, review our outlook for 2026. Net sales for the first quarter were $147.1 million, largely in line with our internal top line expectations as it aligns to our full year guide. This is compared to $175.2 million in the first quarter of the prior year or a 16% decline.

To provide more detail on the decline on a year-over-year basis, we anniversaried a $4 million benefit from hurricane-related sales last year, which we expected to be a headwind in Q1 2026. In addition, the shift from the 53rd week contributed approximately $10 million to the year-over-year decline and the impact of closed stores was approximately $1 million on a year-over-year basis.

Comparable sales decreased 15.5% in the first quarter compared with the same time period of fiscal year 2025, with most categories down in line with the decline in comparable sales. The Q1 headwinds that were just mentioned accounted for approximately 850 basis points of the 15.5% decline we saw in comparable sales in Q1.

Gross profit margin for the first quarter was 18.4% versus 27.2% in the prior year period. Approximately 430 basis points of this gross profit decline during the period was due to the onetime noncash impairment charge taken on inventory located within stores that were closed during the period. The remainder of the decline in gross margin on a year-over-year basis was due to a decline in overall margins on our core chemicals, which had an outsized negative impact on our gross profit margin in Q1 due to the low sales volume. These declines were partially offset by our cost reduction strategies implemented during the quarter.

As Jason mentioned earlier in his remarks, we feel confident in our pricing strategy as we move into pool season and are reiterating our guide that these pricing investments will only cause an approximate 100 to 150 basis point decline in annual gross profit margins on a year-over-year basis for fiscal 2026.

SG&A decreased $1.7 million or 2% to $85.7 million compared to $87.4 million a year ago due to lower store labor, corporate payroll and other operating expenses. We will continue to look for opportunities to reduce our fixed and variable costs as we remain focused on cost optimization and asset utilization. During the quarter, we recorded a $10.1 million noncash impairment charge related to the closure of 80 stores and 1 distribution center, which was at the midpoint of our expectations.

Net loss for the first quarter was $83 million compared with a net loss of $44.6 million in the first quarter of the prior year. Excluding the charges, adjusted net loss in the first quarter was $48.7 million compared with adjusted net loss of $40.7 million in the first quarter of the prior year, which was in line with our internal expectations.

Adjusted EBITDA for the first quarter was negative $40.3 million compared with adjusted EBITDA of negative $29.3 million in the first quarter of 2025. Inventory at the end of the quarter was $210 million compared to $271 million at the end of the first quarter of 2025 due to inventory optimization initiatives and store closures, a reduction of 23% year-over-year. Inventory management is a key priority for us as we work to improve inventory productivity, manage our in-stocks and flow goods to our stores in a more seasonally and regionally relevant manner.

Capital expenditures for the first quarter were $4.3 million compared to $4.7 million a year ago, primarily relating to maintenance of our stores and distribution centers. Regarding liquidity, we ended the quarter with $25 million of outstanding borrowings on our line of credit versus $40 million in the prior year. We also had $752 million of long-term debt. As of quarter end, we had approximately $128 million of availability from cash on hand and borrowings available under our line of credit facility.

As Jason mentioned, we continue to execute our key strategic initiatives and want to reiterate the impact these initiatives will have on our fiscal year 2026 results. We are making adjustments to the pricing of our core chemicals, working closely with our suppliers to ensure that we are priced competitively in the market. We continue to expect this initiative to impact annual product gross margins by 100 to 150 basis points.

As part of our store optimization strategy, we made the decision to close 80 underperforming stores in the first quarter. We expect that this will have an annual sales impact of approximately $25 million to $35 million and generate a net EBITDA improvement of $4 million to $10 million annually once they are fully completed. In late 2025, we began a comprehensive expense reduction initiative to align our costs with the trends of the business. These efforts will include the renegotiation of all contracts with our vendors, suppliers and landlords and a full review of all noncore assets of the business.

We strongly believe that we can leverage our SG&A to further enhance the profitability of the company as we continue to focus our efforts on driving traffic and transactions through strategic investments in pricing and meeting the customer the skill and expertise that they expect from Leslie's. We expect these results to drive an additional $7 million to $12 million of annualized savings with benefits starting to be realized in the second half of 2026.

Our DC network optimization is well underway with the closure of our Illinois distribution center in Q2 2026. We expect this to reduce annual cost by approximately $500,000 to $1 million annually. We remain focused on disciplined inventory management. We will execute this initiative by clearing slow-moving inventory in certain categories that are not delivering our target gross margin returns. This inventory optimization process is expected to result in a onetime reduction of approximately 100 to 200 basis points to annualized gross margins. We expect this impact to occur prominently in our Q3 and Q4 periods.

Our SKU rationalization initiative involves eliminating over 2,000 SKUs to drive cost and inventory efficiency. We expect this focused approach to generate $4 million to $5 million in incremental EBITDA savings by optimizing our product assortment. We continue to expect these combined efforts of all these initiatives to deliver a net benefit to EBITDA of approximately $5 million to $10 million in fiscal 2026. We remain confident in our ability to drive traffic and sales by delivering the right product in the right place at the right time and at the right price for our customers.

We have identified significant cost savings opportunities across our operations that will strengthen our financial position. Consistent with our historical performance, we expect to generate the majority of our sales and earnings in the second half of the year due to the seasonal nature of our business.

For fiscal 2026, which is a 52-week year compared to a 53-week year in fiscal 2025, we continue to expect sales of $1.1 billion to $1.25 billion and adjusted EBITDA of $55 million to $75 million. We expect CapEx to be in the range of $20 million to $25 million in 2026 as we focus on maintenance and productivity investments as well as providing positive free cash flow for fiscal year 2026.

We continue to evaluate capital structure opportunities and are actively working with our incumbent lenders as well as third-party capital providers to finance a series of incremental initiatives that could further accelerate our growth and shorten the path to profitability. The company has ample liquidity and is well positioned to capitalize on the 2026 pool season.

In closing, we remain confident in our strategic direction. Through our strategic actions to drive sales and transactions while enhancing our profitability and strengthening our balance sheet, we are positioned to drive shareholder value and long-term growth.

Now I will turn the call back over to Jason for closing remarks.

We have made meaningful progress on our transformation and our strategic initiatives are advancing with urgency. We're excited about our pricing investments and targeted marketing efforts, while our cost optimization and asset utilization actions proceed on schedule. The successful execution of our store closure program, distribution network optimization and SKU rationalization demonstrates our operational excellence.

As we move into the 2026 pool season with our new low prices, same great quality campaign, we're well positioned to rebuild customer relationships through our enhanced value proposition and consultative retail model. Also, the progress we're making across our strategic initiatives give us the conviction on delivering on our full year commitments.

I want to recognize our Leslie's team members nationwide for their exceptional commitment during this pivotal time. Their adaptability and determination implementing these strategic changes have been outstanding. I also want to thank all our stakeholders for their ongoing support as we execute Leslie's transformation. Together, we are creating a stronger foundation for Leslie's future success.

Now I'd like to pass the call back to the operator.

[Operator Instructions] Your first question comes from the line of Simeon Gutman with Morgan Stanley.

Jason, my question is, it sounds like the pricing actions sound like a move to EDLP in a way, which you want to be competitive on the important thing. I heard the remarks that you don't -- you sized up the gross profit impact. I guess the same question is, how do you feel like the whole year is intact despite these pricing changes? Did you have to find offsets? How does nothing move based on such a -- it feels like a drastic decision or in the right decision, but still a big decision? And then I have one follow-up.

Okay. Thanks, Simeon. Thanks for the question. So I think the first thing is that when it comes to the pricing actions that we're taking, we did an assessment of how we are looking from a regular price standpoint. And this program is really us looking at our regular prices that we had in the marketplace on some key value items that we've -- then we put tests into action around finding ways to optimize that regular price in the future to look at different price points, look at different bundles, look at even different combinations of buy more, save more, and we looked at multiple markets.

So we're actually taking the regular price down and also changing the promotional strategy from where we were more high low before to something that's a lot more consistent and competitive in the marketplace that really is centered around everyday value. So Simeon, that's from the work we've done with our customers. And that's also from the work we've done with our customers specific to switchers and lapsed users to get -- to ensure that we improve the value proposition to get the traffic.

And then when the traffic comes in the stores, our teams are going to focus on the building baskets, which is that consultative approach I talked about in the prepared remarks. I'll pass it to Jeff, and he'll talk to specifically how we have built that into the financials as we look to the balance of the year.

Yes, Simeon, it's a good question. And we talked about it a little bit in our previous call that as we looked at the dollar amount in gross margin that we're going to have to invest on these pricing changes. We've explained all of the cost-cutting initiatives, both from a direct and indirect cost cut perspective that we've done throughout the business. We've said that on a net benefit, it's going to provide roughly $7 million to $10 million to the bottom line adjusted EBITDA number on a full year basis. The amount of expense cuts that we've been able to achieve is a lot greater than the $7 million to $10 million.

So the $7 million to $10 million is the net that flows down to the bottom line while we're taking the rest of the cost savings, and we are investing them back into the pricing changes that we have to make in the gross margin, which is why we feel confident that we're able to guide to -- we do expect it to reduce gross margins on an overall year-to-year basis by about 100 to 150 basis points, but we can limit the reduction there through the initiatives that we've executed on thus far and to Jason's point, the building of the basket as we get the traffic and transactions back into the store.

Okay. And then a quick follow-up. The positive momentum in January, not to be too cute, I guess, you didn't mention February. Is this an inflection in the business or it's the byproduct of also the exit of the stores and now you have a healthier -- a much healthier base. So how to think about those 2 dynamics?

Yes. So there's -- we have a healthier base. That's when we're looking at the Q2 performance, we're seeing positive comp store sales through January, like you called out. As we got into February, where we're pleased is where you see weather that has been more normal in February over the first little bit, that being for us in the Western United States that we've seen that trend continue.

And it's been a bit more challenged in the north part of the country as well as in some of the more southern East states. That said, the part that makes us feel optimistic about the future is that this is all ahead of the campaign we're about to bring to the marketplace through the pool season around new lower prices and same great quality. So that's why we feel confident, and we're looking forward to this pool season, Simeon.

Your next question comes from the line of Jonathan Matuszewski with Jefferies.

My first question was just a follow-up on pricing. I was hoping maybe you could just elaborate on what you're seeing from a basket building perspective during the pilot for new pricing? And just anything you can share in terms of the lift in UPT or AOV? And any metrics you'd want to share in terms of in those markets where you piloted the EDLP pricing, any kind of recapture of lapsed customers in that test? That was my first question.

Jonathan, I'll give you -- thanks for that question. The specifics that we've done is the team has done a variety of different tests, and we've done these tests across multiple regions and markets. And then that being said, what's hard about giving numbers here is the fact that we've actually done a variety of different categories and products across the portfolio that we've looked at. So what we've been really paying attention to is the types of tests that we're doing, whether it be price points or bundles and even the buy more, save more multiples that we're looking at.

And what we have seen is we are seeing some good solid increases from some of those tests in UPT. And our team has done a really nice job over the last year on driving conversion level, conversion at the store, and we've talked about that in prior earnings results in terms of our conversion rate going up. So the combination of seeing good reaction in the marketplace on some of these price changes as well as the conversion rate and the quality of the performance that's done by our teams makes us feel that we have a great recipe for what we need to do to go forward with the launch of the pool season this year.

That's helpful. And then a quick follow-up, maybe just on the store base. I imagine the next step is to think about and measure sales transfer rates from the first 80 to 90 closures and maybe that will inform additional closures for '27 potentially. But if you think longer term, over a multiyear horizon, how do you think about kind of Leslie's footprint in being able to kind of serve the pool owner best? Obviously, convenience and proximity has always been an important part of the value proposition. So any thoughts in terms of as you've done more work and more customer insights, how that's making you think about kind of the footprint longer term?

Yes. Thanks. Good question. This is a very important question because it's how we embarked on the work that we did just in the -- that we implemented in quarter 1 as we took a very strategic approach to how we are thinking about proximity. That's one of the benefits of the pool industry is that we know where the pools are. And obviously, what's key about that is making sure we have the right combination of how we're going to make sure that we service the pools and the pool owners going forward.

So what is the right combination of not only the stores that we have, but the DC footprint that we have, but also the changes and improvements we make to our omnichannel approach on this business. So as we think about this for the future is consistent optimization on not only our store footprint, our DC network to make sure that we're getting product to customers as fast as we can. And we've just recently done that with the closure of the Chicago DC, where we believe that we can get -- having the products closer to the customer at the stores on an e-commerce purchase helps drive speed and convenience for our customer.

And then we also have all the different elements of providing an omnichannel approach through buy online, pick up in store, the recent announcement of Uber and how we're rolling that out nationally. So for us, it's about being the one-stop shop for pool care. And really about that is making sure that we're accessible and available to all customers, whether they want to come in a store or whether we service them digitally or online.

Jonathan, it's Jeff. One thing I'll add on to that. Based off the studies that we did, while we found areas where we may have been oversaturated and had the ability to close stores, but also came to light during that analysis was areas across the country where there's opportunity for further expansion. So while this round, we closed 80 stores and ultimately could be -- we'll continue to monitor and look at store productivity going forward. There's also white space opportunity and opportunity for us to go into new markets as we did the network optimization study.

Thank you. This now concludes our question-and-answer session. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.

Good afternoon, and welcome to the Fiscal Fourth Quarter and Full Year 2025 Earnings Conference Call for Leslie's. [Operator Instructions] As a reminder, this conference call is being recorded and will be available for replay later today on the company's website.

I will now turn the call over to Nitza McKee from ICR.

Thank you, and good afternoon. I would like to remind everyone that comments made today may include forward-looking statements, which are subject to significant risks and uncertainties that could cause the company's actual results to differ materially from management's current expectations. These statements speak as of today and will not be updated in the future if circumstances change. Please review the cautionary statements and risk factors contained in the company's earnings press release and recent filings with the SEC.

During the call today, management will refer to certain non-GAAP financial measures. A reconciliation between the GAAP and non-GAAP financial measures can be found in the company's earnings press release, which was furnished to the SEC today and posted to the Investor Relations section of Leslie's website at ir.lesliespool.com. On the call today is Jason McDonell, Chief Executive Officer; and Jeff White, Chief Financial Officer.

With that, I will turn the call over to Jason.

Good afternoon, everyone, and thank you for joining us today to discuss our fourth quarter and full year fiscal 2025 results. Before we dive into today's discussion, I'm pleased to announce that we've successfully completed a smooth transition in our CFO role during the quarter.

I'd like to welcome Jeff White, who joined Leslie's in early October as our Chief Financial Officer and Treasurer. Jeff brings a combination of financial and accounting expertise and the operational retail experience that will be instrumental as we continue our transformation journey towards sustainable, profitable growth. Jeff has hit the ground running and is heads down focused on several key areas, helping us lead our critical transformation at Leslie's, including, but not limited to, cost optimization, cash and capital management and leading actions and next steps to address our capital structure. Jeff will provide more detail on these critical areas shortly.

On today's call, I will provide a review and a summary of actions we are taking as we execute on the transformation road map for Leslie's future. I will then turn the call over to Jeff, who will discuss our financial results in detail as well as our financial outlook. I'll return with closing thoughts on our path forward before we open the line up for questions.

As outlined in this morning's release, we have implemented immediate actions to improve Leslie's operations and accelerate our path to financial profitability. As we look at the past of Leslie's, we've experienced market share loss and the main driver is price value challenge on some of our key items.

In specific national research we've conducted, we found that pricing on our key items was often out of step with our competitors. And as the customer environment continues to be more value-focused during these macroeconomic conditions, it is critical that we act and invest in our customer value proposition. While we believe the weather was also a factor leading to our softer sales, our price value equation has been a major contributor to a net loss of over 160,000 residential customers this year and decline in residential traffic in 2025 of 8.6%. Key value item pricing sets price value perception with our customer, and we need to improve here.

Price optimization on many of these core items is an area we will address. Keeping in mind, we enjoy a vertical integration on many of these products. As we are streamlining costs in our manufacturing operations, we are also focused on cost optimization efforts across direct materials, packaging and distribution.

Layering on top of these operational cost efforts, we've also taken actions to improve our cost structure by announcing the closure of 80 to 90 underperforming stores over the next month. We closed a warehouse in Denver in July, are closing a distribution center in Illinois that will be completed this January, and we are also currently exiting underperforming SKUs in our system. These overarching cost savings will allow us to invest in an improved price value equation on key items.

Investing in our value proposition at Leslie's is a top priority to reinvigorate our traffic performance.

The great news is that we are adjusting our pricing strategy, and we have the ability to target communications directly to customers based on our zero-party data, which is information that has been provided by the customer to Leslie's. Stated quite simply, we know who our current and former customers are, where to reach them via e-mail, phone or home address as well as other specifics about their pool and historical purchases. Our Pool Perks loyalty program captures these details on over 85% of our transactions.

To communicate our pricing adjustments, we are utilizing precision targeted marketing via our customer data file. For example, delivering personalized messages to lapsed customers to directly address what they told us will bring them back. Our research shows the most effective approach combines a clear value message with Leslie's industry-leading expertise and water testing capabilities. We're refining these messages further by incorporating purchase history, regional uniquenesses and local weather events.

Once we've established that connection with our customer, we leverage our key competitive advantage in this sector with our consultative destination retail model. Once in the store, we work with the customer and customize a solution specific for their needs. That has been a strength for us this year.

In fiscal year '25, conversion rates after a water test increased by 500 basis points year-over-year, reinforcing the trust customers place in our technical expertise. Our 10-point water test delivers a personalized treatment plan tailored to each person's pool environment, size and water composition, driving deeper engagement and continuous improvement in every market we serve. This is a key advantage for us at Leslie's.

When customers come to visit us at Leslie's, our team members will help our customers build their basket. Now this is similar to what is commonplace in the grocery industry. Customers come into the grocery store for milk and bread and fill their basket with other items. The same at Leslie's. As customers come in to buy pool chemicals, our team members make sure they have everything they need and build their basket. Our team members in our stores focused on this in quarter 4, and we achieved mid-single-digit growth in units per transaction in the latest quarter. Improving our value proposition with better pricing in combination with our customer service and pool expertise will help us grow the basket, improve overall loyalty and ultimately regain share that we've lost.

In addition to the actions of price value improvements, targeted marketing and basket building, another action we're taking is to build on our strengths around expertise and customer service.

Today, we are announcing a restructuring of our field teams around a market leadership approach that sharpens our focus and facilitates deeper multichannel consumer relationships to drive growth. In the past, we've operated in silos, stores, service, commercial and trade were all separate within the Leslie's organization.

We are integrating at a local level, giving our managers clear ownership of the pools in the markets and ZIP codes they lead. This restructuring accelerates our vision of becoming America's one-stop shop for pool care. By combining our customer file with our new market leadership model, we will strengthen customer relationships and capture significant growth across millions of pool owners in local markets. The new structure enables full service delivery in every store from BOPIS and service appointments to equipment repair and improved PRO fulfillment.

Supported by our vendor partners, we will also launch deeper training ahead of next pool season to elevate our pool expertise nationwide. These actions all fall under our customer centricity pillar that I've mentioned on past earnings calls and are focused on the Leslie's value proposition and targeted customer approach, which will help Leslie's drive traffic and grow our share across the United States.

Our next set of actions are under our convenience pillar and are focused on directly addressing the evolving expectations of today's pool owners who demand service when, where and how they want. To be even more convenient at Leslie's, we are accelerating our proximity to pools competitive advantage and our omnichannel transformation by expanding same-day delivery through our Uber partnership. In our Phoenix test market, new technology integrations cut ship-to-home fulfillment from days to hours and often minutes. We are now scaling this model across Arizona, and we'll continue expanding across the United States through 2026.

Another action we are taking is to build on the pool service and repairs that we provide by expanding our pool maintenance and service offerings in new markets to meet customers' needs. Today, we offer pool service for their equipment in each territory across the country and are looking to grow this service business.

In addition, today, we offer pool maintenance in Northern California, linked to stores in our Sacramento market and have recently added a test market in Orlando, Florida. In our California market, we've experienced strong double-digit sales growth. And overall, we've grown our active customer accounts by double digits as well. Pool maintenance provides a great opportunity for us at Leslie's. Being right there in their own backyard gives us more frequent connections with each of our customers.

At Leslie's, we are the easy one place customers can go for quality products, advice to solve a problem, get service on their pool equipment, reliable, accurate water test or in expanding markets, we help maintain their pool. Under convenience, we also continue to optimize our local fulfillment centers to maximize coverage and efficiency while providing flexibility to better manage inventory and reduce working capital.

Our local fulfillment centers continue to show benefits, improving in-stock rates and accelerating fulfillment speed, especially in high-volume markets. These local fulfillment centers are giving smaller locations the ability to better serve our PRO customers with access to larger PRO items like 50-pound buckets of chlorine tabs or 100-pound buckets of shock. Additionally, they hold long-tail inventory and stores can meet local customers' needs with having the inventory in the market to help meet the local demand.

We look forward to sharing more in the future on how Leslie's will continue to be more convenient and deliver on being customers' one-stop shop for pool care.

Now to discuss the asset utilization pillar, which directly addresses the fixed cost deleverage challenge at Leslie's that we have highlighted on past calls and represents one of our most significant opportunities for operational improvement. For asset utilization, we have used a combination of internal and external resources to evaluate our asset base, to help optimize productivity, drive efficiency, maximize profitability and optimize the debt structure.

Starting with our stores. We first looked at pool proximity as it is a key competitive advantage, then pool density, the number of pools in the market and then the optimal distance between stores with an omnichannel mindset and approach. We also looked at the profitability and performance of each store. And as mentioned, we made the strategic decision to optimize the Leslie's store network.

As I touched on above, we are announcing today that we will be closing 80 to 90 underperforming locations. These stores represent an annual sales impact of approximately $25 million to $35 million, and this decision will yield an annualized net EBITDA improvement of $4 million to $10 million. These locations are across multiple regions across America and are not centralized in one region of the country. For those stores that are closing, we will use a targeted marketing approach to reach out to customers and invite them with a personalized offer to another nearby location and remind them of accessing our portfolio and services online or via our mobile app. These decisive measures will improve our fixed cost structure, enhance EBITDA flow-through and position Leslie's for sustainable profitable growth.

As we reset our store network, we are also streamlining our distribution footprint. In quarter 3, we closed our Denver warehouse and seamlessly shifted volume to other DCs, reducing annual cost by roughly $500,000.

Looking ahead, we will transition to a more efficient 5 DC network in 2026, including the planned closure of our Illinois facility in January, driving another $500,000 in annualized savings. The Illinois location was mainly focused on our e-commerce fulfillment. Our optimized 5 DC network will fulfill e-commerce orders closer to the customer through local DCs and support BOPIS in stores, lowering shipping costs and significantly improving delivery speed across our app, website and marketplace business.

In another action to improve asset utilization, we are continuing to take a precision inventory approach. Under our recently hired Chief Merchandising and Supply Chain Officer, Amy College, we are improving the Leslie's assortment. The first priority in our inventory optimization work is in SKU optimization. We're conducting a comprehensive assortment review to focus on our highest value inventory items, reducing the long tail of SKUs and deepening our focus on the most valuable items that drive most of our sales.

As we enter the 2026 pool season, we are strategically reducing our SKU count by more than 2,000 SKUs, mainly coming from our long tail in e-commerce and marketplace that is fulfilled from our DCs. With the reduction in SKU count in our distribution centers, this enables Leslie's to simplify our go-to-market solutions and our operations. With this reduction, we will improve our annualized EBITDA by $4 million to $5.

Building on SKU optimization, inventory management also remains a key priority. I'm pleased with the focus that the team has put towards inventory optimization in 2025 as it simplifies our operations by ensuring we have the right product at the right place with the right level of product depth.

In 2025, we rationalized our inventory by $26 million, which exceeded our Q3 commitment of $20 million. Even with this inventory reduction, we improved in-stock levels in our top-selling never out SKUs by over 400 basis points compared to 2024. This in-stock performance helped support strong traffic conversion results by 74 basis points in fiscal year 2025. With a clear focus on inventory, SKU and network optimization, we are targeting continued inventory rationalization by another $20 million to $40 million in fiscal year 2026.

As part of our strategic operating review, we continue to be in a process of conducting a thorough assessment of all of our noncore assets. Specific to our Stellar manufacturing facility, it represents a critical vertical integration asset for our key value items like chlorine tabs, and it enables us to compete effectively in the marketplace. Our team is working diligently to drive continued cost productivity at this site, and this will be passed on to the customer in everyday price value. When it comes to our hot tubs and Horizon businesses, we continue to evaluate, and we'll provide a further update on upcoming calls.

In summary, we have a very robust asset optimization plan for Leslie's across our stores, DCs, warehouse, inventory and SKU assortment. These initiatives represent the next phase of our strategic transformation plan, which are focused on strengthening our balance sheet, optimizing our cost structure and delivering on operational performance and rebuilding stakeholder confidence. We recognize the urgency of our situation and are committed to transparent communication as we execute these critical steps to restore Leslie's to profitable growth.

Lastly, in our cost optimization pillar, we are focused on building a more agile and efficient cost structure that supports profitable growth. With a combination of internal and external resources, we have doubled down on our commitment to accelerated savings and are increasing our cost optimization range to $7 million to $12 million. These savings will begin to benefit the business in fiscal 2026.

In summary, these transformative actions represent fundamental changes to how we operate and how we serve our customers. We're building Leslie's to improve our overall value proposition, be more responsive to local market needs while maintaining the scale advantages that make us the industry leader. Our operational and strategic review continues with urgency and discipline. We're assessing performance across our business, our direct and indirect cost structure and other initiatives that we believe will deliver improvements in working capital and profitability.

I would now like to shift to a summary of our latest performance. While we're capping off a challenging year at Leslie's, we were able to deliver fourth quarter sales and adjusted EBITDA ranges at or above the high end of our guidance.

I will now turn the call over to Jeff to provide a detailed review of our financials.

Thank you, Jason. I'm excited to be joining you today as Leslie's new Chief Financial Officer. While I've only been with the company for a short time, I've been impressed by the quality of our team and the dedication I see throughout the organization. I am looking forward to working with everyone as we continue to execute our strategic priorities, and I'm optimistic about the opportunities to help transform the organization.

I'll begin my remarks today with a review of our fourth quarter and full year fiscal 2025 financial results, then cover our liquidity and capital allocation plans and finally, review our outlook for 2026. Net sales for the fourth quarter were $389.2 million and came in above the high end of our guided range. This is compared to $397.9 million in the fourth quarter of the prior year or a 2.2% decline.

As a reminder, 2025 was a 53-week year, which resulted in 1 extra week in the fourth quarter when compared with the prior year. The 53rd week for 2025 contributed an estimated $18.3 million of net sales and resulted in an additional $0.21 loss to EPS and approximately $760,000 of negative EBITDA compared to the prior year's 52-week period.

Same-store sales decreased 6.8% in the fourth quarter on a 13-week basis compared with the same time period of fiscal year 2024. Looking at comparable sales by categories, our chemicals were down approximately 7.1%, and our equipment category was down 7.6% on a 13-week comparable basis. All other departments were down in the quarter, reflecting the tough macroeconomic environment we are operating in and underscores the importance of the strategic initiatives that Jason highlighted in his prepared remarks.

On our last call, Jason outlined our strategy to optimize inventory and end the year in a much healthier position. During the fourth quarter, we successfully executed on this plan, exceeding our goal and ending the year with $208 million in inventory. By reducing inventory $26 million year-over-year and over $100 million in the last 2 years, while significantly increasing our in-stock percentage on our core goods, we continue to focus on the productivity, utilization and return of our investment of working capital.

Gross margin for the fourth quarter increased to 38.6% versus 36% in the prior year period. This increase was primarily driven by favorable vendor rebates as well as favorable freight costs as we continue to focus on maximizing the efficiency of our spend in our distribution network. SG&A increased 50 basis points as a percentage of sales on a year-over-year adjusted basis. The most significant year-over-year increase was in store payroll, where strategic investments were made to ensure that we were adequately staffed during peak selling times.

During the quarter, we recorded a $184 million impairment charge predominantly related to our goodwill due to current business condition as well as partial impairment charges relating to the closure of underperforming stores. We expect to incur further impairment charges in Q1 and Q2 2026 in relation to the closure of stores in the range of $12 million to $17 million and expect to provide updates during our Q1 and Q2 earnings calls.

Net loss for the fourth quarter was $162.8 million or $17.54 per diluted share compared with net loss of $9.9 million or $1.07 per diluted share in the fourth quarter of the prior year. Excluding the charges, adjusted net income in the fourth quarter was $840,000 or $0.09 per diluted share compared with adjusted net income of $4.4 million or $0.47 per diluted share in the fourth quarter of the prior year.

Adjusted EBITDA for the fourth quarter increased to $45.2 million compared with adjusted EBITDA of $43 million in the fourth quarter of 2024.

Shifting now to the full fiscal year. For the full year of 2025, we finished with sales of approximately $1.24 billion and adjusted net loss of $4.70 per basic share. This is compared to sales of approximately $1.33 billion and adjusted net loss of $0.12 per diluted share.

Full year 2025 ending inventory was $208 million compared to $234.3 million at the end of 2024, a decrease of approximately $26 million or 11%. On a 2-year basis, inventory is down over $100 million, while our in-stock percentage on our core SKUs is significantly up. Inventory management will remain a primary focus as we now expect to move more efficiently in and out of season and improve the productivity of our inventory as we continue to rationalize SKUs and vendors.

For the full year 2025, we incurred approximately $25 million of net capital expenditures, primarily relating to ongoing fleet maintenance and technology investments. This represents an over $20 million reduction in capital expenses versus the same time period of the prior year.

Regarding liquidity, we ended the fiscal year with no outstanding borrowings on our line of credit and $752 million of net long-term debt. As of year-end, we had approximately $168 million of availability from cash on hand and borrowings available under our line of credit facility. We used our cash flow generated during the fourth quarter to pay off our line of credit.

Turning now to our guidance. We are adjusting our cadence and will now provide annual net sales and adjusted EBITDA guidance, which we will update quarterly. Our focus will be on longer-term measures being a great retailer and returning Leslie's to a more efficient operating business in 2026. We are focused on executing our strategic pillars to stabilize our business and position Leslie's for long-term value creation. Our path to financial recovery includes taking immediate actions to optimize our cost structure and strengthen our balance sheet.

Let me walk you through the expected financial impact of the initiatives we have outlined and how it will impact our 2026 financial operating plan. We are making structural adjustments to the pricing of our core chemical products to ensure that we are everyday value priced in the market. This investment is expected to impact product gross margins by 100 to 150 basis points, and we expect to execute on these initiatives starting in Q2 2026. To partially offset this investment into pricing, we will drive internal operational efficiency and continue to work with our suppliers and distribution channels to gain further efficiency.

Our store optimization strategy involves closing approximately 80 to 90 underperforming stores. While this will have an annual sales impact of approximately $25 million to $35 million, it is expected to generate net EBITDA improvement of $4 million to $10 million annually once they are fully completed by the end of Q2 2026.

During the first half of 2026, we will undertake a comprehensive expense reduction initiative to align our costs with the trends of the business. These efforts will include the renegotiation of all major contracts with our vendors, suppliers and landlords and continued review of our noncore assets of the business.

We strongly believe that we can leverage our SG&A to further enhance the profitability of the company as we continue to focus our efforts on driving traffic and transactions through strategic investments in pricing and meeting the customer with the skill and expertise that they expect from Leslie's.

Our DC network optimization is well underway. We closed our Denver warehouse during the third quarter and expect this to reduce annual cost by approximately $500,000 annually. We will close an additional distribution center, which will help make our supply chain more efficient. This additional closure is expected to provide $500,000 of savings annually once fully completed in January.

We are committed to disciplined inventory management. During fiscal 2025, we reduced inventory levels by $26 million and anticipate reducing another $20 million to $40 million in fiscal 2026 without compromising our in-stock rates on our core products. This will be done through the cleanup of slow-moving inventory that is not providing the gross margin return on investment that we would like to see in certain categories. In cleaning up this inventory, we expect to incur a roughly 100 to 200 basis point onetime reduction to annualized gross margins as we move through the product. We anticipate that this decline will be most pronounced in Q1, Q2 and Q3 as we move through products that are no longer sellable due to age or condition and as we sell through products at discounts during peak selling season.

Our SKU rationalization initiative involves eliminating over 2,000 SKUs, driving cost and inventory efficiency. We expect this to lead to $4 million to $5 million in incremental EBITDA savings as we focus our assortment on a true dead net profit metric and the ultimate profitability of every SKU we sell. In total, these cost savings and pricing investments that are needed to be made to the business amount to a net benefit to EBITDA of approximately $7 million to $12 million when fully annualized. And we are carefully evaluating and strongly believe that there are other significant opportunities to further improve efficiencies and profitability in fiscal 2026.

Turning to our outlook for fiscal 2026. We are confident in our ability to execute and drive traffic and sales through focusing on meeting the customer with the right product in the right place at the right time and for the right price. We have identified significant cost savings opportunities across our operations. While we are mindful of the uncertain macroeconomic environment and its potential impact on consumer spending, our proactive approach to customer focus and cost management positions us well to navigate this dynamic environment.

As is typical in our business, we anticipate generating the large majority of our sales and earnings during the second half of the year, driven by the seasonal nature of our industry.

For fiscal 2026, which is a 52-week year compared to a 53-week year in fiscal 2025, we expect sales of $1.1 billion to $1.25 billion and adjusted EBITDA of $55 million to $75 million. Included in our guide is the reduction in sales and increase in EBITDA relating to store closures announced today. Also included in our guide are the strategic pricing initiatives that we have discussed as well as all associated cost savings initiatives noted within today's call. We have not assumed any impacts from abnormal weather patterns or further deterioration in the current macroeconomic environment.

We expect CapEx to be in the range of $20 million to $25 million in 2026 as we focus on maintenance and productivity investments as well as providing positive free cash flow for fiscal year '26. As a reminder, while we are not providing guidance for our Q1 period, we expect to experience meaningful headwinds in the business as we anniversary the hurricane impacts felt during Q1 2025, which drove a significant increase in our business, which we are seeing materialize in our actuals as we move through the Q1 2026 period. We estimate that these events drove an incremental 2% to 4% increase in our Q1 2025 same-store sales.

Incremental to all the work that Leslie's team has done to prepare and execute on our strategic pillars, we periodically engage advisers to identify opportunities to enhance profitability, optimize our store base and distribution network and advance our strategic initiatives. At this time, we are currently working with Kirkland & Ellis, Centerview Partners, BRG and A&G Real Estate, among others. We are energized by the operating initiatives currently underway, which on top of a now stronger and more profitable distribution network and store base will position the company for long-term success.

In closing, we are confident in our strategic direction and our ability to deliver sustainable value for our shareholders. We are taking decisive actions to improve profitability and strengthen our balance sheet. We will remain disciplined with expenses and inventory management, which combined with the cost optimization opportunities we have identified, positions Leslie's for improved performance going forward.

I will now turn the call back over to Jason for closing remarks.

Thanks, Jeff. I want to take this moment to summarize our actions, which are not just operational improvements, but represent a fundamental reimagining of how Leslie's serves our customers and communities. Through customer centricity, we're returning to our roots as the local pool care expert that customers trust. We've taken decisive action to improve our value proposition by implementing targeted strategies and price value on key items, targeted marketing and a market leadership approach. Through convenience, we're meeting customers where and when they need us, with omnichannel capabilities and comprehensive service offerings. Through asset utilization, we're optimizing every element of our footprint to drive efficiency and profitability.

We've conducted a comprehensive review and are executing on optimization opportunities that will structurally improve our cost base and efficiency. And through cost optimization, we're building the agile cost structure necessary for sustainable growth. We've identified significant savings opportunities and are moving with urgency to remove unnecessary costs while preserving our ability to serve our customers. These 4 pillars collectively position Leslie's for long-term profitable growth while maintaining our commitment to maximizing cash flow, reducing debt and building a stronger Leslie's for the future.

We look forward to sharing more details on our progress and the path forward on future calls. Most importantly, I want to express my deep gratitude to our entire Leslie's team. Your unwavering flexibility and dedication to embracing our new strategic direction has been remarkable. You've shown incredible resilience, adapted quickly to new ways of working and maintained our commitment to serving our customers. Your ability to execute while we transform, to embrace change while maintaining operational excellence and to stay focused on our long-term vision while managing day-to-day dynamics has been truly inspiring.

This transformation is only possible because of your hard work and commitment. Thank you for your continued dedication as we build a stronger Leslie's together.

Now I'd like to pass the call back to the operator.

[Operator Instructions] Our first question comes from Justin Kleber with Baird.

First one, Jason, just for you. You mentioned rebuilding stakeholder confidence. So I'm curious if your supplier partners, are they fully supporting your turnaround efforts? Are you getting the right allocation of product you need to serve the customer? And are you getting that at normal payment terms? That's my first question.

Yes. Thanks so much for the question, Justin. Yes, our vendor partners have been great partners with us. And as we continue to build our transformation here at Leslie's, that has been key for us in terms of success and having the confidence to build the plan that we're moving towards with the focus on the customer and making sure we have everything from -- and delivering against the in-stock position that we have.

I think I mentioned in the call, is like we have just -- the strength of our in-stocks has been very key, with an increase of over 400 basis points improvement in our in-stocks across the network and even our key value items. So this -- it's been a partnership that we greatly appreciate.

Justin, it's Jeff. Good to talk with you here. One thing I'll add on that is just as we -- as you hear about the SKU optimization and rationalization, what that helps us do is provide better forecast to the vendor partners, which they really appreciate. So we can plan with them a lot better to get the inventory when we want it, when we need it and make sure it's on time and work with them. So from that aspect, which is really critical compared to how we used to work with them in the past.

Got it. Okay. That makes sense, and that's good to hear. And then just a question for you, Jeff, on the EBITDA guide for this year, how much of that do you expect you can convert into free cash this year? Just asking directionally as you did a similar amount of EBITDA in fiscal '25, and it looks like you burned through a bit of cash. So just curious, any directional help you can give us on free cash conversion this year would be helpful.

Yes. Well, we didn't provide a free cash flow guide. I can -- I'll tell you that at the midpoint of the guide, we're assuming free cash flow positivity. So up and down from there, it could vary on where we end up, but the midpoint does assume that we're free cash flow positive for the year.

Our next question comes from Jonathan Matuszewski with Jefferies.

I had 2 questions. And the first one was on pricing. I appreciate the discussion in terms of plans to kind of reinvest back in price to be more competitive. I was just curious if you could help maybe frame where you see the most opportunity across kind of chemicals versus equipment? And just trying to understand, do the price investments you're doing this year get you back to historical parity? Or is the go-forward pricing for Leslie's now going to be a bit more kind of value-oriented? Just trying to get a sense of directionally where we're going with pricing. That's my first question.

Yes. Thanks for the question. Obviously, from a pricing standpoint this year, we have spent -- that's been a key area of focus for us, making sure that we have focus on making sure where do we want to make sure that we have that level of focus. For price optimization, we've identified that it's predominantly on our key value items. Those are predominantly in our chemical area that we're focused. And the good thing is we enjoy being -- having vertical integration across our portfolio here at Leslie's, specifically on sort of chlorine tabs. And that's an area of focus that we're going to continue to put on, and that's where we're going to be investing back.

From a pricing strategy overall, we've done a variety of different tests in the marketplace, and we continue to hold on the strategy that we want to make sure that we are driving -- be comparable to that of other specialty and ahead of that of -- slightly ahead of that of big box and other major retailers. And that changed a lot this year because in quarter 3, we saw some aggressiveness in pricing that pushed into quarter 4, and we reacted, and we saw some good performance from it. So that's exactly where we're going to be investing. We plan on continuing to keep that strategy going forward. It's really about the everyday focus that we're going to be bringing to the business, and that's the spot.

Okay. That's helpful. And then my follow-up question, just on kind of the EBITDA margin guidance. Looks like maybe just over 0.5 point of margin expansion at the midpoint. Just trying to get a sense of maybe P&L geography a bit. Is it fair to expect, given the price investments for gross margin to be down year-over-year and the EBITDA margin expansion is being largely driven by SG&A operating expense rationalization? Or just want to get a sense for that framework.

Yes, Jonathan, great question. This is Jeff. Good to meet you. As we think about that, you're right, we talked about there's margin degradation built in into the guide. I think I gave 100 to 150 basis points due to the pricing investment. We're going to look at ways to offset that in gross margin, whether that be through freight expense reduction and/or occupancy costs, which goes up into COGS for Leslie's. We'll also look at SG&A.

As we talked about on the call, we're identifying and are currently working hard to find ways to optimize our cost base and bring down the amount of SG&A that we're running through as a percentage of sales. So as you flow it down to EBITDA, you're seeing a mix of both kind of gross margin and an offset in SG&A that gives you that slight increase on a year-over-year basis.

Our next question comes from David Bellinger with Mizuho Securities.

First one on the store closures. You called out a $25 million to $35 million impact to revenue. That seems like a pretty low average unit volume on those units, even if it's just a partial year. Is there potentially another tranche of locations you could close on top of the 80 to 90 that are still well below the company average? Is there a larger subset of stores? Or is there something else you could tap into throughout 2026 if this sales recovery doesn't materialize into next year?

Yes, David, it's Jeff. Great question. As we did this optimization exercise, and we looked at the profitability of these stores, you're spot on that they were a low sales and obviously not making profitability in terms of a 4-wall EBITDA basis. As we peel these ones back, I'm happy to say that from here, the group of stores, everything for the most part is profitable.

If sales continue to decline, I think there's further opportunity to continue to look at stores that may be on the line and look at potential closures in the future. That's something that as a good retailer, we're always going to be looking at. But for right now, this takes out the majority of the unprofitable stores that we have in the chain on a 4-wall basis.

Got it. And then maybe a 2-part follow-up on the lost customers. I think you mentioned $160,000 lost retail customers. Do you have a sense of where those customers went? And second piece is on getting them back, the targeted marketing, the price investments, is there a way to quantify just how much that should cost in order to regain those lost customers?

Yes, great question. So firstly, the net loss of the customers was $160,000, as you mentioned. The one thing we know about these customers is about 80% of them were switchers. So the great thing about these customers is they are current Pool Perks -- they're Pool Perks members. So we know exactly who they are, where they -- what stores they bought in, where they live in terms of their pools and the communities they're in. And honestly and candidly, also what's the reason why they left because we know these are highly conscious towards -- they like our expertise. They like the water testing, but they have an area of opportunity when it comes to price value.

So we are going to make sure that we are specifically targeting them with marketing efforts. And because of that level of precision that we have in targeting them, it becomes a rather efficient marketing spend because we can specifically target them with customized offers to bring them back. And then when they come back, we can then use our consultative approach in our stores to help build the basket and keep them on as customers. So that's what we are doing, and that's what we're currently doing in the marketplace.

Yes, David, just to add a little more color in terms of how we're looking at 2026 guide, the guide does not imply an increase in marketing spend compared to where we've historically been. It's a redeployment of existing dollars and putting them into a more efficient channel that generates a higher ROA. So we're not -- the guide doesn't have an increase in marketing spend. We're keeping it flattish. It's a shift in effectiveness of marketing spend.

Our next question comes from Simeon Gutman with Morgan Stanley.

This is Lauren Ng on for Simeon. First, can you comment more on the competitive dynamics you saw in Q4 and maybe how you're thinking about your competitive positioning for '26?

Yes. I would say from a competitive dynamics, if I step back to quarter 3, in quarter 3, we saw heightened competitive pricing in the marketplace. We had a bit of a late season in quarter 3. So because of that, we had excess supply in the marketplace. And when we saw that excess supply, we saw some price activity in the market. That carried itself through quarter 4. We obviously -- we reacted to that and made sure that we were aggressive in the -- we were also aggressive in the marketplace on price to make sure that we could remain competitive.

We've seen sequential improvement in our performance from quarter 3 to quarter 4. And -- but that's why we also have the insight around making sure that we are sharper on our key value items, and that's why we're committed to drive improvement going forward and are confident in our actions that we're going to do to drive share performance in the future.

Okay. And just a follow-up. Can you give an overall assessment of your strategic pillar framework? Like what have been your biggest learnings? What's gone right versus maybe wrong? And how should we think about it for '26?

Yes. So thanks for that question. I would say the great -- the first thing about our strategic pillar framework is it has provided the unification across our team to be very focused on a common vision across the organization as we want to be the one-stop shop for pool care across America. And I feel very good, especially in this call and what we've announced today around our actions that we're taking across those key pillars of cost optimization and asset utilization and convenience actions we put in place.

I think the biggest area of opportunity that we need to make sure that we're doing to bring our market share back in the marketplace is really by embracing the customer and winning in the residential business and building traffic. And that's why we're making the clear actions of investment around value for the customer so that we can win by improving our price value on our key value items. That's our area of opportunity.

Ladies and gentlemen, thank you for your participation. This concludes our question-and-answer session as well as today's conference. Please disconnect your lines, and have a wonderful day.

Good afternoon, everyone, and welcome to the Fiscal Third Quarter 2025 Earnings Conference Call for Leslie's. [Operator Instructions] And as a reminder, this conference call is being recorded and will be available for replay later today on the company's Investor Relations website. I would now like to turn the call over to Elizabeth Eisleben, Senior Vice President, Investor and Public Relations. Please go ahead, ma'am.

Good afternoon, and thank you for joining us to discuss our fiscal third quarter ended June 28. I'm joined today by Jason McDonell, our Chief Executive Officer; and Anthony Iskander, our Interim Chief Financial Officer and Treasurer. Following their prepared remarks, we will open the call to address your questions. As a reminder, our comments today may include forward-looking statements, which are subject to risks and uncertainties. Actual results may differ materially from those discussed. Please refer to our most recent 10-K, 10-Q and other SEC filings for more information.

Additionally, we will reference certain non-GAAP financial measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in our earnings press release and on our Investor Relations website. Now I will turn the call over to Jason.

Thanks, Elisabeth. I want to begin by thanking our entire team for their hard work and resilience during what proved to be a challenging third quarter. As we face persistent macro pressures, unusual weather patterns across key markets and an increasingly competitive landscape, the team responded with urgency, focus and a relentless commitment to transform Leslie's. Before we discuss our third quarter performance and actions we're taking to accelerate our transformation, I want to welcome Amy College, who joined Leslie's last month as our Chief Merchandising and Supply Chain Officer.

In addition to her significant retail, merchandising and general management experience, Amy brings a unique blend of strategic vision and operational expertise that I am confident will help us accelerate our progress and position Leslie's for long-term profitable growth. As you saw from our preliminary results from the fiscal third quarter, we faced significant challenges in both our top and bottom line that were below our expectations. The much cooler temperatures and significant precipitation across our top geographies disrupted the peak pool season, resulting in quarterly sales down 12% compared to the prior year quarter. In addition, later in the quarter, we saw heightened competitive pressure in certain categories. I will discuss these in more detail shortly.

As customers delayed pool openings, we saw a meaningful reduction in our residential traffic in stores of nearly 11% in the quarter. Moving to our third quarter results. As mentioned in prior quarters, we are aiming to perform while we transform. During this quarter, our team acted with urgency to offset headwinds we faced as a result of the softer top line and mitigate the bottom line impacts where possible, including making tough but necessary decisions around cost control and strategically deferring select investments to protect our financial performance. As I mentioned briefly at the start of this call, we had significant headwinds to retail traffic and residential sales in the quarter.

With that said, through the expertise of our store team and improvement in reliability, we continue to deliver growth on conversion rate, which improved approximately 70 basis points versus the prior year period. In addition, utilizing our AccuBlue water test technology, after a water test is performed in store, conversion rate increased by more than 550 basis points versus the prior year period. While sales were challenged through targeted efforts on growth and expansion, we are improving our customer proposition with the Pro segment. I am confident that our team's disciplined approach to enhancing relationships with existing Pro customers while also expanding to new customers can help us return to growth in this business. Importantly, the team has already surpassed the full year goal for new Pro partner contracts, increasing our total Pro partner contracts by 12% in the first 3 quarters compared to the prior year period.

As we look at our top line in more detail, it is important to look at both category and regional performance to fully understand the impact that weather had in the quarter. Specific to category performance, chemical sales, including both core and specialty chemicals were down nearly 15% as a direct result of the cooler temperatures experienced across much of the United States. For instance, with pool water temperatures below 70 degrees, this has a direct impact on the chemical needs of a pool. Specifically, the demand for specialty chemicals such as algaecide is significantly reduced. In the quarter, algaecide and water clarifiers were down 22% and 19%, respectively. Moving to regional performance. The impact of cooler temperatures was most evident in the non-Sunbelt markets, predominantly in our North region. Historically, the North represents a large portion of our third quarter sales due to the concentration of peak demand in this region.

Of note, during the 2 weeks surrounding Memorial Day weekend, which is historically the height of the season for this region, sales were down approximately 30% as temperatures were below average. With the start of what is historically peak season being disrupted in most areas of the country, the pricing dynamics in our industry changed late in our third quarter. We believe the aggressive pricing action on key SKUs late in the quarter was a result of competitors working to reduce excess inventories on hand throughout the industry. This had a direct impact on our residential sales as we closed the quarter, and we believe led to residential share loss. With all that said, the unique industry dynamics at play this season related to weather and the inventory levels in the market clearly highlighted price value opportunities in some of our categories. Therefore, we are acting with urgency and conducting deep customer research to thoughtfully address these opportunities while working to recapture and grow Leslie's share.

Now shifting to transform and our strategic initiatives underway. As we have said before, we are acting with urgency to transform our business. We remain centered on 4 strategic pillars: customer centricity, convenience, asset utilization and cost optimization. Despite top line challenges in the quarter, we are beginning to see encouraging signs that the foundational changes we are making are beginning to take hold. Let me walk you through some of our early progress under each pillar as well as additional opportunities we have identified to help accelerate profitable growth in our business. Starting with our pillars of customer centricity and convenience. As we introduced last quarter, we are moving forward with the launch of same-day delivery service with our Uber partnership. Our team has been working diligently on the technology integration and are excited for our test market to go live, furthering our transformation as an omnichannel retailer.

With a firm commitment to improve customer experience and Leslie's overall value proposition, we successfully launched our enhanced Pool Perks loyalty program in the third quarter. Through the program enhancements, we are improving our targeted marketing efforts as well as personalized communications to build deeper relationships with our customers. We expect this tiered program to help increase share of wallet with existing customers while attracting new pool owners to Leslie's. Importantly, the introduction of tiers provides a cost savings while allowing us to reinvest in marketing initiatives to drive traffic and incentivize customers to increase their loyalty with Leslie's. In addition to our longer-term customer centricity pillar, we recognize the urgency with which we must act and improve traffic trends at Leslie's.

As the experts in pool care, coupled with our focus on personalization, we are providing custom offers on our quality products while highlighting our free water testing capabilities through our AccuBlue technology. This includes leveraging the expertise of our store team members as well as our zero-party data capability to connect directly with customers to increase traffic. Further, through our detailed customer work, which includes a mix of qualitative and quantitative research on a localized level, we have identified and began implementing regional offers to meet the needs of their specific pool market. I'm pleased with the team's work in this critical area and look forward to sharing more on the improvement of our traffic trajectory.

Moving to the next pillar of asset utilization. We have seen continued benefits from our local fulfillment centers. We believe they are improving in-stock rates and accelerating fulfillment speed, especially in high-volume markets. Importantly, they also provide us the flexibility to better manage inventory and reduce working capital. Our team remains committed to optimizing inventory across our asset base, including the continued focus on our never-out SKUs that are most critical for serving both residential and professional customers. In stores in the third quarter, we achieved more than 99% in-stock levels in our top-selling never-out SKUs. This is a 140 basis point improvement compared with the prior year period and is a key factor in our ability to improve conversion rates. Importantly, while improving in-stock rates, we continue to reduce inventory by 9.6% versus the prior year period.

Through further progress in the third quarter, we are increasing our previous estimate for inventory reduction this year by $5 million and now expect to end the year at least $20 million lower than the prior year-end. We are confident this will help improve cash flow and support our top capital priority of reducing debt. Finally, as we look to optimize all assets and drive efficiency, in the third quarter, we began the process of closing our warehouse in Denver, which we expect to be completed in the coming weeks. Once this is closed, we believe we can seamlessly transfer shipping demand to other distribution centers and reduce annual costs by approximately $800,000. As mentioned in our prerelease, our comprehensive operational and strategic review includes the productivity assessment of all assets across Leslie's footprint. Looking forward, we expect to share more on the optimization of all assets to help improve our omnichannel efficiency. including plans to reduce our fixed cost base, which is the primary driver of our deleverage. In addition, this review includes the evaluation of other core and noncore assets to help optimize productivity, drive efficiency and maximize profitability. We look forward to sharing more on the optimization of assets to position Leslie's for long-term growth.

Now on our fourth pillar of cost optimization. I'm pleased with the early progress. We have already identified savings in indirect procurement and are continuing to evaluate our entire asset base for further efficiency opportunities. We brought on additional external resources in the quarter that are helping us supplement internal talent and accelerate this critical initiative to identify and remove excess direct and indirect costs from the business. While the quarter presented challenges, we are taking action swiftly and decisively. We remain focused on executing our strategy with discipline, continuing to improve conversion, optimizing inventory and leaning into digital capabilities. In addition, our robust strategic and operational review is focused on assessing the performance across our business. Our direct and indirect cost structure as well as other initiatives we believe helps deliver improvements in working capital and profitability.

We are committed to the acceleration of this review and plan to share details on additional actions we're taking following the completion of the review in the coming months. Most importantly, we remain committed to maximizing cash flow, reducing debt and building a stronger Leslie's for long-term profitable growth. We expect to share more on each of these areas discussed today, including the corrective actions and expected financial benefits for the business in our November earnings call. There is significant opportunity ahead for Leslie's, and we look forward to sharing the path forward with enhanced transparency. Now I will turn the call over to Tony.

Thanks, Jason, and good afternoon. I want to reiterate what you heard from Jason and express my gratitude to the team for their diligence in the quarter, taking action to mitigate costs despite the difficult sales environment. We reported net sales of $500 million in our third quarter, down 12.2% versus the prior year period, primarily driven by weather-related headwinds, reduced traffic and heightened competitive pressure, as you heard from Jason. Gross profit was $197.9 million compared with $228.8 million in the prior year. Gross margin in the quarter declined 62 basis points year-over-year, primarily driven by inventory adjustments and occupancy costs, partially offset by improved product margin and lower distribution expenses. SG&A was $129.6 million compared with $131.1 million in the third quarter of the prior year. The year-over-year reduction was primarily due to variable expenses associated with lower sales, including store labor and e-commerce-related fees.

On a rate basis, SG&A as a percent of sales were elevated, primarily due to a softer top line. Turning to working capital. We ended the quarter with inventory of $273.2 million, which was down approximately $29 million or 9.6% year-over-year. Our precision inventory strategy and continued investment in analytics, coupled with our LFCs are helping to build healthier inventory positioning, which we believe will continue to benefit cash flow. As we highlighted in our pre-release last week, we paid the revolver balance of $20 million in full subsequent to quarter end. We currently have no borrowings under our revolving credit facility and reducing debt remains our top capital allocation priority. In addition, as Jason mentioned, we are increasing our inventory reduction commitment and now expect to reduce inventory by at least $20 million year-over-year with additional runway into 2026.

Before turning to balance of year expectations, I want to share an update on our cash and liquidity. We ended the quarter with $42.7 million in cash. And after repaying the remaining outstanding balance on the revolver, we remain confident in our ability to execute the transformation of Leslie's, and we believe we have sufficient liquidity to enable it. Based on year-to-date performance and current business trends, we now expect full year sales of $1.210 billion to $1.235 billion. Net loss of $57 million to $65 million, adjusted net loss of $31 million to $39 million and adjusted EBITDA in the range of $50 million to $60 million. As a reminder, our fiscal 2025 includes a 53rd week and is included in our expectations provided today. We expect capital spend of approximately $30 million. Now I will turn the call back to Jason for closing thoughts.

Thanks, Tony. We recognize that we are operating in a tough environment, but I remain confident in our path forward. Our team continues to rise to the challenge, taking ownership, driving change and serving our customers with care. As we move into the final quarter of the fiscal year, we remain focused on executing with discipline, maximizing peak season performance and driving incremental progress across our transformation agenda. Thank you for your continued support and time today. We will now open the line for your questions.

[Operator Instructions] We'll go first this afternoon to Kate McShane of Goldman Sachs.

I wanted to ask a little bit more about what happened when you started to see the promotions pick up in the third quarter. Did you not meet the promotional environment when competitors started to get more aggressive on price? And if you did, just what did that look like? And do you have any commentary on what quarter-to-date trends look like? And if you've seen any improvement since the third quarter?

Yes. Thanks, Kate, for the question. Overall, in the quarter, as I mentioned, one of the key things that we identified and we saw going through the quarter is the impact of weather in the quarter and obviously, the impact of the excess inventories when we have a bit of a disruptive weather season. In the quarter, overall, on a price per pound basis, we made investments throughout the quarter mid-single digits in price. but we also saw some aggressive pricing still in the marketplace. So we still have an opportunity for us as we look forward to take a really good look at the strategic pricing approach as to how we look at the business going forward. It's one of those items that we are putting into -- putting a specific plan against. And I mentioned some of that in my -- in the prerecorded comments. We've done obviously some good amount of research and discipline and understanding, looking at our zero party data and how do we be more personalized with each one of our customers and then being very local and regional in how we do it.

As it goes for in this quarter so far, we're seeing an improvement in terms of traffic. We've actually -- but that being said, it's not where we need it to be and an improvement versus traffic versus -- the versus quarter 3, but it is not where we need it to be. So we are putting those actions in place and looking to try to -- looking to change the trajectory of our traffic going forward. And the team is very committed to that and acting with urgency and diligence.

We go next now to Jonathan Matuszewski of Jefferies.

My first one was a follow-up just on Kate's question. I think you mentioned the mid-single-digit price investment on the chemical side. I wanted to better understand what you're seeing in terms of competitive pressures maybe on the equipment side of the business. That's my first question.

Yes, from an equipment standpoint, we were down in the quarter, obviously, with traffic being down as we articulated specifically on the residential side of the business. From an equipment standpoint, we sort of saw a difference in 2 areas from an equipment performance standpoint. One is the -- is our core equipment basis was down mid-single digits. We were -- where we saw the total equipment being down similar to where we were in residential number was mainly through a lot of the automatic pool cleaners and some of those other areas where we saw some declines. So not as challenged as chemicals, as we talked about in our pre-comments, mainly because of weather. But that being said, the traffic obviously did hurt us on some of those core elements in equipment.

Understood. And then just a question on gross margin. Obviously, some of these results are being impacted by the promotional intensity in the industry. But maybe if you could just give us a sense of kind of the recovery in gross margin going forward as we look out to next year. I know you're not ready to provide guidance for the fiscal year, but just buckets that we should think about in terms of helping the trajectory of the current gross margin move towards historical norms over time.

Yes. Jonathan, this is Tony. So a couple of things on that. So one, as we saw and we've talked about in the past, we have a fixed cost deleverage that we deal with in this business. And as sales declined, we saw just a decline in our overall gross margin rate. what we're doing now is we've talked a lot over the last several quarters around our asset utilization pillar. Jason made mention of that during our prepared remarks. We do know that we have costs to take out in this business, and we will address those as we continue to assess the overall network of our company.

Yes. So as we articulated earlier in prior elements, we've had 2 key pillars that were critical to us in our transformation. One was the asset utilization pillar. The other one is the cost optimization pillar. And what's critical about those items is we believe that we have a significant amount of fixed cost deleverage within the P&L. And therefore, we need to make sure that we're putting actions in place to do it. And that's why we mentioned in our prepared remarks, the strategic review that we're doing, both with our internal resources, but also supplementing with external resources to help build that build that plan and act on that plan and work quickly to put those actions in place, and we look forward to be sharing that in the November meeting.

We'll go next now to Steven Forbes with Guggenheim.

Maybe just a higher-level question, right? As you look back on the third quarter performance here, I guess, externally, looking at the performance versus others that have reported, I think the question right is, like is the business executing, I guess, in the field at the level it should? Or is there opportunity to sort of improve field level execution? Like where are the biggest areas to sort of close the market share gap? Or as you sort of said before, is it very much just price value proposition?

Yes. Thanks for the question. One of the key pieces I'm very pleased with is the team's response to the executional excellence in the marketplace, challenged with some key areas that we were putting in place. So we asked the team to make sure that we drive for a much better in-stock performance, and we've been in such a great position all year in terms of our level of in-stocks at greater than 99% around our never-out performance. Our conversion rates in the stores and then also with water test and post the water test conversion, that's all in the store from an execution standpoint, and I feel very good about that as well as I'm really pleased as we continue to monitor NPS scores and how we are connecting with customers and get feedback from customers, I think that's -- we're doing well there.

For us, to your point, Steve, as we -- for us is we need to make sure that we are doing everything we can to really change the trajectory of our traffic. And we believe the combination of truly the value equation by looking at it as a numerator and a denominator. Obviously, the numerator is how do we make sure that we're communicating the great values that we provide to -- for Leslie's to our customers in a very meaningful way, such as the expertise that each one of those store members is bringing at store level, the quality of our water testing, our in-store experience, the product quality that we have and at the same time, taking a strategic pricing approach. And the strategic pricing approach is where it is maybe more competitive on some SKUs, we're going to take a full basket approach. And that's one of the benefits from an execution standpoint of our field sales team because they can really -- as we're looking to make sure that we're really competitive on some key SKUs, they can also help in terms of building that basket. So -- it's a total value proposition, and I'm really pleased with the execution. We just have to make sure that we're converting that to increase in traffic.

And maybe following up on that value proposition comment, right? We're sort of in a net inflationary environment for goods pretty broadly. Clearly, you made the investment in chemicals, right, during the quarter, pricing-wise. But any sort of way to frame up how your Leslie's outlook for average unit cost or product cost is going to trend here versus sort of the need for investment? I mean, are there other funding mechanisms? Or is the funding for the investment solely going to be in the back of Leslie's.

Hi, Steven, it's Tony. There's a couple of things in that. So one, I'll go back to some of our strategic pillars, specifically our asset utilization. As we focus in on our fixed cost and the high deleverage that we've seen, we believe that will give us the benefit in certain areas to -- that will benefit price that will help the value proposition while we continue to grow the business.

We'll go next now to Shaun Calnan of Bank of America.

I just wanted to focus on market share a little bit here. So sales were down a little more than we expected even with the weather headwinds and some of that could be geography. But do you think pool owners are just moving away from DIY towards the Pro? Or are you seeing any changes in buying patterns from the DIY customer?

I do not -- so from a market share standpoint that you're asking in terms of the development of Pro or DIY, there's nothing from a marketplace telling me that there's a difference in migration between those 2 channels necessarily. For us, in particular, I'm pleased with the progress the team is making on our Pro business. If you remember the last couple of quarters, I mentioned that we were putting a specific focus in that area where we had 100 Pro stores out there in the marketplace, and we're making sure that we're going after Pro customers in all 1,000 stores. We've increased our Pro contracts by about 12%, and the team is making really good efforts with that. And then it links to our strategic priorities around building the -- actually shifting some of the stores to LFCs so that we can make sure that our never-outs are good for our Pro customer and our in-stocks are there. So we feel good there.

It's the residential side that we believe is just -- is our area of opportunity. And that's the spot that we are making sure we're putting the action plans in place with and literally leveraging our Pool Perks program. We have over 85% of our transactions are through our loyalty program. We have the ability to get very customized in terms of our offers. So I'm not seeing a difference in Pro versus DIY there, but for us, our actions are clear and one that we're focused on with urgency.

Okay. Got it. And then the guidance implies that 4Q sales are down about 7% at the midpoint. Can you just talk about some of those drivers? And is that where sales are currently trending? Or do you expect them to improve or get worse throughout the summer?

Hey, Shaun, it's Tony. So our current expectations for the full year contemplate what we are seeing in the fourth quarter and opportunity that we can capture within the quarter as well. So obviously, we're not pleased with our performance, but we are focused in on the fundamentals that we need to for the balance of the year, many of which Jason mentioned in his prepared remarks.

We go next now to Ryan Merkel of William Blair.

I wanted to start with a big picture question. What is your forecast for the pool retail industry sales in '25? I'm just trying to get a sense of how much share loss there might be this year.

Yes. Ryan, it's Tony. Good to talk to you again. So we've looked at a couple of things. So for us, in terms of market share, you heard Jason's comment just a second ago. But really, as we look at the market, we looked at it from both the weather analytics and impact and then the value proposition that Jason mentioned. And we've modeled the expectations for the balance of the year around both of those, what we see in our current business trends and what we're expecting in terms of just pools in general for the proximity to our stores over the next several weeks.

Okay. So just to clarify, your view is that the industry sales this year are down almost 10%, high single digits?

No, no. If you look at ours and you take in the commentary that we put in based on where we saw weather impacts versus value price proposition, it would be more single -- low single digit -- low to mid-single-digit decline, not 10% or more.

Got it. Okay. And then you mentioned reducing costs, you're cutting labor hours. How much cost do you plan to take out in '25? And you mentioned closing the DC. Are you planning store closures?

Yes. So we reacted really well. Our team took the opportunity and reacted when we saw sales decline in the quarter, similar to Q2 as well. And we are not contemplating store closures in this year and those are not built into our current expectations or guide that we've provided. What we've provided is a very rigorous view of what we expect to achieve for the balance of the year. There's the additional $5 million to $10 million that we've talked about in cost optimization, and we expect to achieve those beginning next year.

We go next now to Simeon Gutman of Morgan Stanley.

This is Lauren Ng on for Simeon. Our first question is around leverage. Your leverage ratio is now in the low double digits. Just curious how this is maybe impacting your ability to execute on the plan you want and any thoughts around there?

Yes. Lauren, so a couple of things on that. So we are focused in on our top capital allocation priority, which is reducing our debt. To do so, we have to work on many of the strategic pillars that we are working with urgency, including our cost optimization and including our network optimization through our asset utilization pillars. We are focused on those, as you saw during Q3, while we are not pleased with the results, we are pleased with our team's ability to react quick to take out excess costs where we did not need to. We continue to focus in other areas. Jason also provided in his prepared remarks, the areas where we bought in extra help to help achieve these and accelerate these initiatives. And we believe in these initiatives under our 4 strategic pillars to drive long-term growth for the business.

And I think building off the prior question and on this question is in regards to us making sure that why we put those 4 key strategic pillars out there is we need to make sure that we are doing the due diligence and taking this with urgency on the review around some of those key items, especially in the areas of asset utilization and in cost optimization. That being said also around direct change in the trajectory in traffic. We understand the importance of improving the flow-through from a P&L standpoint to EBITDA as well as the importance, obviously, to deliver against the top capital priority of paying down the debt. We look forward to sharing a road map and a view of this in November in our November meeting.

Yes. And Lauren, one thing I would see on top of that is we continue to maintain sufficient liquidity to meet all of our liabilities. We have -- like we said, we repaid the $20 million of the revolver subsequent to Q3, and we began the year with $109 million. Couple that with a full revolver availability as needed, we believe we have the liquidity we need to execute on this transformation agenda.

Okay. Great. That's helpful. And our follow-up is, are you seeing any supply constraints? And are you getting the inventory you want? Just any color around this?

We've had minimal in terms of what we've been doing. Anything that you see in regards to the commitments we're making regarding our inventory has been something with the specific efforts that we are making in the market -- in the field and with our type of organization as being inventory optimization -- from an inventory optimization standpoint. So I'm really proud of the teams. The teams have had the challenge of how do we improve in-stocks at a great rate, at the same time, continue to drive inventory optimization. And as Tony mentioned, we were down in the quarter, I think, 9.6% in inventory, down $29 million. And then in addition, we just moved up our -- how much inventory reduction we're going to do on the year from $15 million to $20 million. That has not -- that has to do with purposeful actions here at Leslie's versus anything external in terms of supplier fill.

We go next now to Justin Kleber of Baird.

First one for me. Just I know weather was not helpful during the quarter, particularly in these northern markets. So can you comment on how sales performed in these year-round markets like the Sunbelt region, where weather was presumably less of an issue for you?

There's -- as mentioned in the prepared remarks and as you know, is that the North was obviously much cooler in temperature as you even got through Memorial Day. What we even found in some of the Sunbelt region is we saw cooler temperatures than usual in a variety of different key locations in the Sunbelt as well. So we did get improved performance in some of the key Sunbelt regions. That being said, water temperatures were not where they normally were, and that did impact chemicals as well in some of those regions as well. So it wasn't enough to offset the challenges in the North. But that being said, the team is working diligently right now to make sure that we're doing everything we can for our customer base. We're reaching out to those lapsed users or those lapsed customers from a Leslie standpoint, and we have the capabilities to do it. So that's what we have in action right now, and we have those plans in action now.

Okay. And then just trying to square the implied fiscal 4Q guide with the comments around traffic improving in July. If I back out the extra week from 4Q, the guidance seems to imply a similar level of comp decline. And I wouldn't think weather has been a headwind in July. So I'm just trying to understand, are you planning the business just assuming no change for fiscal 3Q? Or have you not really seen much of a pickup? It just was a little bit unclear to me in terms of what you're seeing quarter-to-date.

Yes. Just for clarity, the one piece I want to make sure and then I'll pass it to Tony is just from a traffic standpoint so far in the quarter in terms of your question, we're seeing improvements versus the prior quarter. And as I mentioned, it's still an area of change that we need to require. So I want to make sure that, that's clear. That's something we're working against. But I'll pass it to Tony for the rest of the question for sure.

Yes. So to clarify that, if you peel the 53rd week from the guide in the assumed midpoint, there is a continued decline year-over-year, but it is not a continued growth versus Q3 -- I'm sorry, decline versus Q3 either. Yes. We expect -- we actually expect it to improve in Q4.

And we'll go next now to David Bellinger of Mizuho.

First one, even if we look back a few quarters and absent all these weather discrepancies across the country, is there sort of a wide band of store performance where some of the top-performing regions versus the bottom performing regions has widened out to some degree. Just help us understand what the potential is for some of these lower-run stores to improve over time and catch up to sort of just the average across the whole chain.

Good question. One of the things that I'm based on with the team is how we look at the store performance on a perpetual basis. The team does a really good detailed analysis of that as we're working across -- in addition, what I'm pleased with is the -- as I mentioned earlier, the level of store performance and the focus around the key trends of the controllables that the teams are executing against. As part of our strategic review that we are doing, we are obviously looking and reviewing the entire footprint that we have as we think about what the future of Leslie's is from being an omnichannel player, including our stores and our distribution centers to evaluate their performance and to go deep on their performance, especially through this year, as you mentioned. And I look forward to sharing more about that in November as we look at that because asset utilization and making sure we're getting most out of our assets is such a critical element for us to make sure that we're improving our gross margin, obviously improving EBITDA and then paying down the debt. So hopefully, that helps.

Yes. Got it. And then just the next logical question here. You mentioned some of these inventory optimization. I think the $5 million of cost outs coming next year. Just curious as to why we haven't seen a more formal cost-cutting program in place. I know you mentioned not touching the store base for now. But is that something we can expect that [ Webwood ] comes out with a more formal cost-cutting outlook from here?

Yes, really good question. I think the -- first and foremost, from an asset base, I think it's important, especially on the stores. Stores are critical cash-generating assets, and this is such a critical time of the year for us in quarter 3 and quarter 4 as we're going through those. As we get -- as we are doing this operational and strategic review. Some of those -- obviously, 2 critical key pillars that we've identified in asset utilization and cost optimization are areas of where we've brought in both -- actually have a combination of internal resources as well as supplementing with external resources to help and review and then bring some of those thoughts or actions that you're suggesting or mentioning is that we're going to bring some of those forward in the November meeting. So I look forward to sharing those at that time.

Thank you all for the time today. That was our last question, I believe, [indiscernible] so we appreciate your support. We recognize it was a challenging quarter, and we're working hard to turn around the trajectory of the business. Have a nice afternoon.

Thank you very much, Ms. Eisleben. And again, ladies and gentlemen, that will conclude today's third quarter 2025 Leslie's conference call. Again, thanks so much for joining us, and we wish you all a great day. Goodbye.