What a brutal six months it’s been for Leslie's. The stock has dropped 61.8% and now trades at $4.61, rattling many shareholders. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy Leslie's, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free for active Edge members.
Why Do We Think Leslie's Will Underperform?
Despite the more favorable entry price, we're cautious about Leslie's. Here are three reasons there are better opportunities than LESL and a stock we'd rather own.
1. Shrinking Same-Store Sales Indicate Waning Demand
Same-store sales is a key performance indicator used to measure organic growth at brick-and-mortar shops for at least a year.
Leslie’s demand has been shrinking over the last two years as its same-store sales have averaged 8.6% annual declines.
2. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Leslie’s margin dropped by 8.9 percentage points over the last year. This decrease came from the higher costs associated with opening more stores.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Leslie's burned through $24.33 million of cash over the last year, and its $1.03 billion of debt exceeds the $42.68 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Leslie’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Leslie's until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Leslie's, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 9.8× forward EV-to-EBITDA (or $4.61 per share). At this valuation, there’s a lot of good news priced in - you can find more timely opportunities elsewhere. We’d recommend looking at the most dominant software business in the world.
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