LESLIE'S, INC. The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes, which are included elsewhere in this Quarterly Report on Form 10-Q. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in Part I, Item 1A, "Risk Factors" of our Annual Report on Form 10-K for the year endedOctober 3, 2020 , Part II, Item 1A, "Risk Factors" of our Quarterly Report on From 10-Q for the quarter endedJanuary 2, 2021 , Part II, Item 1A, "Risk Factors" of this Quarterly Report on Form 10-Q, or other sections of this Quarterly Report on Form 10-Q. We operate on a fiscal calendar that results in a fiscal year consisting of a 52- or 53-week period ending on the Saturday closest toSeptember 30th . In a 52-week fiscal year, each quarter contains 13 weeks of operations; in a 53-week fiscal year, each of the first, second and third quarters includes 13 weeks of operations and the fourth quarter includes 14 weeks of operations. References to fiscal year 2021 refer to the fiscal year endingOctober 2, 2021 , which contains 52 weeks. References to fiscal year 2020 refer to the fiscal year endedOctober 3, 2020 , which contained 53 weeks. Our Company We are the largest and most trusted direct-to-consumer brand in the$11 billion United States pool and spa care industry, serving residential, professional, and commercial consumers. Founded in 1963, we are the only direct-to-consumer pool and spa care brand with national scale, operating an integrated marketing and distribution ecosystem powered by a physical network of 940 branded locations and a robust digital platform. We offer an extensive assortment of professional-grade products, the majority of which are exclusive to Leslie's, as well as certified installation and repair services, all of which are essential to the ongoing maintenance of pools and spas. Our dedicated team of associates, pool and spa care experts, and experienced service technicians are passionate about empowering our consumers with the knowledge, products, and solutions necessary to confidently maintain and enjoy their pools and spas. The considerable scale of our integrated marketing and distribution ecosystem, which is powered by our direct-to-consumer network, uniquely enables us to efficiently reach and service every pool and spa in the continentalUnited States . We operate primarily in the pool and spa aftermarket industry which is one of the most fundamentally attractive consumer categories given its scale, predictability, and growth outlook. We have a highly predictable, recurring revenue model, as evidenced by our 57 consecutive years of sales growth. Approximately 80% of our assortment is comprised of non-discretionary products essential to the care of residential and commercial pools and spas. Our assortment includes chemicals, equipment and parts, cleaning and maintenance equipment, and safety, recreational, and fitness-related products. We also offer important essential services, such as equipment installation and repair for residential and commercial consumers. Consumers receive the benefit of extended vendor warranties when purchasing product through our locations or when our certified in-field technicians install or repair equipment on-site. We offer complimentary, commercial-grade in-store water testing and analysis via our proprietary AccuBlue® system, which increases consumer engagement, conversion, basket size, and loyalty, resulting in higher lifetime value. Our water treatment expertise is powered by data and intelligence accumulated from the millions of water tests we have performed over our history, positioning us as the most trusted water treatment service provider in the industry. Due to the non-discretionary nature of our products and services, our business has historically delivered strong, uninterrupted growth and profitability in all market environments, including the Great Recession and the COVID-19 pandemic. We have a legacy of leadership and disruptive innovation. Since our founding in 1963, we have been the leading innovator in our category and have provided our consumers with the most advanced pool and spa care available. As we have scaled, we have leveraged our competitive advantages to strategically reinvest in our business and intellectual property to develop new value-added capabilities. Over the course of our history, we have pioneered complimentary in-store water testing, offered complimentary in-store equipment repair services, introduced the industry's first loyalty program, and developed an expansive platform of owned and exclusive brands. These differentiated capabilities allow us to meet the needs of any pool and spa owner, whether they care for their pool or spa themselves or rely on a professional, whenever, wherever, and however they choose to engage with us. Key Factors and Measures We Use to Evaluate Our Business
We consider a variety of financial and operating measures in assessing the performance of our business. The key GAAP measures we use are sales, gross profit and gross margin, selling, general and administrative expenses, and operating income. The key non-GAAP measures we use are comparable sales, comparable sales growth, Adjusted EBITDA, adjusted net income (loss), and adjusted net income (loss) per share.
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Sales
We offer a broad range of products that consists of regularly purchased, non-discretionary pool and spa maintenance items such as chemicals, equipment, cleaning accessories and parts, as well as installation and repair services for pool and spa equipment. Our offering of proprietary, owned and third-party brands across diverse product categories drives sales growth by attracting new consumers and encouraging repeat visits from our existing consumers. Revenue from merchandise sales at retail locations is recognized at the point of sale, revenue from services are recognized when the services are rendered and revenue from e-commerce merchandise sales is generally recognized upon shipment of the merchandise. Revenue is recorded net of related discounts and sales tax. Payment from retail customers is generally at the point of sale and payment terms for commercial customers are based on the Company's credit requirements and generally have terms of less than 60 days. When we receive payment from a consumer before the consumer has taken possession of the merchandise or the service has been performed, the amount received is recorded as deferred revenue or as a customer deposit until the sale or service is complete. Sales are impacted by product mix and availability, as well as promotional and competitive activities and the spending habits of our consumers. Growth of our sales is primarily driven by comparable sales growth and expansion of our locations in existing and new markets.
Comparable Sales and Comparable Sales Growth
We measure comparable sales growth as the increase or decrease in sales recorded by the comparable base in any reporting period, compared to sales recorded by the comparable base in the prior reporting period. The comparable base includes sales through our locations and through our e-commerce websites and third-party marketplaces. Comparable sales is a key measure used by management and our board of directors to assess our financial performance. We consider a new or acquired location comparable in the first full month after it has completed 52 weeks of sales. Closed locations become non-comparable during their last partial month of operation. Locations that are relocated are considered comparable at the time the relocation is complete. Comparable sales are not calculated in the same manner by all companies, and accordingly, are not necessarily comparable to similarly titled measures of other companies and may not be an appropriate measure for performance relative to other companies. The number of new locations reflects the number of locations opened during a particular reporting period. New locations require an initial capital investment in location build-outs, fixtures, and equipment, which we amortize over time as well as cash required for inventory. We operated 940 and 932 retail locations in 38 and 37 states acrossthe United States as ofApril 3, 2021 andMarch 28, 2020 , respectively. We own 27 locations and lease the remainder of our locations. Our initial lease terms are typically five years with options to renew for multiple successive five-year periods. We evaluate new opportunities in new and existing markets based on the number of pools and spas in the market, competition, our existing locations, availability and cost of real estate, and distribution and operating costs of our locations. We review performance of our locations on a regular basis and evaluate opportunities to strategically close locations to improve our profitability. Our limited investment costs in individual locations and our ability to transfer sales to our extensive network of remaining locations and e-commerce websites allows us to improve profitability as a result of any strategic closures.
Gross Profit and Gross Margin
Gross profit is equal to our sales less our cost of merchandise and services
sold. Cost of merchandise and services sold reflects the direct cost of
purchased merchandise, costs to package certain chemical products, including
direct materials and labor, costs to provide services, including labor and
materials, as well as distribution and occupancy costs. The direct cost of
purchased merchandise includes vendor rebates, which are generally treated as a
reduction of merchandise costs. We recognize such vendor rebates at the time the
obligations to purchase products or perform services have been completed, and
the related inventory has been sold. Distribution costs include warehousing and
transportation expenses, including costs associated with third-party fulfillment
centers used to ship merchandise to our e-commerce consumers. Occupancy costs
include the rent, common area maintenance, real estate taxes, and depreciation
and amortization costs of all retail locations. These costs are significant and
are expected to continue to increase as our company grows.
Gross margin is gross profit as a percentage of our sales. Gross margin is
impacted by merchandise costs, pricing and promotions, product mix and
availability, inflation, and service costs, which can vary. Our proprietary
brands, custom-formulated products, and vertical integration provide us with
cost savings, as well as greater control over product availability and quality
as compared to other companies in the industry. Gross margin is also impacted by
the costs of distribution and occupancy costs, which can vary.
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Our gross profit is variable in nature and generally follows changes in sales. The components of our cost of merchandise and services sold may not be comparable to the components of cost of sales or similar measures of other companies. As a result, our gross profit and gross margin may not be comparable to similar data made available by other companies.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses ("SG&A") include selling and
operating expenses at our retail locations and corporate-level general and
administrative expenses. Selling and operating expenses at retail locations
include payroll, bonus and benefit costs for personnel, supplies, and credit and
debit card processing costs. Corporate expenses include payroll, bonus, and
benefit costs for our corporate and field support functions, marketing and
advertising, insurance, utilities, occupancy costs related to our corporate
office facilities, professional services, and depreciation and amortization for
all assets, except those related to our retail locations and distribution
operations, which are included in cost of merchandise and services sold. Selling
and operating expenses generally vary proportionately with sales and the change
in the number of locations. In contrast, general and administrative expenses are
generally not directly proportional to sales and the change in the number of
locations, but will be expected to increase over time to support the needs of
our growing company. The components of our SG&A may not be comparable to the
components of similar measures of other companies.
Operating Income
Operating income is gross profit less SG&A. Operating income excludes interest expense, loss on debt extinguishment, income tax expense, and other expenses, net. We use operating income as an indicator of the productivity of our business and our ability to manage expenses.
Adjusted EBITDA
Adjusted EBITDA is defined as earnings before interest (including amortization of debt costs), taxes, depreciation, amortization, loss (gain) on disposition of fixed assets, management fees, equity-based compensation expense, mark-to-market on interest rate cap, loss on debt extinguishment, and special items. Adjusted EBITDA is a key measure used by management and our board of directors to assess our financial performance. Adjusted EBITDA is also frequently used by analysts, investors and other interested parties to evaluate companies in our industry, when considered alongside other GAAP measures. We use Adjusted EBITDA to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other companies using similar measures. Adjusted EBITDA is not a recognized measure of financial performance under GAAP but is used by some investors to determine a company's ability to service or incur indebtedness. Adjusted EBITDA is not calculated in the same manner by all companies, and accordingly, is not necessarily comparable to similarly entitled measures of other companies and may not be an appropriate measure for performance relative to other companies. Adjusted EBITDA should not be construed as an indicator of a company's operating performance in isolation from, or as a substitute for, net income (loss), cash flows from operations or cash flow data, all of which are prepared in accordance with GAAP. We have presented Adjusted EBITDA solely as supplemental disclosure because we believe it allows for a more complete analysis of results of operations. Adjusted EBITDA is not intended to represent, and should not be considered more meaningful than, or as an alternative to, measures of operating performance as determined in accordance with GAAP. In the future, we may incur expenses or charges such as those added back to calculate Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these items.
Adjusted Net Income (Loss) and Adjusted Net Income (Loss) per Share
Adjusted net income (loss) and adjusted net income (loss) per share are
additional key measures used by management and our board of directors to assess
our financial performance. Adjusted net income (loss) and adjusted net income
(loss) per share are also frequently used by analysts, investors, and other
interested parties to evaluate companies in our industry, when considered
alongside other GAAP measures.
Adjusted net income (loss) is defined as net income adjusted to exclude loss
(gain) on disposition of fixed assets, management fees, equity-based
compensation expense, mark-to-market on interest rate cap, loss on debt
extinguishment, and special items. Adjusted net income (loss) per share is
defined as adjusted net income (loss) divided by the weighted average number of
common shares outstanding.
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Factors Affecting the Comparability of our Results of Operations
Our reported results have been affected by, among other events, the following events, which must be understood in order to assess the comparability of our period-to-period financial performance and condition.
Impact of COVID-19
We are closely monitoring the continuing impact of COVID-19 on all aspects of our business and in all of our locations. As ofApril 3, 2021 , we operated 940 locations in 38 states and all locations are currently open. During the 13- and 26- weeks endedApril 3, 2021 , we maintained operations as an 'essential' business, as defined by various federal, state, and local authorities, by providing essential products and services that maintain the safety and sanitization of homes and businesses. From time to time, certain of our locations may be temporarily closed or restricted to curbside service only. Closures and restrictions did not have a material impact on our performance during the 13- and 26- weeks endedApril 3, 2021 . We remain committed to supporting federal, state, and local mandates to prevent the spread of COVID-19 while we operate our business and to do our part in protecting public health. We help keep our communities safe from serious public health risks by providing essential products and services. Water that is not properly maintained can serve as a breeding ground for potentially fatal bacteria and viruses. As a business, the health and safety of our consumers, communities, and associates remain our highest priority, and we continue to take all precautions recommended by theCenters for Disease Control and Prevention to ensure their safety and well-being. We have proactively implemented extensive measures in response to COVID-19 throughout our business operations, including:
• Required team members who are experiencing symptoms or have been in close
contact with someone who has symptoms or has been exposed to the
coronavirus to stay home;
• Provided additional employee benefits related to COVID-19, including
covering the cost of the vaccine for our employees;
• Distributed personal protective equipment and implemented new monitoring
protocols, including the installation of contactless temperature scanners
in our corporate offices and distribution centers;
• Enhanced facility cleaning including routine sanitization of high touch
surfaces;
• Implemented social distancing guidelines and capacity restrictions in our
locations and reduced operating hours;
• Encouraged contactless payments and introduced curbside pickup and
contact-free service calls;
• Incurred front line recognition pay for associates in our locations,
distribution centers, and service technicians during the third and fourth
quarters of 2020;
• Executed remote workforce plan for associates in our corporate offices; and
• Enacted mandatory travel restrictions.
We have also closely coordinated with our vendor partners to minimize the impact of supply disruptions and maintain the flow of essential products to meet the elevated demand from consumers in the current environment. The full impact of COVID-19 on our financial and operating performance depends significantly on the duration and severity of the pandemic, the actions taken to contain or mitigate its impact, and any changes in consumer behaviors. It is not possible to predict the likelihood, timing, or severity of the aforementioned direct and indirect impacts of COVID-19 on our business. Restrictions on the operation of our locations and distribution facilities could have a material impact on our sales and earnings. COVID-19 could also lead to significant disruption to our supply chain for products we sell and could have a material impact on our sales and earnings. Business Acquisitions
Our business acquisitions did not have a material impact on our financial position or results of operations. See Note 3 - Business Combinations to the accompanying unaudited condensed consolidated financial statements for information regarding our business acquisitions.
Incremental Public Company Expenses
As a newly public company we incur significant expenses on an ongoing basis that
we did not incur as a private company. Those costs include additional director
and officer liability insurance expenses, as well as third-party and internal
resources related to accounting, auditing, Sarbanes-Oxley Act compliance, legal,
and investor and public relations expenses. These costs will generally be
expensed under SG&A in the condensed consolidated statement of operations.
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Results of Operations
We derived the condensed consolidated statements of operations for the 13- and
26- weeks ended April 3, 2021 and March 28, 2020 from our condensed consolidated
financial statements. Our historical results are not necessarily indicative of
the results that may be expected in the future. The following tables summarize
key components of our results of operations for the periods indicated, both in
dollars and as a percentage of our sales.
(dollars in thousands, except per share
amounts) Three Months Ended Six Months Ended
March 28, March 28,
Statement of operations data: April 3, 2021 2020 April 3, 2021 2020
Sales $ 192,441 $ 126,377 $ 337,447 $ 249,355
Cost of merchandise and services sold 120,758 86,464 214,049 168,364
Gross profit 71,683 39,913 123,398 80,991
Selling, general and administrative
expenses 70,374 56,048 147,863 115,769
Operating income (loss) 1,309 (16,135 ) (24,465 ) (34,778 )
Other expense:
Interest expense 8,126 22,709 19,642 45,126
Loss on debt extinguishment 1,888 - 9,169 -
Other expenses, net 1,057 187 1,057 324
Total other expense 11,071 22,896 29,868 45,450
Loss before taxes (9,762 ) (39,031 ) (54,333 ) (80,228 )
Income tax benefit (3,310 ) (9,205 ) (17,624 ) (24,215 )
Net loss $ (6,452 ) $ (29,826 ) $ (36,709 ) $ (56,013 )
Net loss per share
Basic and diluted $ (0.03 ) $ (0.19 ) $ (0.20 ) $ (0.36 )
Weighted average shares outstanding
Basic and diluted 186,810 156,500 181,900 156,500
Percentage of Sales(1) (%) (%) (%) (%)
Sales 100.0 100.0 100.0 100.0
Cost of merchandise and services sold 62.8 68.4 63.4 67.5
Gross margin 37.2 31.6 36.6 32.5
Selling, general and administrative
expenses 36.6 44.4 43.8 46.4
Operating income (loss) 0.7 (12.8 ) (7.3 ) (13.9 )
Other expense:
Interest expense 4.2 18.0 5.8 18.1
Loss on debt extinguishment 1.0 - 2.7 -
Other expenses, net 0.5 0.1 0.3 0.1
Total other expense 5.8 18.1 8.9 18.2
Loss before taxes (5.1 ) (30.9 ) (16.1 ) (32.2 )
Income tax benefit (1.7 ) (7.3 ) (5.2 ) (9.7 )
Net loss (3.4 ) (23.6 ) (10.9 ) (22.5 )
Other financial and operations data:
Number of new and acquired locations 4 - 4 6
Number of locations open at end of
period 940 932 940 932
Comparable sales growth(2) 51.3 % 13.7 % 33.7 % 8.4 %
Adjusted EBITDA(3) $ 9,528 $ (8,081 ) $ 9,285 $ (17,085 )
Adjusted EBITDA as a percentage of
sales(3) 5.0 % (6.4 )% 2.8 % (6.9 )%
Adjusted net loss(3) $ (2,781 ) $ (28,756 ) $ (13,400 ) $ (53,070 )
Adjusted net loss per share $ (0.01 ) $ (0.18 ) $ (0.07 ) $ (0.34 ) (1) Components may not add to totals due to rounding.
(2) See the section titled "Management's Discussion and Analysis of Financial
Condition and Results of Operations-
Evaluate Our Business."
(3) The tables below provide a reconciliation from our net loss to Adjusted
EBITDA and net loss to adjusted net loss for the 13- and 26- weeks ended
April 3, 2021 andMarch 28, 2020 (in thousands). 18
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Three Months Ended Six Months Ended
March 28, March 28,
April 3, 2021 2020 April 3, 2021 2020
Net loss $ (6,452 ) $ (29,826 ) $ (36,709 ) $ (56,013 )
Interest expense 8,126 22,709 19,642 45,126
Income tax benefit (3,310 ) (9,205 ) (17,624 ) (24,215 )
Depreciation and amortization expenses(a) 6,263 6,812 12,858 14,088
Loss (gain) on disposition of fixed assets(b) 5 27 (1,753 ) 470
Management fee(c) - 617 382 1,940
Equity-based compensation expense(d) 1,951 598 14,111 1,195
Mark-to-market on interest rate cap(e) - - - 22
Loss on debt extinguishment(f) 1,888 - 9,169 -
Costs related to equity offerings(g) 1,057 - 9,209 -
Other(h) - 187 - 302
Adjusted EBITDA $ 9,528 $ (8,081 ) $ 9,285 $ (17,085 )
Three Months Ended Six Months Ended
March 28, March 28,
April 3, 2021 2020 April 3, 2021 2020
Net loss $ (6,452 ) $ (29,826 ) $ (36,709 ) $ (56,013 )
Loss (gain) on disposition of fixed assets(b) 5 27 (1,753 ) 470
Management fee(c) - 617 382 1,940
Equity-based compensation expense(d) 1,951 598 14,111 1,195
Mark-to-market on interest rate cap(e) - - - 22
Loss on debt extinguishment(f) 1,888 - 9,169 -
Costs related to equity offerings(g) 1,057 - 9,209 -
Other(h) - 187 - 302
Tax effects of these adjustments(i) (1,230 ) (359 ) (7,809 ) (986 )
Adjusted net loss $ (2,781 ) $ (28,756 ) $ (13,400 ) $ (53,070 )
______________
(a) Includes depreciation related to our distribution centers and stores, which
is included within the cost of merchandise and services sold line item in our
condensed consolidated statements of operations.
(b) Consists of loss (gain) loss on disposition of assets associated with store
closures or the sale of property and equipment.
(c) Represents amounts paid or accrued in connection with our management services
agreement. The management services agreement terminated upon the completion
of our initial public offering during the six months ended
(d) Represents non-cash charges related to equity-based compensation.
(e) Includes non-cash charges related to the change in fair value of our interest
rate cap agreements, which expired in
(f) Represents non-cash expense due to the write-off of deferred financing costs
related to our Term Loan modification during the three months ended
2021 and the repayment of our Senior Unsecured Notes during the six months
ended
(g) Includes one-time payments of contractual amounts incurred in connection with
our IPO that was completed in
in
(h) Other non-recurring, non-cash or discrete items as determined by management,
such as transaction related costs, personnel-related costs, legal expenses,
strategic project costs, and miscellaneous costs.
(i) Represents the tax effect of the total adjustments based on our actual
statutory tax rate for fiscal year 2020 and our estimated statutory tax rate
for fiscal year 2021.
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Selected Financial Information
Sales
Sales increased to$192.4 million for the three months endedApril 3, 2021 from$126.4 million in the prior period, an increase of$66.0 million or 52.3%. This increase was the result of a comparable sales increase of 51.3% and non-comparable sales growth primarily attributable to acquisitions. The comparable sales increase of$64.8 million for the three months endedApril 3, 2021 was driven by an increase in consumer demand across all product categories due to higher use of residential pools and spas. Sales increased to$337.4 million for the six months endedApril 3, 2021 from$249.4 million in the prior year period, an increase of$88.0 million or 35.3%. This increase was the result of a comparable sales increase of 33.7% and non-comparable sales growth primarily attributable to acquisitions. The comparable sales increase of$84.1 million for the six months endedApril 3, 2021 was driven by an increase in consumer demand across all product categories due to higher use of residential pools and spas. We believe that COVID-19 has accelerated secular trends in consumer behavior and has favorably impacted our sales. While the duration and effects of the COVID-19 pandemic are uncertain, we anticipate that the changes in consumer behavior will continue for the foreseeable future.
Gross Profit and Gross Margin
Gross profit increased to$71.7 million for the three months endedApril 3, 2021 from$39.9 million in the prior period, an increase of$31.8 million or 79.6%. Gross margin increased to 37.2% for the three months endedApril 3, 2021 compared to 31.6% in the prior year period, an increase of 567 basis points. Gross profit increased to$123.4 million for the six months endedApril 3, 2021 from$81.0 million in the prior year period, an increase of$42.4 million or 52.4%. Gross margin increased to 36.6% for the six months endedApril 3, 2021 compared to 32.5% in the prior year period, an increase of 409 basis points. These increases in gross profit were primarily driven by the increase in comparable sales.
Selling, General and Administrative Expenses
SG&A increased to$70.4 million for the three months endedApril 3, 2021 from$56.0 million in the prior period, an increase of$14.4 million or 25.6%. As a percentage of sales, SG&A decreased to 36.6% for the three months endedApril 3, 2021 compared to 44.4% in the prior period, a decrease of 779 basis points. The increase in SG&A for the three months endedApril 3, 2021 , consisted primarily of$12.1 million attributed to the increase in overall sales and our continued investments to support Company growth and$2.0 million related to noncash equity-based compensation charges. SG&A increased to$147.9 million for the six months endedApril 3, 2021 from$115.8 million in the prior year period, an increase of$32.1 million or 27.7%. As a percentage of sales, SG&A decreased to 43.8% for the six months endedApril 3, 2021 compared to 46.4% in the prior year period, a decrease of 261 basis points. The increase in SG&A for the six months endedApril 3, 2021 , consisted primarily of$14.8 million attributed to the increase in overall sales and our continued investments to support Company growth,$12.9 million related to noncash equity-based compensation charges primarily due to the vesting of performance-based equity units at the time of the IPO, and$8.2 million of one-time contractual amounts incurred in connection with the IPO, partially offset by$3.8 million of expenses related to the strategic consolidation of certain locations during the first quarter of fiscal year 2020.
Total Other Expense
Total other expense decreased to$11.1 million for the three months endedApril 3, 2021 from$22.9 million in the prior period, a decrease of$11.8 million . Total other expense decreased to$29.9 million for the six months endedApril 3, 2021 from$45.5 million in the prior year period, a decrease of$15.6 million . These decreases were primarily driven by lower interest expense on our floating rate debt of$14.6 million and$25.5 million for the three and six months endedApril 3, 2021 , respectively, partially offset by a loss on debt extinguishment related to the repayment of our Senior Unsecured Notes and Term Loan of$1.9 million and$9.2 million for the three and six months endedApril 3, 2021 , respectively.
Income Taxes
The income tax benefit decreased to$3.3 million for the three months endedApril 3, 2021 from$9.2 million compared to the prior period, a decrease of$5.9 million . The income tax benefit decreased to$17.6 million for the six months endedApril 3, 2021 from$24.2 million compared to the prior year period, a decrease of$6.6 million . These decreases primarily relate to a lower loss before taxes in each of the current year periods. 20
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The effective income tax rate was 31.8% for the six months endedApril 3, 2021 and includes the reversal of a valuation allowance for our interest limitation carryforward as a result of our IPO and subsequent debt paydown. The effective income tax rate was 30.7% for the six months endedMarch 28, 2020 and includes a decrease in the valuation allowance for our interest limitation carryforward due to favorable provisions of the CARES Act.
Net Loss and Net Loss per Share
Net loss improved to a loss of$6.5 million for the three months endedApril 3, 2021 from a loss of$29.8 million in the prior period, an increase of$23.3 million or 78.4%. Net loss per share improved to a loss of$0.03 per share for the three months endedApril 3, 2021 from a loss of$0.19 per share in the prior period. Net loss improved to a loss of$36.7 million for the six months endedApril 3, 2021 from a loss of$56.0 million in the prior year period, an increase of$19.3 million or 34.5%. Net loss per share improved to a loss of$0.20 per share for the six months endedApril 3, 2021 from a loss of$0.36 per share in the prior year period. Adjusted EBITDA Adjusted EBITDA improved to$9.5 million for the three months endedApril 3, 2021 compared to an Adjusted EBITDA loss of$8.1 million in the prior year period, an increase of$17.6 million . Adjusted EBITDA improved to$9.3 million for the six months endedApril 3, 2021 compared to an Adjusted EBITDA loss of$17.1 million in the prior year period, an increase of$26.4 million . These improvements are due primarily to our increase in comparable sales and an improvement in gross margin.
Adjusted Net Loss and Adjusted Net loss per Share
Adjusted net loss improved to a loss of$2.8 million for the three months endedApril 3, 2021 from an adjusted net loss of$28.8 million in the prior year period. Adjusted net loss per share improved to a loss of$0.01 for the three months endedApril 3, 2021 from an adjusted net loss per share of$0.18 in the prior year period. Adjusted net loss improved to a loss of$13.4 million for the six months endedApril 3, 2021 from an adjusted net loss of$53.1 million in the prior year period. Adjusted net loss per share improved to a loss of$0.07 for the six months endedApril 3, 2021 from an adjusted net loss per share of$0.34 in the prior year period.
Seasonality and Quarterly Fluctuations
Our business is highly seasonal. In general, sales and earnings are highest
during our fiscal year third and fourth quarters, which include April through
September and represent the peak months of swimming pool use. In fiscal year
2020, we generated 77% of our sales and 109% of our Adjusted EBITDA in the third
and fourth quarters of our fiscal year. Sales are substantially lower during our
fiscal first and second quarters. We have a long track record of investing in
our business throughout the year, including in operating expenses, working
capital, and capital expenditures related to new locations and other growth
initiatives. While these investments drive performance during the primary
selling season in our third and fourth fiscal quarters, they have a negative
impact during our first and second fiscal quarters.
We experience a build-up of inventory and accounts payable during the fiscal
first and second quarters of the year in anticipation of the peak swimming pool
supply selling season. We negotiate extended payment terms with certain of our
primary suppliers as we receive merchandise in December through March and we pay
for merchandise in April through July. As a result of lower sales volumes during
our fiscal first and second quarters, we reach peak borrowing during our fiscal
second quarter.
The principal external factor affecting our business is weather. Hot weather can
increase purchases of chemicals and other non-discretionary products, purchases
of discretionary products, and can drive increased activity around installation
and repair services we offer. Unseasonably cool weather or significant amounts
of rainfall during the peak sales season can reduce chemical consumption in
pools and spas and decrease consumer purchases of our products and services. In
addition, unseasonably early or late warming trends can increase or decrease the
length of the pool season and impact timing around pool openings and closings
and, therefore, our total sales and timing of our sales.
We generally open new locations before our peak selling season begins and we
close locations after our peak selling season ends. We expect that our quarterly
results of operations will fluctuate depending on the timing and amount of sales
contributed by new locations.
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Liquidity and Capital Resources
Overview
Our primary sources of liquidity are net cash provided by operating activities
and availability under our ABL Credit Facility. Historically, we have funded
working capital requirements, capital expenditures, payments related to
acquisitions, and debt service requirements with internally generated cash on
hand and borrowings under our ABL Credit Facility.
Cash and cash equivalents consist primarily of cash on deposit with banks. Cash
and cash equivalents totaled $90.3 million as of April 3, 2021 and $157.1
million as of October 3, 2020 . There were no amounts outstanding under the ABL
Credit Facility as of April 3, 2021 and October 3, 2020 . On April 12, 2021 , we
entered into an amendment to the $200.0 million ABL Credit Facility. See Note
7-Long-Term Debt to the notes of the unaudited condensed consolidated financial
statements for more detail.
Our primary working capital requirements are for the purchase of inventory, payroll, rent, other facility costs, distribution costs, and general and administrative costs. Our working capital requirements fluctuate during the year, driven primarily by seasonality and the timing of inventory purchases.
Our capital expenditures are primarily related to infrastructure-related investments, including investments related to upgrading and maintaining our information technology systems, ongoing location improvements, expenditures related to our distribution centers, and new location openings. We expect to fund capital expenditures from net cash provided by operating activities.
Based on our growth plans, we believe our cash and cash equivalents position, net cash provided by operating activities and availability under our ABL Credit Facility will be adequate to finance our working capital requirements, planned capital expenditures, and debt service over the next 12 months. In the future, we may also allocate capital toward additional strategic acquisitions. If cash provided by operating activities and borrowings under our ABL Credit Facility are not sufficient or available to meet our capital requirements, then we will be required to obtain additional equity or debt financing in the future. There can be no assurance equity or debt financing will be available to us if we need it or, if available, the terms will be satisfactory to us. As ofApril 3, 2021 , outstanding standby letters of credit totaled$9.2 million and, after considering borrowing base restrictions, we had$190.8 million of available borrowing capacity under the terms of the ABL Credit Facility. As ofApril 3, 2021 , we were in compliance with the covenants under the ABL Credit Facility and the Term Loan.
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