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. Actual results or outcomes may differ materially from those anticipated in these forward-looking statements, which is subject to risks, uncertainties, and other factors described in Part l, Item 1A,"Risk Factors" of our Annual Report on Form 10-K for the fiscal year endedOctober 2, 2021 , and elsewhere in this Quarterly Report on Form 10-Q, and in our other filings with theSecurities and Exchange Commission . 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 2022 refer to the fiscal year endedOctober 1, 2022 . Fiscal 2022 included 52 weeks of operations. Our Company We are the largest and most trusted direct-to-consumer brand in the$14 billion United States pool and spa care industry, serving residential and professional 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 965 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 58 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 consumers and professional pool operators. Consumers receive the benefit of extended vendor warranties on purchased products from our locations and on installations or repairs from our certified in-field technicians. 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 the years, 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 through 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 measures we use under United States GAAP are sales, gross profit and gross margin, SG&A, and operating income (loss). The key non-GAAP measures and other operating measures we use are comparable sales, comparable sales growth, Adjusted EBITDA, Adjusted net income (loss), and Adjusted earnings per share. 15
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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 is 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 professional pool operator customers are based on our 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 is 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. As ofApril 2, 2022 , we operated 965 retail locations in 38 states acrossthe United States . We owned 27 locations and leased 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 increase proportionate to our growth.
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.
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.
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Selling, General and Administrative Expenses
Our SG&A includes selling and operating expenses across our retail locations, digital platform, 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, equity-based compensation, 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 are expected to increase over time to support our growth and public company obligations. The components of our SG&A may not be comparable to the components of similar measures of other companies.
Operating Income (Loss)
Operating income (loss) is gross profit less SG&A. Operating income (loss) excludes interest expense, loss on debt extinguishment, income tax expense (benefit), and other expenses, net. We use operating income (loss) 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 issuance costs), taxes, depreciation and amortization, management fees, equity-based compensation expense, loss on debt extinguishment, costs related to equity offerings, strategic project costs, executive transition costs, loss (gain) on disposition of assets, mark-to-market on interest rate cap, and other non-recurring, non-cash or discrete 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 Earnings per Share
Adjusted net income (loss) and Adjusted earnings 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 earnings 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 (loss) adjusted to exclude
management fees, equity-based compensation expense, loss on debt extinguishment,
costs related to equity offerings, strategic project costs, executive transition
costs, loss (gain) on disposition of assets, mark-to-market on interest rate
cap, and other non-recurring, non-cash or discrete items. Adjusted diluted
earnings per share is defined as Adjusted net income (loss) divided by the
diluted 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 continue to closely monitor the ongoing impact of COVID-19 on all aspects of our business and in all of our locations. Closures and restrictions did not have a material impact on our performance during the 13 weeks endedApril 2, 2022 andApril 3, 2021 , respectively. 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 employees who are experiencing symptoms or have been in close contact with someone who has symptoms or have been exposed to the coronavirus to stay home;
•
Provided additional employee benefits related to COVID-19, including paid sick leave while employees recover from receiving the COVID-19 vaccine;
•
Provided vaccination clinics for our employees at our corporate office and distribution centers;
•
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 in our locations;
•
Implemented mask guidelines for all locations and distribution centers;
•
Encouraged contactless payments and introduced curbside pickup and contact-free service calls;
•
Executed remote workforce plan for associates in our corporate offices.
Effective
•
EffectiveOctober 2021 , enacted a vaccination policy requiring certain employees to provide proof of vaccination or receive a religious or medical exemption. The vaccination policy currently applies to all corporate office employees. 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 our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for information regarding our business acquisitions.
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Incremental Public Company Expenses
As a newly public company we will incur significant expenses on an ongoing basis
that we did not incur as a private company. Those costs include additional
director compensation and 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 included in SG&A in our condensed
consolidated statements of operations.
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Results of Operations
We derived our condensed consolidated statements of operations for the 13- and
26- weeks ended April 2, 2022 and April 3, 2021 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 table summarizes
key components of our results of operations for the periods indicated, both in
dollars and as a percentage of our sales (in thousands, except per share
amounts).
Three Months Ended Six Months Ended
Statements of Operations data: April 2, 2022 April 3, 2021 April 2, 2022 April 3, 2021
Sales $ 228,072 $ 192,441 $ 412,896 $ 337,447
Cost of merchandise and services
sold 142,443 120,758 259,951 214,049
Gross profit 85,629 71,683 152,945 123,398
Selling, general and
administrative expenses 89,618 70,374 169,403 147,863
Operating (loss) income (3,989 ) 1,309 (16,458 ) (24,465 )
Other expense:
Interest expense 6,949 8,126 13,812 19,642
Loss on debt extinguishment - 1,888 - 9,169
Other expenses, net 161 1,057 550 1,057
Total other expense 7,110 11,071 14,362 29,868
Loss before taxes (11,099 ) (9,762 ) (30,820 ) (54,333 )
Income tax benefit (3,659 ) (3,310 ) (8,929 ) (17,624 )
Net loss $ (7,440 ) $ (6,452 ) $ (21,891 ) $ (36,709 )
Earnings per share
Basic $ (0.04 ) $ (0.03 ) $ (0.12 ) $ (0.20 )
Diluted $ (0.04 ) $ (0.03 ) $ (0.12 ) $ (0.20 )
Weighted average shares
outstanding
Basic 182,678 186,810 185,592 181,900
Diluted 182,678 186,810 185,592 181,900
Percentage of Sales(1) (%) (%) (%) (%)
Sales 100.0 100.0 100.0 100.0
Cost of merchandise and services
sold 62.5 62.8 63.0 63.4
Gross margin 37.5 37.2 37.0 36.6
Selling, general and
administrative expenses 39.3 36.6 41.0 43.8
Operating (loss) income (1.7 ) 0.7 (4.0 ) (7.3 )
Other expense:
Interest expense 3.0 4.2 3.3 5.8
Loss on debt extinguishment - 1.0 - 2.7
Other expenses, net 0.1 0.5 0.1 0.3
Total other expense 3.1 5.8 3.5 8.9
Loss before taxes (4.9 ) (5.1 ) (7.5 ) (16.1 )
Income tax benefit (1.6 ) (1.7 ) (2.2 ) (5.2 )
Net loss (3.3 ) (3.4 ) (5.3 ) (10.9 )
Other Financial and Operations
data:
Number of new and acquired
locations, net 6 4 13 4
Number of locations open at end
of period 965 940 965 940
Comparable sales growth(2) 13.3 % 51.3 % 16.4 % 33.7 %
Adjusted EBITDA(3) $ 8,696 $ 9,528 $ 9,792 $ 9,285
Adjusted EBITDA as a percentage
of sales(3) 3.8 % 5.0 % 2.4 % 2.8 %
Adjusted net loss(3) $ (2,738 ) $ (2,781 ) $ (13,654 ) $ (13,400 )
Adjusted diluted earnings per
share $ (0.01 ) $ (0.01 ) $ (0.07 ) $ (0.07 )
(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-Key Factors and Measures We Use to 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 2, 2022
and April 3, 2021 , respectively (in thousands).
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Three Months Ended Six Months Ended
April 2, 2022 April 3, 2021 April 2, 2022 April 3, 2021
Net loss $ (7,440 ) $ (6,452 ) $ (21,891 ) $ (36,709 )
Interest expense 6,949 8,126 13,812 19,642
Income tax benefit (3,659 ) (3,310 ) (8,929 ) (17,624 )
Depreciation and amortization
expense(1) 6,576 6,263 15,817 12,858
Management fees(2) - - - 382
Equity-based compensation
expense(3) 2,918 1,951 5,712 14,111
Loss on debt extinguishment(4) - 1,888 - 9,169
Costs related to equity
offerings(5) 161 1,057 550 9,209
Strategic project costs(6) 2,274 - 3,787 -
Executive transition costs and
other(7) 917 5 934 (1,753 )
Adjusted EBITDA $ 8,696 $ 9,528 $ 9,792 $ 9,285
Three Months Ended Six Months Ended
April 2, 2022 April 3, 2021 April 2, 2022 April 3, 2021
Net loss $ (7,440 ) $ (6,452 ) $ (21,891 ) $ (36,709 )
Management fees(2) - - - 382
Equity-based compensation
expense(3) 2,918 1,951 5,712 14,111
Loss on debt extinguishment(4) - 1,888 - 9,169
Costs related to equity
offerings(5) 161 1,057 550 9,209
Strategic project costs(6) 2,274 - 3,787 -
Executive transition costs and
other(7) 917 5 934 (1,753 )
Tax effects of these
adjustments(8) (1,568 ) (1,230 ) (2,746 ) (7,809 )
Adjusted net loss $ (2,738 ) $ (2,781 ) $ (13,654 ) $ (13,400 )
(1)
Includes depreciation related to our distribution centers and locations, which
is reported in cost of merchandise and services sold in our condensed
consolidated statements of operations.
(2)
Represents amounts paid or accrued in connection with our management services
agreement, which was terminated upon the completion of our IPO in November 2020
and are reported in SG&A in our condensed consolidated statements of operations.
(3)
Represents charges related to equity-based compensation and the related Company
payroll tax expense which are reported in SG&A in our condensed consolidated
statements of operations.
(4)
Represents non-cash expense due to the write-off of deferred financing costs
related to the Term Loan modification during the three months ended April 3,
2021 and the repayment of our senior unsecured notes during the six months ended
April 3, 2021 which are reported in loss on debt extinguishment in our condensed
consolidated statements of operations.
(5)
Includes one-time payments of contractual amounts incurred in connection with
our IPO that was completed in November 2020 which are reported in SG&A, and
costs incurred for follow-on equity offerings in December 2021 which are
reported in other expenses, net in our condensed consolidated statements of
operations.
(6)
Represents non-recurring costs, such as third-party consulting costs that are
not part of our ongoing operations and are incurred to execute differentiated,
strategic projects, and are reported in SG&A in our condensed consolidated
statements of operations.
(7)
Includes executive transition costs, losses (gains) on disposition of fixed
assets and other non-recurring, non-cash or discrete items as determined by
management. Amounts are reported in SG&A and other expenses, net in our
condensed consolidated statements of operations.
(8)
Represents the tax effect of the total adjustments based on our actual statutory
tax rate. Amounts are reported in income tax benefit in our condensed
consolidated statements of operations.
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Selected Financial Information
Sales
Sales increased to$228.1 million for the three months endedApril 2, 2022 , from$192.4 million in the prior year period, an increase of$35.7 million , or 18.5%. The increase was primarily driven by higher comparable sales growth of$25.5 million , or 13.3% in the current year period as well as non-comparable sales growth driven by acquisitions and new locations open for less than 52 weeks. Sales increased to$412.9 million for the six months endedApril 2, 2022 , from$337.4 million in the prior year period, an increase of$75.5 million , or 22.4%. The increase was primarily driven by higher comparable sales growth of$55.2 million , or 16.4% in the current year period as well as non-comparable sales growth driven by acquisitions and new locations open for less than 52 weeks 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$85.6 million for the three months endedApril 2, 2022 from$71.7 million in the prior year period, an increase of$13.9 million , or 19.5%. Gross margin increased to 37.5% compared to 37.2% in the prior year period, an increase of 30 basis points. Gross profit increased to$152.9 million for the six months endedApril 2, 2022 from$123.4 million in the prior year period, an increase of$29.5 million , or 23.9%. Gross margin increased to 37.0% compared to 36.6% in the prior year period, an increase of 40 basis points.
These increases in gross profit were primarily due to product margin improvements and occupancy leverage, partially offset by business mix.
Selling, General and Administrative Expenses
SG&A increased to$89.6 million for the three months endedApril 2, 2022 from$70.4 million in the prior year period, an increase of$19.2 million , or 27.3%. This increase in SG&A was primarily related to a$15.2 million increase associated with higher sales, M&A, and other investments to support Company growth, a$3.0 million increase primarily related to strategic project costs incurred in the second quarter of fiscal 2022, and higher non-cash equity-based compensation expense of$1.0 million . SG&A increased to$169.4 million for the six months endedApril 2, 2022 from$147.9 million in the prior year period, an increase of$21.5 million , or 14.6%. This increase in SG&A was primarily related to a$31.7 million increase associated with higher sales, M&A, and other investments to support Company growth, a$2.6 million reduction primarily in gain on sale of assets realized in the first half of fiscal 2021, and a$3.8 million increase related to strategic project costs incurred in the first half of fiscal 2022. This increase was offset by lower non-cash equity-based compensation costs of$8.4 million and certain one-time payments of contractual amounts of$8.2 million , as compared to the prior year period. These offsets were primarily incurred in connection with our IPO in the first half of fiscal 2021.
Total Other Expense
Total other expenses decreased to$7.1 million for the three months endedApril 2, 2022 from$11.1 million in the prior year period, a decrease of$4.0 million . Total other expenses decreased to$14.4 million for the six months endedApril 2, 2022 from$29.9 million in the prior year period, a decrease of$15.5 million . These decreases were primarily driven by$1.9 million and$9.2 million of non-cash loss on debt extinguishment related to the refinancing of the Term Loan and repayment of our senior unsecured notes during the three and six months endedApril 2, 2021 , respectively, and lower interest expenses related to the repayment of our senior unsecured notes with the proceeds of our IPO inNovember 2020 of$1.2 million and$5.8 million , respectively.
Income Taxes
Income tax benefit increased to$3.7 million for the three months endedApril 2, 2022 from$3.3 million in the prior year period, an increase of$0.4 million . Income tax benefit decreased to$8.9 million for the six months endedApril 2, 2022 , from$17.6 million in the prior year period, a decrease of$8.7 million . The effective income tax rate was a benefit of 33.0% and 29.0% for the three and six months endedApril 2, 2022 , respectively, and includes the net income tax benefits attributable to equity-based compensation awards and research and development credits. The effective income tax rate was 33.9% and 32.4% for the three and six months endedApril 3, 2021 , respectively, and includes a decrease in the valuation allowance for our interest limitation carryforward and net income tax benefits attributable to equity-based compensation awards. 22
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Net Loss and Earnings per Share
Net loss was$7.4 million for the three months endedApril 2, 2022 compared to a net loss of$6.5 million in the prior year period. Net loss decreased to$21.9 million for the six months endedApril 2, 2022 compared to a net loss of$36.7 million in the prior year period, an improvement of$14.8 million . Diluted earnings per share was$(0.04) for the three months endedApril 2, 2022 compared to$(0.03) in the prior year period. Diluted earnings per share improved to$(0.12) for the six months endedApril 2, 2022 from$(0.20) in the prior year period. Adjusted net loss improved slightly to$2.7 million for the three months endedApril 2, 2022 compared to an Adjusted net loss of$2.8 million in the prior year period. Adjusted net loss was$13.7 million for the six months endedApril 2, 2022 compared to an Adjusted net loss of$13.4 million in the prior year period.
Adjusted diluted earnings per share of
Adjusted EBITDA
Adjusted EBITDA was$8.7 million for the three months endedApril 2, 2022 compared to$9.5 million in the prior year period, a decrease of$0.8 million . Adjusted EBITDA increased to$9.8 million for the six months endedApril 2, 2022 compared to$9.3 million in the prior year period, an increase of$0.5 million . Seasonality and Quarterly Fluctuations Our business is highly seasonal. In general, sales and earnings are highest during the third and fourth fiscal quarters, which include April through September, and represent the peak months of swimming pool use. In fiscal 2021, we generated 75% of our sales and 97% of our Adjusted EBITDA in the third and fourth quarters of our fiscal year. Sales are substantially lower during our first and second fiscal 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 first and second fiscal quarters 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. The principal external factor affecting our business is weather. Hot weather can increase purchases of chemicals and other non-discretionary products and purchases of discretionary products, and can drive increased purchases of installation and repair services. 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. Liquidity and Capital Resources
Overview
Our primary sources of liquidity are net cash provided by operating activities and borrowing availability under our Revolving Credit Facility. Historically, we have funded working capital requirements, capital expenditures, payments related to acquisitions, debt service requirements and repurchases of shares of our common stock with internally generated cash on hand and through our Revolving Credit Facility. Cash and cash equivalents consist primarily of cash on deposit with banks. Cash and cash equivalents totaled$52.0 million and$343.5 million as ofApril 2, 2022 andOctober 2, 2021 , respectively. As ofApril 2, 2022 , we had$45.0 million outstanding on our Revolving Credit Facility as compared to$0 as ofOctober 2, 2021 . Subsequent toApril 2, 2022 , we repaid the outstanding balance of$45.0 million on the Revolving Credit Facility.
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.
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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 borrowing availability under our Revolving Credit Facility will be adequate to finance our working capital requirements, planned capital expenditures, share repurchases, and debt service over the next 12 months. In the future, we may also allocate capital toward additional strategic acquisitions and share repurchases. If cash provided by operating activities and borrowings under our Revolving Credit Facility are not sufficient or available to meet our capital requirements, then we may need to obtain additional equity or debt financing. There can be no assurance that equity or debt financing will be available to us if we need it or, if available, whether the terms will be satisfactory to us. As ofApril 2, 2022 , outstanding standby letters of credit totaled$10.0 million and, after considering borrowing base restrictions, we had$145.0 million of available borrowing capacity under the terms of the Revolving Credit Facility. As ofApril 2, 2022 , we were in compliance with the covenants under the Revolving Credit Facility and our Term Loan agreements.
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