Leslie’s Poolmart credit rating downgraded at S&P Global due to higher leverage

Investing.com -- U.S. specialty pool supply retailer Leslie’s Poolmart Inc. has seen its credit rating downgraded from ’B+’ to ’B’ by S&P Global Ratings. This downgrade follows an increase in the company’s leverage to 5.9x in its first fiscal quarter, which ended on Dec. 28, 2024. This rise in leverage is attributed to soft demand trends and transformational expenses.

S&P Global Ratings no longer expects Leslie’s Poolmart to be able to reduce its leverage to below 5x in fiscal 2025, which ends in September 2025, due to its ongoing compressed profitability. As a result, the rating on the company’s $757 million senior secured term loan due 2028 has also been downgraded to ’B’ from ’B+’, while the ’4’ recovery rating remains unchanged.

The outlook for Leslie’s Poolmart is stable, with S&P Global Ratings expecting the company to maintain leverage in the low-5x area over the next 12 months. This is due to the company’s progress on its strategic initiatives during the key pool season, which runs from April to September.

The downgrade reflects a weaker outlook for Leslie’s Poolmart in fiscal 2025 compared to earlier expectations. The costs of implementing the company’s recently announced strategic initiatives, such as the buildout of local fulfillment centers and the conversion of stores to serve both do-it-yourself and professional customers, have delayed a rebound in its performance. The potential benefits from these strategic initiatives remain unclear ahead of the key pool season.

S&P Global Ratings now forecasts that Leslie’s Poolmart’s EBITDA margins will remain near the low-14% area in fiscal 2025. This is a 60-basis-point improvement from 13.7% in fiscal 2024. Better product margins are expected to be largely offset by inventory optimization costs and professional fees amid flat sales.

Leslie’s Poolmart’s financial policy includes a target leverage ratio of approximately 3x, which it is currently significantly above. The company is expected to pause share repurchases and limit acquisitions in the near term while it dedicates excess cash to debt paydown and growth investments. Leslie’s Poolmart repaid $25 million of its senior secured term loan in the first quarter, reducing the balance to $757 million.

S&P Global Ratings expects Leslie’s Poolmart’s topline to stabilize in fiscal 2025 due to better in-stock rates and a return to more normal customer purchasing patterns. The company reported positive comparable store sales growth in the first quarter for the first time in two years, with growth in both core and specialty chemical sales and a stabilization in equipment sales declines.

S&P Global Ratings expects demand trends to stabilize in fiscal 2025. It also expects the benefits from Leslie’s strategic initiatives, including better in-stock rates on key items, will lead to improved traffic and conversion trends during the second half of fiscal 2025. This, in combination with three net new stores, is expected to lead to roughly flat to 1% revenue growth in fiscal 2025.

S&P Global Ratings expects Leslie’s Poolmart to generate roughly $20 million to $30 million of reported annual free operating cash flow (FOCF). Despite ongoing profitability pressures, this forecast incorporates working capital inflows given tight inventory management and improved payables terms. Combined with an expectation for reduced capital spending of $35 million to $40 million, S&P Global Ratings expects free cash flow of $20 million to $30 million in fiscal 2025.

The stable outlook reflects expectations for leverage in the low-5x area and about $20 million of annual FOCF over the next 12 months as strategic initiatives take hold and profitability improves, though at a slower pace than previously anticipated.

S&P Global Ratings could lower the rating if operating performance further weakens, such that leverage is expected to increase and remain at or above 6x. On the other hand, the rating could be raised if Leslie’s comfortably reduces and maintains leverage below 5x, successfully executes its strategic initiatives, and its demand prospects and profitability strengthen from fiscal 2025 by 150 to 200 bps.

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