Leslie's
Annual Report 2023

Plain-text annual report

2023 ANNUAL REPORT Mission Statement We are committed to providing consumers with the expertise, service, and innovative products necessary to enjoy clean, safe, and beautiful pools and spas. VALUES BE CUSTOMER FOCUSED We create great experiences and lasting relationships with those we serve. We understand our customers’ needs, consider the impact on them in our decisions, and strive to make every experience easy, connected, and joyful. SHARE EXPERTISE We are the leading experts in our field, no matter our role. We take pride in what we know, share it willingly, and help others understand. As partners in pool care, we act as trusted guides. INVEST IN INNOVATION We see every moment as an opportunity to do better than the last time. We constantly look to take leaps forward by investing in big ideas and new technologies in every aspect of the business. OWN THE OUTCOME WELCOME EVERYONE We value outcomes over activity, and hold ourselves and each other to the highest standards for how we perform every day. We proactively take ownership of how we spend time, dollars, and energy. As champions of diversity, equity, and inclusion, we create an environment where everyone can proudly work together, do their best, and have fun along the way. MEASURE OUR IMPACT We work to align across all stakeholders—customers, shareholders, partners, employees, and environment—and strive to make a positive difference for people, planet, and the business in every decision. LETTER TO SHAREHOLDERS Dear Shareholders, In fiscal year 2023, Leslie’s, Inc. (“Leslie’s”) delivered sales of $1,451M, Adjusted EBITDA of $168M and Net Income of $27.2M. During this dynamic year in the pool and spa care industry, the diligent efforts of Leslie’s associates allowed us to serve all of our customers at a consistently high level and achieve all-time highs in brand awareness, in-stock service levels, and NPS scores. In addition, we grew our store footprint to over 1,000 locations. Industry Update: After a multi-year period of above average growth, the pool and spa care industry faced unexpected challenges in fiscal year 2023. These challenges included unfavorable weather, a macroeconomic environment that resulted in decreased retail chemical pricing and discretionary product spend, and customer stockpiling of core sanitizers resulting from three years of supply uncertainty and price inflation. Importantly, most of these challenges are expected to be transitory, and Leslie’s still gained market share against this backdrop. Exiting the year, we remain the largest specialty retailer in the pool and spa care industry with unmatched scale and we believe we have clear long-term growth opportunities. Notwithstanding the industry headwinds in fiscal year 2023, the long-term fundamentals of the pool and spa care industry remain solid. New pools continue to be built and the growing installed base of pools needs to be maintained. The category also continues to be supported by numerous secular tailwinds. Specifically, consumers are continuing to (1) invest more in their homes, (2) permanently shift to remote and hybrid work schedules, (3) pursue healthy outdoor lifestyles, and (4) move to the suburbs and exurbs – particularly in the Sunbelt. We believe these tailwinds, combined with the necessity of pool safety and sanitization, support the industry’s long-term growth. The pool and spa care industry has a long track record of consistent growth, and Leslie’s has consistently grown faster than the industry. We remain the leading direct to consumer pool and spa care retailer with scale, capabilities, and brand awareness that our competitors do not have. While our team navigates the current environment, we remain focused on executing our strategic initiatives that underpin our competitive advantages. Annual Report 2023 1 Strategic Growth Initiatives: Growing Consumer File: Leslie’s customer file contracted by 6% in fiscal year 2023, primarily driven by decreases in customer traffic, which was impacted by factors including abnormally unfavorable weather throughout the year. Deeper Customer Relationships: Leslie’s leveraged its omni-channel capabilities and Loyalty program to mitigate industry headwinds and limit the decline in average revenue per customer to 1%. Loyalty file members grew +12% and comprised 78% of Leslie’s transactions in fiscal year 2023. The PRO Market: Leslie’s expanded its PRO initiative, ending fiscal year 2023 with 98 PRO locations and more than 3,900 PRO contracts in place. PRO sales were flat for the year, which we consider a strong outcome given the overall industry environment. M&A and New Store Growth: In fiscal year 2023, M&A and New Stores drove $58M in non-comparable sales. During the year, we opened 12 new stores and acquired 12 stores, bringing our total store count to 1,008 as of the end of the fiscal year. Disruptive Innovation: Leslie’s introduced the next-generation AccuBlue Home device in May 2023. We observed strong demand for the AccuBlue Home program despite limited marketing support, and we continue to be encouraged by member reviews of the program. We are pleased with the progress on our strategic growth initiatives given the industry challenges we faced in fiscal year 2023 and have confidence in their ability to continue to drive growth in our business. Fiscal Year 2023 Financial Results: Sales in fiscal year 2023 totaled $1,451M, a 7% decline compared to fiscal year 2022, with comparable store sales down 11%. On a two-year stack basis, our comparable store sales were flat. Our gross profit for the year was $548M. Adjusted EBITDA for the year was $168M. Net Income for the year was $27.2M. While our financial results for fiscal 2023 did not meet our internal expectations, Leslie’s remains well-positioned for future success as we continue to execute on our strategic growth initiatives. In fiscal year 2023, we invested $52M in growth initiatives and added 18 net new locations. These investments are consistent with our disciplined approach to capital allocation, demonstrate our confidence in our growth prospects and strategic plan, and are consistent with our commitment to driving long-term shareholder value. 2 Leslie’s, Inc. ESG: We were pleased to publish our third annual ESG report in September 2023, which can be found on our investor relations website. We are proud of our ongoing ESG efforts and want to highlight some of the key accomplishments highlighted in our report: Improvement of our MSCI ESG ratings from A to AA; Creation of four employee resource groups with membership across the company; Disclosure of additional environmental data, including expanded disclosures on Scope 3 greenhouse gas emissions and waste; and Recognition by St. Jude Children’s Research Hospital® as the St. Jude New Corporate Partner of the Year. Leslie’s is committed to continuing our efforts to be an organization that makes a positive difference for our consumers, associates, shareholders, and the communities in which we operate. Looking Ahead: We believe the dedication of our team members and the competitive advantages derived from our business model and capabilities position us well as we expect the pool and spa care industry to normalize in fiscal year 2024. At the same time, Leslie’s remains focused on leveraging its competitive advantages, executing our strategic initiatives, and delivering exceptional customer service. Taken together, we believe these actions will drive growth and market share gains in fiscal year 2024 and beyond. We appreciate the continued support of our shareholders and we remain confident in our ability to deliver long-term value. Sincerely, Steven L. Ortega Chairman of the Board Michael R. Egeck CEO Annual Report 2023 3 Reconciliation of Non-GAAP Measures This letter contains certain non-GAAP (Generally Accepted Accounting Principles) measures that our management believes provide our shareholders with additional insights into Leslie’s results of operations. The non-GAAP measures in this letter are supplemental in nature. They should not be considered in isolation or as alternatives to net income as indicators of company performance or to other financial information prepared in accordance with GAAP. Reconciliations of this non-GAAP financial information to Leslie’s financial statements as prepared under GAAP are included in this report. Forward-looking Statements This letter includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical or current facts, including statements regarding our environmental and other sustainability plans and goals, made in this document are forward- looking. We use words such as “may,” “will,” “likely,” “anticipates,” “believes,” “expects,” “estimates,” “future,” “intends,” “continue,” “maintain,” “remain,” “goal,” “target,” “recurring,” and similar expressions to identify forward-looking statements. Forward-looking statements reflect management’s current expectations and involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied. Risks and uncertainties that could cause our actual results to differ significantly from management’s expectations are described in our 2023 Annual Report on Form 10-K. Our forward-looking statements speak only as of the date of this letter or as of the date they are made, and we undertake no obligation to update them, notwithstanding any historical practice of doing so. Forward- looking and other statements in this letter may also address our corporate responsibility and sustainability progress, plans, and goals (including environmental and diversity & inclusion matters), and the inclusion of such statements is not an indication that these contents are necessarily material to investors or required to be disclosed in the Company’s filings with the SEC. In addition, historical, current, and forward-looking environmental and social-related statements may be based on standards for measuring progress that are still developing, internal controls and processes that continue to evolve, and assumptions that are subject to change in the future. We caution you that these statements are not guarantees of future performance, nor promises that goals or targets will be met, and are subject to numerous and evolving risks and uncertainties that we may not be able to predict or assess. In some cases, we may determine to adjust our commitments, goals or targets or establish new ones to reflect changes in our business, operations or plans. Website references throughout this letter are provided for convenience only, and the content on the referenced websites is not incorporated by reference into this report. 4 Leslie’s, Inc. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) ☒☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2023 OR ☐☐ TRANSRR TRANSITION PERIOD FROM ITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TO Commission File Number: 001-39667 LESLIE’S, INC. (Exact Name of Registrant as Specified in its Charter) Delaware (State or other jurisdiction of incorporation or organization) 2005 East Indian School Road Phoenix, AZ (Address of principal executive offiff ces) 20-8397425 (I.R.S. Employer Identification No.) 85016 (Zip Code) Registrant’s telephone number, including area code: (602) 366-3999 Securities registered pursuant to Section 12(b) of the Act: Title of each class Common Stock, par value $0.001 per share Securities registered pursuant to Section 12(g) of the Act: None Trading Symbol(s) LESL Name of each exchange on which registered The Nasdaq Global Select Market Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒ Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ☐ NO ☒ Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subju ect to such filing requirements for the past 90 days. YES ☒ NO ☐ Indicate by check mark whether the Registrant has submu of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submu Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer itted pursuant to Rule 405 of Regulation S-T (§ 232.405 Interactive Data File required to be submu it such files). YES ☒ NO ☐ itted electronically everyrr Accelerated filer ☐ ☒ Non-accelerated filer ☐ Emerging growth company ☐ Smaller reporting company ☐ If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the Registrant has filed a report on and attestation to its management’s assessment of the effeff ctiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐ Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive offiff cers during the relevant recovery period pursuant to §240.10D-1(b). ☐ Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒ The aggregate market value of the Common Stock held by non-affiff liates of the Registrant, based on the closing price of the Common Stock on The Nasdaq Global Select Market (“Nasdaq”) on March 31, 2023, the last business day of the Registrant’s most recently completed second fiscal quarter was approximately $2.0 billion. For purposes of this response, the Registrant has assumed that its directors, executive offiff cers, and beneficial owners of 5% or more of its Common Stock are affiff liates of the Registrant. The number of shares of Registrant’s Common Stock outstanding as of November 20, 2023 was 184,333,670. DOCUMENTS INCORPORATRR ED BY REFERENCE The information required by Part III of this Report, to the extent not set forth herein, is incorporated herein by reference from the Registrant’s definitive proxy statement relating to the Annual Meeting of Shareholders to be held in 2024, which definitive proxy statement shall be filed with the Securities and Exchange Commission within 120 days afteff r the end of the fiscal year to which this Annual Report on Form 10-K relates. Page 2 9 27 27 28 28 29 30 31 42 43 68 68 73 73 74 74 74 74 74 75 77 78 PART I Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. PART II Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. Item 9C. PART III Item 10. Item 11. Item 12. Item 13. Item 14. PART IV Item 15. Item 16. Signatures Table of Contents Business Risk Factors Unresolved Staffff Comments Properties Legal Proceedings Mine Safety Disclosures Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities [Reserved] Management’s Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Suppl Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedurd es Other Information Disclosure Regarding Foreign Jurisdictions that Prevent Inspections ementary Data u Directors, Executive Offiff cers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accountant Fees and Services Exhibits, Financial Statement Schedules Form 10-K Summary i CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements about us and our industryrr that involve subsu tantial risks and uncertainties. All statements other than statements of historical fact contained in this Annual Report on Form 10-K, including statements regarding our future results of operations or financial condition, business strategy, legal proceedings, competitive advantages, market size, growth opportunities, industryrr expectations, and plans and objectives of management for future operations, are forward- looking statements. In some cases, you can identifyff forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “projeo ct,” “should,” “target,” “will,” or “would,” or the negative of these words or other similar terms or expressions. Our actual results or outcomes could differ materially from those indicated in these forward-looking statements for a variety of reasons, including, among others: • • • • • • • • • • • • • • • our ability to execute on our growth strategies; u suppl r y disrupt ions; our ability to maintain favorabla e relationships with suppl u iers and manufact ff urt ers; competition from mass merchants and specialty retailers; impacts on our business from the sensitivity of our business to weather conditions, changes in the economy (including rising interest rates, recession fears, and inflationary pressures), geopolitical events or conflicff ts, and the housing market; r disrupt ions in the operations of our distribution centers; our ability to implement technology initiatives that deliver the anticipated benefits, without disrupt rr ing our operations; our ability to attract and retain senior management and other qualifieff d personnel; regulatoryrr regulations concerning environmental, social and governance (“ESG”) matters; changes and development affeff cting our current and future products including evolving legal standards and our ability to obtain additional capia tal to finance operations; commodity price inflation and deflation; impacts on our business from epidemics, pandemics, or natural disasters; impacts on our business from cyber incidents and other security threats or disrupt r ions; our ability to remediate material weaknesses or other deficiencies in our internal control over financial reporting or to maintain effeff ctive disclosure controls and procedurd es and internal control over financial reporting; and other risks and uncertainties, including those listed in the section titled “Risk Factors” in our filings with the United States Securities and Exchange Commission (“SEC”). You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Annual Report on Form 10-K primarily on our current expectations and projections about future events and trends that we believe may affeff ct our business, financial condition, and operating results. The outcome of the events described in these forward- looking statements is subju ect to risks, uncertainties, and other factors described in Part I, Item 1A, “Risk Factors” and elsewhere in this Annual Report on Form 10-K for the year ended September 30, 2023. Moreover, we operate in a very competitive and rapia dly changing environment. New risks and uncertainties emerge from time-to-time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Annual Report on Form 10-K. The results, events, and circumstances reflected in the forward-looking statements may not be achieved or occur, and actuat l results or outcomes could differ materially from those described in the forward-looking statements. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subju ect. These statements are based on information availabla e to us as of the date of this Annual Report on Form 10-K and while we believe that information provides a reasonabla e basis for these statements, that information may be limited or incomplete. Our statements should not into, or review of,ff all relevant information. These statements are be read to indicate that we have conducted an exhaustive inquiryrr inherently uncertain, and investors are cautioned not to unduly rely on these statements. The forward-looking statements made in this Annual Report on Form 10-K are based on events or circumstances as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Annual Report on r the date of this Annual Report on Form 10-K or to reflect new information, changed Form 10-K to reflect events or circumstances afteff expectations, the occurrence of unanticipated events or otherwise, except as required by law. We may not actually achieve the plans, intentions, outcomes or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint venturt es, or investments. 1 Item 1. Business. PART I In this Annual Report on Form 10-K, unless otherwise indicated or the context otherwise requires, all references to “we,” “our,” “us,” “Leslie’s,” “the Company,” and “our Company” refer to Leslie’s, Inc. and its consolidated subsu idiaries. Our Company We are the largest and most trusr ted direct-to-consumer brand in the $15 billion United States pool and spa care industry,rr serving sional consumers. Founded in 1963, we are the only direct-to-consumer pool and spa care brand with national residential and profesff scale, operating an integrated marketing and distribution ecosystem powered by a physical network of over 1,000 branded locations and a robust digital platform. We have a market-leading share of approximately 15% of residential afteff rmarket product spend as of 2022, our physical network is larger than the sum of our 20 largest competitors and our digital sales are estimated to be greater than five times sional-grade products, the majoa rity of which as large as that of our largest digital competitor. We offeff are exclusive to Leslie’s, as well as certifieff d 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 confidff ently maintain and enjon y their pools and spas. The unprecedented scale of our integrated marketing and distribution ecosystem, which is powered by our direct-to-consumer network, uniquely enables us to effiff ciently reach and service everyrr pool and spa in the continental United States. r an extensive assortment of profesff We operate primarily in the pool and spa afteff rmarket industry,rr which is one of the most fundamentally attractive consumer categories given its scale, predictabia lity, and growth outlook. More than 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 offeff r important essential services, such as equipment installation and repair for residential consumers and profesff sional pool operators. Consumers receive the benefit of extended vendor warranties on products purchased through our locations and on on-site installations or repairs by our certifieff d in-field commercial-grade in-store water testing and analysis via our proprietary AccuBlue® system, which technicians. We offeff increases consumer engagement, conversion, basket size, and loyalty, resulting in higher lifetff ime 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 trusr ted water treatment service provider in the industry.rr Due to the non-discretionary nature of our products and services, our business has historically delivered strong, growth and profitaff bia lity in challenging market environments, including through the Great Recession and the COVID-19 pandemic. r complimentary,rr r We have a legacy of leadership and disrupt ive innovation. Since our founding in 1963, we have been the leading innovator in our categoryrr and have provided our consumers with the most advanced pool and spa care availabla e. As we have scaled, we have leveraged l property to develop new value-added capaa bia lities. our competitive advantages to strategically reinvest in our business and intellectuat We have pioneered complimentary in-store water testing, offeff in-store equipment repair services, introduced the red complimentaryrr s first loyalty program, and developed an expansive platform of owned and exclusive brands. These differentiated capabilities industry’rr 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 profesff sional, whenever, wherever, and however they choose to engage with us. Our Competitive Strengths We believe that the following competitive strengths have been key drivers of our success to date, and strategically position us for continued success. Undispii utedtt direii ct-ttt o-tt consumer market leader in the afteff rmarkerr .yy t pool and spa care industrytt For 60 years, we have been dedicated to addressing our consumers’ pool needs so that they can spend less time maintaining and more time enjon ying their pools. We are the only direct-to-consumer pool and spa care brand with a nationwide physical presence and an integrated digital platform, consisting of individually merchandised e-commerce websites, a mobile app with transaction capabilities, and online marketplt ace operations, designed to address the needs of all pool and spa consumers. The remainder of the industryrr is highly fragmented across both offlff ine and online providers. 2 Direii ct relationships withii more than 12 million pool and spa owners and profesff sionals,ll generatingii durable,ll annuityii -likll e economics. We are the largest national pool and spa care brand with a direct relationship with pool and spa owners and the profesff sionals who serve them. Across our integrated platform, we have more than 12 million consumers who rely on us for their ongoing pool and spa care r sophisticated product recommendations and other expert needs. Through our team of highly trained pool and spa experts, we offeff advice, which cultivates long-standing relationships with our consumers. The comprehensive nature of our product and service offeff ring eliminates the need for consumers to leave the Leslie’s ecosystem, driving exceptional retention with annuity-like economics. We define “direct relationships” as the number of unique customers for whom we have a mailing address, a phone number, or an email address. Consumer-crr entric connected ecosystemtt brands across allll channels. for allll pool and spa owners and the profesff sionalsll who serve them using proprietary,yy leadingii We have built the most extensive and geographically diverse pool and spa care network in the United States. Our locations are strategically located in densely populated areas mainly throughout the Sunbelt, including Califorff nia, Arizona, Texas, and Florida. Across our physical network, we employ a team of more than 3,000 associates, including pool and spa care experts and service technicians, who act as solution providers to all of our consumers, including both do-it-yourself (“DIY”) and do-it-for-me (“DIFM”) pool owners as well as pool profesff sionals. As the world has become more digitally focused, we have focused on architecting an industry-rr leading integrated digital platform of proprietary e-commerce websites designed to serve our residential and profesff sional consumers. Our proprietary e-commerce websites serve digital consumers through curated pricing and targeted merchandising strategies. In addition to our owned e-commerce websites, we also offeff r our producd ts through online marketplt aces such as Amazon, eBay, and Walmart. As a result of our strategic investments in digital, we are uniquely positioned to serve our consumers with cross-channel capabilities and capture incremental online demand from new consumers while growing the total profitff ability of the network. Comprehensive assortmett based services for allll consumers.rr nt of proprietary brands withii recurringii ,gg essentiatt l, supeu rior product formulatll iott ns,s and trusted, solution- We offeff r a comprehensive producd t assortment, consisting of more than 30,000 products across chemicals, equipment and parts, cleaning and maintenance equipment, and safety, recreational, and fitness-related categories. More than 80% of our product sales are non-discretionary and recurring in nature. In addition, more than 55% of our total sales and 80% of our chemical sales are derived from y proprietary brands and custom-formulated products, which allows us to create an entrenched consumer relationship, optimize our suppl chain, and capture attractive margins. Consumers choose our exclusive, proprietary brands and custom-formulated products for their effiff cacy and value, a combination that we believe cannot be found elsewhere. u We pair our comprehensive producd t assortment with differentiated in-store and on-site service offeff rings. We pioneered the in-store water test and resulting pool or spa water prescription, which has driven consumer traffiff c and loyalty, and has complimentaryrr created a “pharmacist-like” relationship with our consumers. We recently developed and introduced significant upgrades to our water testing capabilities with the launch of our AccuBlue® platform. The AccuBlue® testing device screens for nine distinct water quality criteria. Our in-store experts leverage our proprietary AccuBlue® water diagnostics software engine to offeff r our consumers a customized prescription and treatment plan using our comprehensive range of exclusive products, walking them through product use sequencing step-by-step. These detailed and sophisticated treatment algorithms are suppor ted by our differentiated water treatment expertise built over decades. Historically, we have found that consumers who test their water with us regularly spend more with us per year than those s largest network of in- who do not, underscoring the importance of this acquisition and retention vehicle. We also employ the industry’rr sional pool field technicians who perform on-site evaluations, installation, and repair services for residential consumers and profesff operators. u Attrtt active finaii ncial profileff r value. to drive shareholdell characterizeii d by consistent,tt profitaff blell growth, and strott ng cash flowll conversirr on offeff ringii multiptt le levers We historically have had strong sales growth, demonstrating our ability to deliver strong financial results through all economic sional pool consumers and has been driven bla e acquisition of sticky, long-term consumer relationships. Due to our scale, vertical integration, and bia lity. Due to our low maintenance capital intensity, we generate strong cash flows. As , we have significant flexibility with respect to capital allocation, giving us the ability to drive cycles. Our growth has been broad-based across residential pool, residential spa, and profesff by strong retention and profitaff operational excellence, we maintain high profitaff a result of our attractive financial profileff long-term shareholder value through various operating, investing, and financial strategies. 3 expexx rienced and visiii onaryr leadershipii team that combines deep industrytt expexx rtistt e and advanced direii ct-ttt o-tt consumer Highlgg yll a capabi liii tieii s. Our strategic vision and culturt e are directed by our executive leadership team under the leadership of our Chief Executive Offiff cer, Michael R. Egeck, and our Chief Financial Offiff cer, Scott Bowman. Our well-balanced executive leadership team is comprised of leaders with decades of experience in the pool and spa care industryrr as well as recently-hired executives who bring new expertise and capabilities ly to Leslie’s from outside industries. Our leadership team is uniquely capable of executing upon our strategic vision and successfulff continuing to create long-term shareholder value. We believe we are well positioned to drive sustainabla e growth and profitff ability over the long-term by executing on the following Our Growth Strategies strategies: .ee Grow our consumer fileii We believe we have significant opportunity to acquire new residential consumers and reactivate lapsa ed residential consumers, which we plan to do by executing on the following strategies: • • Acquire or reactivate consumers via optimized marketing strategy. We believe we have a sizeable opportunity to grow by serving the millions of pool and spa owners in our market who do not actively shop with us today. We plan to accelerate our acquisition of these potential new or reactivated consumers and, at the same time, manage consumer g our marketing mix toward more effiff cient digital and social channels. acquisition cost by shiftinff Capture outsized share of new pool and spa consumers. We intend to bolster consumer file growth by deploying targeted marketing tactics to win an outsized share of new pool and spa owners. Increase share of wallet among existingii consumers.rr We believe we have a significant opportunity to increase spend from existing consumers and drive higher lifetff ime value. We plan to do this by executing on the following strategies: • • • Increase loyalty membership penetration and introduce program upgrades. We plan to continue to market our loyalty program in-store and online to convert more of our consumers to loyalty members through our loyalty program, Pool Perks®, r more value-added featurt es to further drive member enrollment and engagement. We will explore in order to offeff opportunities to drive interest by selectively offeff ring special incentives and rewards as well as introducing new value-added featurt es. We believe these initiatives will drive higher transaction frequency and basket size, which will result in increased categoryrr spend and higher lifetff ime value with existing consumers. Enhance retention marketing. While we have historically been satisfied with our consumer retention metrics, we believe there is opportunity to drive even greater retention. We plan to do this by more actively leveraging our consumer databaa se to personalize the consumer experience with targeted messaging and product recommendations. Expand our product and service offeff ring. We plan to expand our offeff ring by introducing new and innovative products and services in our existing categories and by expanding into adjad cent categories. Specifically, we believe there is an opportunity with products targeted to spa owners, who have historically been underserved. Grow additioii nal share in the profesff sional market.tt We believe we have a significant opportunity to grow our sales with pool care profesff u 25x as much as residential consumers on pool suppl ies and equipment. sionals, who individually spend more than r given our over 1,000 locations and the industry’rr Our research suggests that small and mid-size pool profesff sionals value convenience and referrals, both of which we are uniquely s largest consumer file. We plan to expand our physical network of positioned to offeff PRO locations, which specifically cater to pool profesff sionals, by opening new locations and selectively remodeling existing residential locations. We believe there is significant whitespace opportunity to operate more than 350 PRO locations, inclusive of new store openings and conversions, across the United States. We continue to assemble an affiff liated network of qualifieff d pool professionals sionals, we through our PRO Partner program, extending the Leslie’s name into water maintenance. To further benefit pool care profesff also have a dedicated Leslie’s PRO e-commerce website. This website provides all of the online tools needed for profesff sionals to serve their respective communities and grow their pool care businesses. We believe that this initiative represents a natural adjad cency and will resonate with existing residential consumers as well as help attract new residential consumers. 4 tt Utili zeii stratt tegie c M&A to consolidll atdd ett share and furthett r enhance capabi a liii tieii s. The afteff rmarket pool and spa industryrr is highly fragmented, which offeff rs attractive opportunities to utilize strategic M&A to drive consolidation. We have historically used, and plan to continue to use, strategic acquisitions to obtain consumers and capabilities in both new and existing markets. We completed six acquisitions during fiscal 2022 and five acquisitions during fiscal 2023, and continue to look for opportunities that will strategically benefit our business. We believe that we are the consolidator of choice in the industry,rr and we will continue to focus on acquiring high quality, market-leading businesses with teams, capabilities, and technologies that uniquely position us to create value by applying best practices across our entire physical and digital network to better serve new and existing consumer types. Addrdd essingii underserved residentiatt l whitespace. We have identified more than 800 markets in the continental United States that we can address through our store densificff ation strategy. With our omni-channel capabilities, successfulff track record of new location openings, location acquisitions, and targeted digital marketing tactics, we believe we are well positioned to capitalize on this meaningfulff whitespace opportunity. We plan to assess each market independently and determine the most capia tal effiff cient way to serve these trade areas using digital assets, new locations, or acquired locations. Contintt ue to introduce disrii uptive innovation. Leslie’s has a legacy of disrupt ive innovation in the pool and spa care industry.rr We plan to continue that legacy by developing and introducing capaa bia lities that create value for our consumers. Present areas of focus include water testing, maintenance prescriptions, new product offeff rings, and our product distribution ecosystem. rr As the Internet of Things wave continues, we believe consumers will seek the convenience of “smart” home functionality in more facets of their daily lives. We perceive this as an opportunity to introduce a full service, connected home solution that effeff ctively automates pool maintenance, including actively monitoring our consumers’ water, diagnosing, developing, and prescribing a treatment plan, and delivering to their home the assortment of products needed to maintain a clear, safe, beautiful pool. Accordingly, in fiscal 2023 we completed the commercial launch of our AccuBlue Home® program, a subsu cription-based offeff ring that enables pool and spa owners to confidff ently test and treat their pools and spas without ever having to leave their backyakk rd. Using leading AccuBlue Home® connected device and the Leslie’s mobile app, program members can test all critical aspects the new, industry-rr of their water chemistryrr with ease and generate a custom treatment plan tailored to the specifications of their pool or spa. Within the Leslie’s mobile app, consumers can review their prescription, order the products they need, and have them delivered right to their door or arrange for a same-day pick-upu at their local Leslie’s location. We plan to introduce enhancements and expand the program. Our Industry We operate in the afteff rmarket pool and spa care industry,rr which is broadly comprised of:ff (i) chemicals; (ii) equipment, parts, and accessories; and (iii) services. The United States market consists of millions of installed pools and spas, which require routine ime. We estimate the average in-ground pool owner spends $900 each year on the chemicals, maintenance throughout their lifetff equipment, parts, and accessories needed to maintain their pool. Neglecting pool maintenance is not a viable option, as it can result in equipment failure, structurt al damage, or other costly issues. This drives an annuity-like stream of demand for the chemicals and products necessary to properly maintain a pool or spa. While we benefit from the growth in the installed base, our business is not dependent on new pool construcr tion activity and can generate strong growth from a fixed installed base through increased pool usage, more frequent sanitization, and recurring maintenance needs. Our business is highly seasonal. Sales and earnings are highest during our third and fourth fiscal quarters, being April through September, and represent the peak months of swimming pool use. Sales are subsu tantially lower during our first and second fiscal quarters when we typically generate net losses and we realized negative operating cash flows. Seasonality 5 We strategically serve all consumers within the afteff rmarket pool and spa care industryrr including Residential Pool, Residential Spa, and Profesff sional Pool consumers. Our Consumers • • • l Pool. The residential pool market consists of 8.8 million pools representing a total afteff Residentiatt rmarket sales opportunity rmarket spend represents roughly 70% of total spend while DIFM services of $8.4 billion. Within this market, the DIY afteff represent approximately 30% of total spend. Many of our residential pool consumers visit our locations on a regular basis to conduct water testing, seek expert pool advice, and purchase products as well as utilize our integrated digital platforms. l Spa. representing a $0.9 billion rmarket sales opportunity for chemicals and equipment. Including the $1.7 billion market for new spas, residential spa The residential spa market consists of nearly 5.5 million spas or hot tubsu Residentiatt afteff represents a total addressabla e market of approximately $2.6 billion. sional Pool. The profesff Profesff Pool service profesff government entities. Profesff complexes, and water parks. This market represents a total afteff sional pool operators. sionals specialize in maintenance and equipment repair for DIFM homeowners, businesses, and sional pool operators manage approximately 250,000 pools across hotels, motels, apartment sional pool market consists of pool service profesff rmarket sales opportunity of $4.4 billion. sionals and profesff Our Product and Service Offeff ring We offeff r a comprehensive assortment of more than 30,000 products across chemicals, equipment and parts, cleaning and maintenance equipment, and safety, recreational, and fitness related products. Historically, more than 80% of our assortment has been comprised of essential and non-discretionary products that are needed by residential and profesff sional consumers to care for pools and spas. The vast majoa rity of our assortment featurt es non-discretionary products that are shelf-stabla e and generally not prone to either ted one-stop destination obsolescence or shrinkage, which could occur from changing technology or consumer buying habia ts. As the trusr ring. We aim to fulfilff l the needs rmarket pool and spa needs, we provide an extensive and highly differentiated product offeff for all afteff of our residential and profesff and product selection across a sional consumers with our comprehensive assortment, in-stock inventory,rr broad range of premium third-party and proprietary brands. Since our inception in 1963, we have offeff io of owned and exclusive brands. We continue to expand our selection of rings through innovation. Our exclusive brands and products account for more than 55% of total sales and 80% of chemical exclusive offeff sales. These proprietary brands and custom-formulated producd ts are only availabla e through our integrated platform and offeff r sional-grade quality to our consumers, while allowing us to achieve higher gross margins relative to sales of third-party products. profesff red a portfolff In addition to our comprehensive product assortment, we offeff equipment repair. We also employ a large in-field service network of pool and spa care service profesff provide essential on-site equipment installation and repair services for residential consumers and profesff the continental United States. r critical services, such as complimentaryrr water testing and in-store sionals who have the expertise to sional pool operators throughout We operate an integrated platform consisting of locations, distribution centers, and proprietary e-commerce websites. Our Integrated Platform • • • • r a range of differentiated and innovative in-store and on-site service offeff l Locations. We serve our residential consumers through locations that are strategically spread across 39 states. Residentiatt rings including our in-store water test. Our We offeff residential locations are suppor ted by a team of associates, including pool and spa care experts and experienced service technicians, who are committed to decoding pool care for consumers and performing on-site installation and repair services. sional Our residential locations have service counters through which we also provide products and services to profesff consumers. u taii l Networkrr . Our complementaryrr platform of branded proprietary e-commerce websites and marketplt ace storefronff Digii ts allows us to seamlessly serve the needs of all digital consumers through curated pricing and targeted merchandising io of proprietary e-commerce websites includes Leslie’s and In the Swim. In addition to our owned e- strategies. Our portfolff commerce websites, we sell through online marketplt aces such as Amazon, Walmart, and eBay. PRO Locations. Our PRO locations are conveniently situated along popular service routes and carry a producd t assortment sional consumer. We have identifieff d significant opportunities to expand and develop our PRO network that targets the profesff sional consumer base. Our PRO locations also serve residential consumers. to address the growing and underserved profesff l Hot Tub Locations. Residentiatt banners. At these locations, we offeff and prospective spa owners. In select markets, we also operate full service hot tubu and spa locations under various r an expanded assortment of merchandise and services specificff ally catering to current 6 We operate a vertically integrated suppl u y chain, packaging, and distribution model, which represents a significant competitive advantage. Our Vertically Integrated Model u Our vertically integrated suppl ring us a significant cost advantage. We source a variety of raw materials and chemicals directly from a diversifieff d suppl y chain enables us to producd e and package products at our company-operated packaging facilities and third-party contract packaging facilities. Our strategy is to identify, produce, and package high volume items that do not require r our consumers a premium product while sophisticated or capital-intensive production or packaging equipment, but allow us to offeff offeff ier base; ier that represented more than 10% we maintain strong relationships with these suppl of our annual purchases. Using these raw materials, we manufact urt e and package a wide selection of final products, including, but not limited to, chlorine products, pH adjud sters, and filter cleaners. A significant portion of our total mix is comprised of products that we manufacff rs economies of scale that has resulted in higher quality products and a . structurt ally advantaged margin profileff ture or package through vertical integration, which offeff iers. As of September 30, 2023, we had one suppl u u u ff We also operate a vertically integrated distribution and deliveryrr model. In addition to operating two manufact ing facilities, we operate a national network of company-operated distribution centers as well as utilize third-party distribution centers. Our company- operated distribution centers and our third-party logistics partners have the capacity to carry a broad breadth of our products in significant throughout our physical network. From these facilities, we distribute to our physical quantities and are capable of replenishing inventoryrr network through a contracted fleet of tractors and trailers, which helps ensure optimal in-stock levels throughout the year. Our third- party distribution centers are strategically located to complement our company-operated distribution centers and primarily fulfilff l online orders. urt ff Our Marketing Strategy We believe there is significant potential to drive increased share of wallet among our existing consumers through strategic initiatives, such as our loyalty membership program and dynamic promotions. Due to the highly recurring, replenishment nature of our producd t mix and long-term consumer relationships, we believe that our investments in consumer acquisition marketing generate highly attractive returns. We know the location of pools and spas throughout the United States, and by leveraging this information, we have the ability to allocate our advertising dollars in a highly targeted manner. Additionally, we have added experienced marketing talent with significant expertise in analytics and performance marketing to grow our consumer file. Through these strategies, we plan to increase brand awareness and continue profitaff bla y acquiring new consumers. Our Competition The United States afteff turers, retailers, distributors, and service providers in the residential and profesff rmarket pool and spa care industryrr is fragmented and competitive. We compete against a wide range of sional pool and spa care market. This includes urt ers, regional and local retailers, home improvement retailers, mass-market retailers, and specialty e- manufacff original equipment manufact ff commerce operators. Key competitive groups include: • • • • Regie onal and Local Indepeee ndendd which offeff economies of scale, this group generally offeff in marketing; t Retailers. Estimated to include more than 8,000 smaller, local independent competitors, r the convenience of proximity. The vast majoa rity of these competitors operate single stores and, due to relative rs limited product assortment, charges higher prices and invests less resources Home Imprm ovement Retailers. and regional hardware stores. This group generally employs a seasonal strategy, offeff select spring and summer months, does not offeff care expertise; Includes national home improvement retailers, such as Home Depot, Lowe’s, and local ring limited product assortment during r services, and typically does not employ associates with the pool and spa Mass-Ma- offeff rket Retailerll srr . rs limited product assortment, ofteff n on a seasonal basis, and does not offeff Includes larger, scaled players, such as Amazon, Walmart, and Costco. This group generally r services or pool and spa care expertise; and Wholesll alell Distii ritt bui generally does not directly serve the end-consumer, but rather serves as an intermediary that suppl well as the profesff Includes large wholesalers, such as Heritage Pool Suppl sional channel. tors. u y Group and Pool Corp. This group ies product to retailers as u 7 Our competitors offeff rmarket pool and spa care industryrr via e-commerce. These challenges include regulatoryrr r pool care products and services of varied quality and across a wide range of retail price points. We experience greater brick-and-mortar competition in the states with the largest installed pool bases, including Califorff nia, Texas, Florida, and Arizona. While some of our competitors also market and sell online, there are various challenges to serving consumers in the afteff restrictions on shipping hazardous and the need for regular water testing, expert advice, materials, the need for profesff rmarket pool and customized prescriptions and solutions related to the sale of chemicals. In addition, due to the seasonality of the afteff several competitors only stock related products during the summer months, and their product assortment tends to and spa care industry,rr rings. be limited to basic offeff sional installation of equipment at point of delivery,rr Human Capital Resources As of September 30, 2023, we employed approximately 4,100 employees. Of these employees, approximately 3,200 work in our physical network, approximately 250 work as in-field service technicians, approximately 360 work in our corporate offiff ce, and approximately 275 work in our distribution centers. We believe that we have good relations with our employees. None of our employees are currently covered under any collective bargaining agreements. We consider our employees to be the foundation for our growth and success. As such, our future success depends in large part on our ability to attract, train, retain, and motivate qualified personnel. The growth and development of our workforce is an integral part of our success. We place a priority on promoting from within. Over the last three years, approximately 80% of our retail and corporate management openings have been filled by existing employees. We are also committed to developing and fostering a culture of diversity and inclusion and know that a company’s ultimate success is directly linked to its ability to identify and hire talented individuals from all backgrounds and perspectives. Trademarks and Other Intellectual Property In the course of our business, we employ various trademarks, trade names and service marks, including Leslie’s®, AccuBlue®, AccuBlue Home®, Pool Perks®, and our logo, in packaging and advertising our products. We have registered trademarks and trade names for several of our majoa r products on the Principal Register of the United States Patent and Trademark Offiff ce. We distinguish the products produced in our chemical repackaging operation or by third-party repackagers at our direction through the use of the Leslie’s brand name and logo and the trademarks and trade names of the individual items, none of which is patented, licensed, or otherwise restricted to or by us. We believe the strength of our trademarks and trade names has been beneficial to our business and we intend to continue to protect and promote our trademarks in appropriate circumstances. Leslie’s®, AccuBlue®, AccuBlue Home®, Pool Perks®, and other trademarks, trade names or service marks of Leslie’s, Inc. appearing in this Annual Report on Form 10-K are the property of Leslie’s, Inc. All other trademarks, trade names, and service marks appearing in this Annual Report on Form 10-K are the property of their respective owners. Available Information Our website address is www.lesliespool.com. Information contained on our website or connected thereto does not constitute a part of this Annual Report on Form 10-K or any other filing we make with the SEC. We make availabla e on this website under the “Investor Relations” section, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and amendments to those reports, as soon as reasonabla y practicable afteff r we electronically file those materials with, or furnish them to, the SEC. The SEC also maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. Note Regarding Third-Party Information This Annual Report on Form 10-K includes market data and certain other statistical information and estimates that are based on reports and other publications from industryrr analysts, market research firms, and other independent sources, as well as management’s own good faith estimates and analyses. We believe these third-party reports to be reputable, but have not independently verified the underlying data sources, methodologies, or assumptions. Information that is based on estimates, forecasts, projections, market research, or similar methodologies is inherently subju ect to uncertainties, and actuat l events or circumstances may differ materially from events and circumstances reflected in this information. 8 Item 1A. Risk Factors. ee of riskii skk described below in addition Investing in our common stock involves a highi to the other infon rmation set forth in this Annual Repor nancial Condition and Resultstt of Operations section and the consolidatdd ed financial statements and related notes, befoe re making an investment decisiii on. The riskii skk or skk and uncertainties not presentlyll known to us, or that we currentlyll believe to be immaterial,l could materially and additional riskii adverserr cts,tt or resultstt of operations. In such case, the trading price of our common stock could decline, and you maya lose all or part of your original investment. Our actual results could diffi erff materially from those anticipated in the forward-looking statements as a result of specifici degre t on Form 10-K, including the Management’s Discii ussion and Analysll skk or uncertainties we face. The occurrence of any of the following riskii ly affeff ct our business, financial condition, prospes skk and uncertainties described below. skk described below are not the onlyll .kk You should carefue llyll considerdd including the riskii factors,rr the riskii ff is of Fi riskii e constraints,tt ptu ions, labor marketkk Addidd tionally,yy macroeconomic and geopolitical developmo risiii ng rates of inflan ts, suppl yll u skk discii ussed chain disruii ents, including public health crises, below to which we are subject. The extent of the impacm on our financial and operating perforff mance depee nds signi antly on the duration and severity of such macroeconomic and geopolitical developments, including public health crises, the actions taken to contain or mitigate its impacm t and any changes in consumer behaviorsrr as a result thereof.o Among other factors,rr a signi yll chain for products we sell,l as a result of macroeconomic and geopolitical developmo ents, including public health crises, escalating global conflicff tion and risiii ng interest rates maya amplm ify many of the riskii t of macroeconomic and geopolitical developmo i ents, including public health crises or otherwise, could have a material impacm t on our sales and earnings. ant disrii uption to our suppl fici fici u i Summary of Risk Factors The following summarizes the risks facing our business, all of which are more fully described below. This summaryrr should be read in conjunction with Risk Factors below and should not be relied upon as an exhaustive summaryrr of the material risks facing our business. The order of presentation is not necessarily indicative of the level of risk that each factor poses to us. Risks Related to the Nature of Our Business • • • • • • • If we are unable to achieve comparm able sales growth, our profitaff impacm ted. bilitytt and perforff mance could be materially adverserr ly Past growth maya not be indicative of fuff ture growth. We maya not be able to successfulff ly manage our inventory to match consumer demand. Loss of key membersrr of management could adverserr ly affeff ct our business. Our business is signi i fici antly depee ndent on our ability to meet our labor needs.dd We are subject to legae l or other proceedings that could have a material adverserr effeff ct on us. Disruii ptu ions from disaii stersrr and similar events could have a material adverserr effeff ct on our business. Risks Related to Our Industry and the Broader Economy • • • • • • • • We face competition by manufacff and spa care marketkk . turers, retailers, distii ributors,rr and service providerdd srr in the residential and profesff sional pool The demand for our swimming pool and spa related products and services maya be adverserr economic conditions. ly affeff cted by unfavff orable The COVID- II 19 pandemic could adverserr ly impacm t our business and results of operations. The demand fod r pool chemicalsll maya be affeff cted by consumer attitudes towardsdd products for environmental or safea ty reasons. Our results of operations maya fluctuate from quarter to quarter for many reasons, including seasonality. serr Adverdd developmo defae ults, or non-pe- and projected business operations and our financial condition and results of operations. ents affeff cting the financial services industry,r rforff mance by financial institutions or transactional counterpar such as actual events or concerns involving liquidity,yy ly affeff ct our current ties, could adverserr rr We maintain our cash at financial institutions in balances that maya exceed federally insured limits. We are susceptible to adverserr weather conditions. Technology and Privacy Related Risks • • If our online systyy ems do not function effeff ctively,ll our operating results could be adverserr ly affeff cted.dd Anyn limitation or restriction to sell on online platfot rms could harm our profitff ability. 9 • • fici ant distii urbance or breach of our technological infrn astructure could adverserr A signi i results of operations. ly affeff ct our financial condition and Imprm oper activities by third parties and other events or developments maya result in future intrusions into or compromiseii our networksrr , payment card terminals,ll or other payment systyy ems. of Risks Related to Our Business Strategy • • • We maya acquire other companies or technologies, which could fail to result in a commercial product and otherwise disruii our business. ptu Our operating results will be harmed if we are unable to effeff ctivelyll manage and sustain our future growth or scale our operations. Our aspis could adverserr ly affeff ct our repue tation and perforff mance. rations and discii losures related to environmental, social,l and governance (“ES“ G”)” mattersrr expose us to riskii skk that Risks Related to the Manufacturing, Processing, and Supply of Our Products • • • Our business includes the packaging and storage of chemicals,ll and an accident related to these chemicalsll could subject us to liability and increased costs.tt Product suppl u yll disrii uptions maya have an adverserr effeff ct on our profitaff bility and operating results. The cost of raw materialsll could increase our cost of goods sold and cause our resultstt of operations and financial condition to suffeu r. Risks Related to Commercialization of Our Products • • • • • • The commercial success of our planned or future products is not guaranteed.dd We maya implm ement a product recall or voluntaryr marketkk withdrawal,l which could signi e our reput ation, and disruii our business. ptu i fici antly increase our costs,tt damage If we do not manage product inventory effeff ctivelyll and efficff iently,yy it could adverserr ly affeff ct profitaff bility. If we do not effeff ctivelyll manage our distii ribution centers, it couldl adverserr ly affeff ct our business and financial condition. If we do not continue to obtain favorable purchase terms with manufacff turers, it could adverserr ly affeff ct our operating results. Product quality,tt warrantytt claims, or safea ty concerns could impacm t our sales and expose us to litigation. Risks Related to Government Regulation • The nature of our business subjectstt us to compliance with emplm oyment,t environmental, health, transpor other governmental regul ations. e s tation, safea ty,yy and Risks Related to Intellectual Property Matters • • If we are unable to adequatelyll protect our intellectual property right could be required to incur signi fii cant expenses to enfon rce or defee nd our right i i i s.tt s,tt our competitive position couldl be harmed or we If we infrn inge on or misaii ppr a opriate the proprietary right stt of othett i rs, we maya be liable for damages. Risks Related to Our Indebtedness • • • • Our substantial indebtednedd ss could materially adverserr business. ly affeff ct our financial condition and our abilitytt to operate our Our ability to generate suffiu cient cash depee nds on numerous factorsrr beyoe nd our controt sufficu ient cash flow to service our debt obligations. l, and we maya be unable to generate Restrictive covenantstt strategie es, and failure to comply with these restrictions couldl result in acceleration of our debt. in the agreements governing our Credit Facilities maya restrict our ability to pursurr e our business Incurrence of substantially more debt couldll further exacerbate the riskii skk associated with our substantial leverage. Risks Related to Ownership of Our Common Stock • • Our stock price maya be volatile, resulting in substantial losses for investors.rr An active trading marketkk for our common stock maya not be sustained. 10 • • • • • • • Future sales of common stock by existii ing stockholders could cause our stock price to decline. Transactions engaged in by our principal adverdd i effeff ct on the price of our stock. serr stockholders, our officff ersrr or directorsrr involving our common stock maya have an We do not intend to pay dividends for the foreseeable future. Anti-takeover provisions in our charter documents and under Delaware law could limit certain stockholdel r actions. Certain provisions of our sixtii h amended and restated certificate of incorporation maya have the effeff ct of discii ouraging lawsuits against our directorsrr and officff ers.rr We will continue to incur increased coststt as a result of being a public company. sses in our internal control over financial repor We have idendd tified material weaknekk determination that our internal control over financial repor as of Septe ember 30, 2023. Our inability to remediate these material weaknekk weaknekk financial repor confidff endd ce in us. sses, or our inability to achieve and maintain effeff ctive discii ting in a timelyll manner couldll adverserr sses led to a losure controls and procedurdd es were not effeff ctive sses, our idendd tification of any additional losure controls and procedurdd es and internal control over ly affeff ct our results of operations, our stock price and investor ting. Such weaknekk ting and discii e e e Risks Related to the Nature of Our Business Our success depeee ndsdd on our abiliii tyii tt growth, our profitff abi and perforff marr lityii to maintain or increase comparablell nce couldll be materiallyll adverserr ly impacm ted. sales, and if we are unablell to achieve comparablell sales Our success depends on increasing comparable sales through our merchandising strategy and ability to increase sales and profitff s. , and thereforff e comparable sales growth, we focus on delivering value and generating consumer excitement To increase sales and profitsff by staffiff ng our locations with pool and spa experts, developing compelling products, optimizing inventoryrr management, maintaining strong location conditions, and effeff ctively marketing current producd ts and new product offeff , rts become less successfulff we may not be able to maintain or improve the levels of comparable sales that we have experienced in the past, which could adversely impact our profitff ability and overall business results. In addition, competition and pricing pressures from competitors may also materially adversely impact our operating margins. Our comparable sales growth could be lower than our historical average or our future target for many reasons, including general economic conditions, operational performance, price inflation or deflation, rising interest rates, recession fears, industryrr competition, new competitive entrants near our locations, price changes in response to competitive factors, the impact of new locations entering the comparable base, cycling against any year or quarter of above-average sales results, unfavff orable weather conditions, suppl ions, the number and dollar amount of consumer transactions in our locations, our ability to provide product or service offeff rings that generate new and repeat visits to our locations, and the level of consumer engagement that we provide in our locations. Opening new locations in our establa ished markets may result in inadvertent oversaturt ation, temporaryrr or permanent diversion of consumers, and sales from our existing locations to new locations and reduced comparable sales, thus adversely affeff cting our overall financial perforff mance. These factors may cause our comparable sales results to be materially lower than in recent periods, which could harm our profitaff bia lity and business. y shortages or other operational disrupt rings. If these effoff u rr Past growth maya not be indicative of fuff ture growth. Historically, we have experienced subsu tantial sales growth through organic market share gains, new location openings, and acquisitions that have increased our size, scope, and geographic footprt int. Our various business strategies and initiatives, including our growth initiatives, are subju ect to business, economic, and competitive uncertainties and contingencies, many of which are beyond our control. While we contemplate continued growth through internal expansion and acquisitions, we may not be able to: • • • • • • • acquire new consumers, retain existing consumers, and grow our share of the market; penetrate new markets; provide a relevant omni-channel experience to rapia dly evolving consumer expectations through our proprietary mobile app and e-commerce websites; generate sufficient cash flows or obtain sufficff ient financing to suppor u t expansion plans and general operating activities; identify suitable acquisition candidates and successfulff ly integrate acquired businesses; maintain favorabla e suppl u ier arrangements and relationships; and identify and divest assets that do not continue to create value consistent with our objectives. 11 If we do not manage these factors successfulff ly, our operating results could be adversely affeff cted. We maya not be ablell on our busineii lly managea ss, finaii ncial conditdd iott n, and resultstt of operations. our inventortt to successfus yr to match consumer demand,dd which couldll have a material adverserr effeff ct We base our inventoryrr purchases, in part, on our sales forecasts. If our sales forecasts overestimate consumer demand, we may levels, which could result in the need to sell products at lower than anticipated prices, leading to decreased to meet demand, experience higher inventoryrr profitff margins. Conversely, if our sales forecasts underestimate consumer demand, we may have insufficient inventoryrr leading to lost sales, either of which could materially adversely affeff ct our financial performance. Loss of keye membersrr of managea ment or failure to attrtt act, develop, busineii ss. ll and retain highi ly qualifll ieff d personnel couldll adverserr ly affeff ct our Our future success depends on the continued effoff rts of the members of our executive leadership team. If one or more of our executives or other key personnel are unabla e or unwilling to continue in their present positions, or if we are unabla e to attract and retain high-quality executives or key personnel in the future, our business may be adversely affeff cted. We consider our employees to be the foundation for our growth and success. As such, our future success depends in large part on our ability to attract, train, retain, and motivate qualifieff d personnel. During the height of our seasonal activities, we hire additional employees, including seasonal and part-time employees who generally are not employed during the off-sff eason. If we are unabla e to attract and hire additional personnel during these seasons, our operating results could be adversely affeff cted. Our busineii ss is signi ificff antlyll depeee ndendd t on our abilityii to meet our labor needs.dd In order to maintain and continue expanding our operations, we depend on our ability to attract and retain qualified team members. Competition for non-entry-rr level personnel, particularly for team members with retail experience, is significant. Additionally, our ability to maintain a consistent level of high-quality customer service in our stores is critical to our success. Many of our store team members needs and control our costs are in entry-rr due to external factors such as the availabia lity of qualifieff d persons in the work forces of the markets in which we operate, which is impacted by factors including competition, unemployment levels, demand for certain labor expertise, prevailing wage rates, and the potential adoption of new or revised employment and labor laws and regulations. If we are unabla e to locate, attract, or retain qualifieff d personnel, or if costs of labor or other related costs increase significantly, our financial performance could be adversely affeff cted. level positions that historically have high rates of turnover. We may be unabla e to meet our labor a a a a We are subject to, and maya in the future be subject to, legal e or othett r proceedindd gs that couldll have a material adverserr effeff ct on us. t claims, intellectuat From time-to-time, we are a party to legal proceedings, including matters involving personnel and employment issues, personal l property claims, securities law claims, and other proceedings arising in or outside of the ordinary injun ry, antitrusr course of business. We cannot guarantee that the insurance coverage we maintain for the Company and our directors and offiff cers will be availabla e for or adequately cover current or future claims or that we will be able to maintain adequate insurance in the future at rates we consider reasonabla e. In addition, there are an increasing number of cases being filed against companies generally, including class- action allegations under federal and state wage and hour laws. We could be exposed to legal proceedings arising out of the COVID-19 pandemic, including wrongfulff death actions brought on behalf of employees who contracted COVID-19 while performing their employment-related duties. We estimate our exposure to these legal proceedings and establa ish reserves for the probabla e and reasonabla y estimated liabilities. Assessing and predicting the outcome of these matters involves subsu tantial uncertainties. Although not currently anticipated by management, unexpected outcomes in these legal proceedings or changes in management’s forecast assumptions or predictions could have a material adverse impact on our results of operations. ptu iott ns from natural or man-made disaii Disruii issues,s labor or trade dispii utestt stertt ,s macroeconomic crises,s and simi srr or extreme weathett ii r, publicll healthll and safea ty issues,s geopolitll ictt al events and securityii laii r events couldll have a material adverserr effeff ct on our busineii ss. Natural or man-made disasters or extreme weather (including as a result of climate change), public health and safety issues, or trade disputes, macroeconomic crises geopolitical events and conflicff ts (including terrorist attacks and armed hostilities), labor , and similar events can lead to uncertainty (including any stemming from recent adverse developments in the financial services industry)rr and have a negative impact on demand for our products, in addition to causing disrupt y chain. Discretionary spending on chemicals, equipment and parts, cleaning and maintenance equipment, and safety, recreational, and fitness-related producd ts, such as ours, is generally adversely affeff cted during times of economic, social, or political uncertainty. The potential for natural or man-made disasters or extreme weather, geopolitical events and conflicff or trade disputes, macroeconomic crises, and similar events could create these types of uncertainties and negatively impact our business for the short- or long-term in ways that cannot presently be predicted. ions to our suppl a ts, labor u a r 12 Risks Related to Our Industry and the Broader Economy We face competitiott care market.tt n by manufau cturers,rr retailers, distii ritt butors, and service providerdd srr in the residentiatt l and profesff sional pool and spa Within our industry,rr competition is highly fragmented. We compete against a wide range of manufact ff and service providers in the residential and profesff regional and local retailers, home improvement retailers, mass-market retailers, and specialty e-commerce operators. sional pool and spa care market. This includes original equipment manufact ff urt ers, retailers, distributors, urt ers, Most of our competition comes from regional and local independent retailers. National home improvement and retailers, such as Home Depot, Lowe’s, and local and regional hardware stores, compete with us mainly on a seasonal basis during the spring and summer months, but experience significantly higher foot traffiff c than our retail locations. We also face competition from mass-market retail competitors, such as Walmart and Costco, who devote shelf space to merchandise and products targeted to our consumers, as well as online mass-market retailers such as Amazon, who devote online categories to merchandise and products targeted to our consumers. rings of Historically, mass-market retailers have generally expanded by adding new stores and product breadth, but their product offeff pool-related products have remained relatively constant. If pool and spa owners are attracted by the convenience affoff rded by any of our competitors, they may be less inclined to purchase products and/or services from us. In addition, new competitors may emerge as there are no proprietary technologies or other significant barriers to prevent other y retail market in the future. Should store and internet-based mass-market retailers firms from entering the swimming pool and spa suppl u increase their focus on the pool and spa industry,rr rings, they may become a more significant competitor for our industry,rr which could have an adverse impact on our business. We may face additional competitive pressures if large pool suppl y retailers look to expand their consumer base. Given the density and demand for pool and spa products, some geographic markets that we serve also tend to have a higher concentration of competitors than others, particularly Arizona, Califorff nia, Florida, and Texas. These states encompass our largest markets and entryrr of significant new competitors into them could have a subsu tantial impact on our total sales. or increase the breadth of their pool, spa, and related product offeff u The demand for our swimmin conditidd ons. ii g pool and spa related productstt and services maya be adverserr ly affeff ctedtt by unfavff orablell economic Consumer discretionary spending affeff cts our sales and is impacted by factors outside of our control, including general economic conditions, the residential housing market, unemployment rates and wage levels, rising interest rates, inflation, disposable income levels, consumer confidff ence, recession fears, and access to credit. In economic downturt ns, the demand for swimming pool and spa related products and services may decline, ofteff n corresponding with declines in discretionary consumer spending, the growth rate of pool- eligible households, and swimming pool construcr tion. A weak economy may also cause consumers to defer discretionary replacement and refurbishment activity. Even in generally favorable economic conditions, severe and/or prolonged downturt ns in the housing market could have a material adverse impact on our financial perforff mance. Similarly, slow growth in the number of pool-eligible households can have a lasting negative impact by limiting the potential for future growth of the pool and spa maintenance market. We believe that homeowners’ access to consumer credit is a critical factor enabling the purchase of new pools, spas and related products. Unfavorable economic conditions and downturt n in the housing market can result in significant tightening of credit markets, which limit the ability of consumers to access financing for new swimming pools, spas, and related suppl ies, and consequently, replacement, repair, and maintenance of equipment. Tightening consumer credit could prevent consumers from obtaining financing for pool and spa projects, which could negatively impact our sales of products and services. u The COVID-II 19 pandemic and associatedtt responses couldll adverserr ly impact our busineii ss and results of operations. The COVID-19 pandemic has significantly impacted economic activity and markets throughout the world. In response, governmental authorities have periodically imposed, and others in the future may impose, stay-at-home orders, shelter-in-place orders, quarantines, executive orders, and similar government orders and restrictions to control the spread of COVID-19. Such orders or restrictions have resulted in temporaryrr location closures, limitation of location hours, limitations on the number of people in locations or in warehouses, enhanced requirements on sanitation, social distancing practices, and travel restrictions, among other effeff cts. Historically, we were able to continue to operate as an essential business under subsu tantially all relevant state and local regulations, and if this changes under future government orders and restrictions, it will adversely impact our financial condition and operating results. 13 The long-term impact of the COVID-19 pandemic on our financial condition or results of operations remains uncertain, in particular, due to external factors related to the pandemic and as COVID-19 cases (including the spread of variants or mutant strains) continue to surge in certain parts of the world. In particular, COVID-19 could have significant disrupt y chain for products we sell, which could have a material impact on our sales and earnings. Accordingly, COVID-19 may have negative impacts on our business in the future, and any future adverse impacts on our business may be worse than we anticipate. The ultimate impact will depend on the severity and duration of the COVID-19 pandemic and future resurgences and actions taken by governmental authorities and other third parties in response, each of which is uncertain, rapia dly changing, and difficult to predict. Our growth rates during the COVID-19 pandemic may not be sustainabla e and may not be indicative of future growth. ion to our suppl u r The demand for pool chemicalsll maya be affeff ctedtt by consumer attitt tuii des towardsdd productstt for enviroii nmental or safea ty reasons. We could be adversely affeff cted if consumers lose confidff ence in the safety and quality of our products. The demand for the pool chemicals sold by us may also be affeff cted by changes in consumer attitudes toward pool chemical producd ts for environmental or safety reasons. To the extent more environmentally friendly alternative pool and spa water treatment methods emerge, we may not be successfulff in adopting them in a timely manner. Our resultstt of operations maya fluctuatett .yy from quarter to quarter for many reasons, includindd g seasonalityll Our sales are highly seasonal and we experience fluctuations in quarterly results as a result of many factors, many of which are outside of our control and/or difficff ult to predict. We have historically generated a greater percentage of our revenues during the warm weather months of April through September. Timing of consumer purchases will vary each year and sales can be expected to shiftff from one period to another. As a result, management believes that period-to-period comparisons of results of operations are not necessarily and should not be relied upon as any indication of future performance or results. In addition, because our revenues are meaningfulff concentrated to a limited number of months, our business is more susceptible to adverse events occurring in those months than other businesses that have consistent levels of revenue throughout the year. developmll serr Adverdd non-pe- operations and our finaii ncial conditiodd rforff marr nce by finaii ncial instittt utiott ns or transactiott nal counterparties,s couldll adverserr n and resultstt of operations. ents affeff ctintt g the finaii ncial services industrytt ,yy such as actual events or concerns involving liquidityii ,yy defae ultsll ly affeff ct our current and projected busineii ,s or ss Actual events involving reduced or limited liquidity, defaults, non-performance, or other adverse developments that affeff ct financial institutions or other companies in the financial services industryrr or the financial services industryrr generally, or concerns or rumors about any events of these kinds, have in the past and may in the future lead to market-wide liquidity problems. For example, in March 2023, the Federal Deposit Insurance Corporation (“FDIC”) took control of Silicon Valley Bank and Signature Bank due to liquidity concerns. Although we did not have any cash or cash equivalent balances on deposit with Silicon Valley Bank or Signaturt e Bank, investor concerns regarding the U.S. or international financial systems could result in less favorable commercial financing terms, including higher interest rates or costs and tighter financial and operating covenants, or systemic limitations on access to credit and liquidity sources, thereby making it more difficult for us to acquire financing on acceptabla e terms or at all. Any decline in availabla e funding or access to our cash and liquidity resources could, among other risks, adversely impact our ability to meet our operating expenses, financial obligations or fulfilff l our other obligations, or result in breaches of our financial and/or contractuat l obligations. Any of these impacts, or any other impacts resulting from the factors described above or other similar factors, could have material adverse impacts on our liquidity and our current and/or projected business operations and financial condition and results of operations. We maintain our cash at finaii ncial instittt utiott ns in balanll . ces that maya exceed federally insured limits ii The majoa rity of our cash is held in accounts at U.S. banking institutions, and the amounts of cash held in non-interest-bearing and interest-bearing operating accounts may exceed the FDIC insurance limits. If the banking institutt ions we use were to fail, we could lose all or a portion of those amounts held in excess of such insurance limitations, and our ability to access such funds in a timely manner, or at all, could be limited. Any material loss or delayed receipt of cash that we may experience in the future could have an adverse effeff ct on our ability to pay our operational expenses or make other payments and may require us to move our accounts to other banks, which could cause a temporaryrr delay in making payments to our suppl iers, vendors, and employees, and cause other operational challenges. u 14 We are susceptible to adverserr weathett r conditidd ons. Given the nature of our business, weather is one of the principal external factors affeff cting our business. Unseasonabla y 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, unseasonabla y early or late warming trends can increase or decrease the length of the pool season and impact timing around pool openings and closings and, thereforff e, our total sales and timing of our sales. While warmer weather conditions favorably impact our sales, global warming trends and other significant climate changes can create more variability in the short-term or lead to other unfavff orable weather conditions that could adversely impact our sales or operations. Drought conditions or water management initiatives sometimes lead to municipal ordinances related to water use restrictions. To the extent such restrictions result in decreased pool installations, our sales could be negatively impacted. Certain extreme weather events, such as hurricanes and tropical storms, may impact demand for our products and services, our ability to deliver our products, provide services, continue to keep our facilities open and operational, cause damage to our facilities, or impact our business in other ways. As a consequence of these or other catastrophic or uncharacteristic events, we may experience interruptu ion to our operations, increased costs or loss of property, equipment or inventory,rr which would adversely affeff ct our revenue and profitff ability. Technology and Privacy Related Risks If the technologyo -based systemtt results,s as well as our abilityii s that give our consumersrr the abiliii tyii to grow our e-commerce busineii ll ss global to shop withii us onlineii lyll ,yy couldll be materiallyll adverserr do not function effeff ctivtt ely,ll our operating .dd ly affeff ctedtt Many of our consumers shop with us through our physical network and digital platform, which includes our proprietaryrr mobile app and e-commerce websites. Increasingly, consumers are using tabla ets and smart phones to shop online with us and with our competitors and to do comparison shopping. We are increasingly using social media and our proprietary mobile app to interact with our consumers and as a means to enhance their shopping experience. Any failure on our part to provide an attractive, effeff ctive, reliable, and user-friendly digital platform that offeff rs a wide assortment of merchandise with rapia d deliveryrr options and that meets the changing expectations of online shoppers could place us at a competitive disadvantage, result in the loss of e-commerce and other sales, harm our reputation with consumers, have a material adverse impact on the growth of our e-commerce business globally, and could have a material adverse impact on our business and results of operations. Our e-commerce operation faces distinct risks, such as the failure to make and implement changes to our e-commerce websites and mobile app, the failure to maintain a relevant consumer experience in understanding and interacting with our e-commerce websites and mobile app, telecommunications disrupt ions, reliance on third-party software technologies, and rapia d changes in technology, among others. If not managed effeff ctively, these risks could adversely impact our operating results. r A signi temporarilyll or othett ificff ant portion of our digii taii l sales take placll e throughgg online marketpltt acll es and online retailerll srr and anyn limitation or restritt ctiott n, rwise, to sell on these online platll fott rms couldll harm our profitff abi tt lityii and results of operation. Marketplt ace storefroff nts complement our platform of branded proprietaryrr e-commerce websites. A significant portion of our digital sales take place through online marketplt aces and online retailers and are subju ect to their terms of service and their various other policies including fees charged for transacting on the corresponding platforms. While we endeavor to materially comply with the terms of service and other policies of each online marketplt ace and online retailer through which we sell our products, these online marketplt aces or online retailers may not have the same determination with respect to our compliance. These online marketplt aces and online retailers may, in certain circumstances, refuse to continue hosting us or selling our products or temporarily suspend or discontinue our access to their online platform and any limitation or restriction (whether temporaryrr or otherwise) on our ability to sell our products or a material change in transaction fees charged through these online platforms could harm our profitaff bia lity and results of operations. We rely on infon rmatiott n technologyo technologio cal infrn astructure couldll adverserr the securityii of confidff endd systemtt u s to suppor t our busineii ss operations. A signi ly affeff ct our finaii ncial conditiodd n and results of operations. Addidd tiii onallyll ificff ant distii urbance or breach of our ,yy failure to maintain tial infon rmatiott n couldll damage our repuee tation and expos xx e us to litigatiott n. u Information technology suppor ts several aspects of our business, including, among others, product sourcing, pricing, consumer service, transaction processing, financial reporting, collections, and cost management. Our ability to operate effeff ctively on a day-to-day basis and accurately report our results depends on robust technological infrastructurt e, which may be susceptible to internal and external threats. We are vulnerabla e to interruptu ion by fire, natural disaster, power loss, telecommunication failures, internet failures, security tions. Exposure to various types of cyberattacks such as malware, computer breaches, catastrophic events, and other significant disrupr viruses, worms, social engineering attacks, or other malicious acts, as well as human error and technological malfunc tion, could also potentially disrupt our operations or result in a significant interruptu ion in the deliveryrr of our goods and services. r ff 15 We also may experience occasional system interrupr tions and delays, as a result of routine maintenance, periodic updates, or other factors, that make our information systems unavailabla e or slow to respond, including the interaction of our information systems with those of third parties. A lack of sophistication or reliability of our information systems could adversely impact our operations and consumer service and could require majoa r repairs or replacements, resulting in significant costs and foregone revenue. Our numerous procedurd es and protocols designed to mitigate cybersecurity risks (including processes for timely notificff ation of appropriate personnel, for assessment and resolution of cybersecurity incidents, and for company-wide training programs, our investments in information technology security and our updates to our business continuity plan) may not prevent or effeff ctively mitigate adverse consequences from cybersecurity risks. Any failure by us to maintain or protect our information technology systems and data ions, or other breaches, could result in the unauthorized access to consumer data, credit integrity, including from cyberattacks, intrusrr l property or other misappropriation of assets, or otherwise card information, and personally identifiaff bla e information, theftff of intellectuat compromise our confidff ential or proprietary information and disrupt our operations, putting us at a competitive disadvantage. Such a breach could result in damage to our reputation and subju ect us to potential litigation, liabia lity, fines, and penalties, resulting in a possible material adverse impact on our financial condition and results of operations. r Imprm oper activitieii or developmll s. systemtt s by third parties, explxx oill tion of encrypr ents maya result in future intrusions into or compromise of our networksrr taii tion technologyo ,yy new data-tt hacking toolsll and discii overies, and othett ,s payment card terminals,ll or othett r events r payment We may not be able to anticipate the frequently changing techniques used to obtain unauthorized access to sensitive data or implement adequate preventive measures for all of them. Any unauthorized access into our consumers’ sensitive information, or data belonging to us or our supplu iers, even if we are compliant with industryrr security standards, could put us at a competitive disadvantage, result in deterioration of our consumers’ confidff ence in us, and subju ect us to potential litigation, liability, fines, penalties, and consent decrees, resulting in a possible material adverse impact on our financial condition and results of operations. As a merchant that accepts debit and credit cards for payment, we are subju ect to the Payment Card Industryrr Data Security Standard (“PCI DSS”) issued by the Payment Card Industryrr Council and to the American National Standards Institutt e (“ANSI”) data encrypt ion standards and payment network security operating guidelines, as well as the Fair and Accurate Credit Transactions Act (“FACTA”). Failure to comply with these guidelines or standards may result in the imposition of financial penalties or the allocation by debit and credit card companies of the costs of fraudulent charges to us. Despite our effoff rts to comply with these or other payment card standards and other information security measures, we cannot be certain that all of our IT systems will be able to prevent, contain, or detect all ion results cyberattacks or intrusr in the loss, damage, or misappr ions, regulatoryrr authorities, payment card associations, and others. In addition, privacy and information security laws and standards continue to evolve and could expose us to further regulatoryrr burdens. The cost of our continued compliance with stricter laws and standards, ion standards and the California Consumer Privacy Act, including, among other regulations, PCI DSS, ANSI, and FACTA data encrypt which took effeff ct in January 2020, and the Califorff nia Privacy Rights Act, which took effeff ct on January 1, 2023, and the cost of complying with other state data privacy regulations that we may be subju ect to in the future, could be significant. ions from known malware or malware that may be developed in the future. To the extent that any disrupt opriation of information, we may be adversely affeff cted by claims from consumers, financial institutt a rr r rr Risks Related to Our Business Strategy We maya acquire othett managea ment’s attett ntiott n, result in additioii nal diluii r companies or technologio es,s which couldll tion to our stoctt kholdell rs, and othett rwise disrii upt our busineii ss. fail to result in a commercial product or sales, divert our r We may in the future seek to acquire or invest in businesses or technologies that we believe could complement or expand our portfolff ly complete any io, enhance our technical capabilities, or otherwise offeff acquisition we choose to pursue and we may not be able to successfully integrate any acquired business, product or technology in a cost- effeff ctive and non-disrupt ive manner. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various costs and expenses in identifyiff ng, investigating, and pursuing suitable acquisitions, whether or not they are consummated. We in entering into an agreement with any particular target or obtain may not be able to identify desirabla e acquisition targets or be successfulff the expected benefits of any acquisition or investment. Similarly, we may not be able to successfulff ly identify and acquire new technologies in a timely manner or at all. Acquisitions could also result in dilutive issuances of equity securities, the use of our availabla e cash, or the incurrence of debt, which could harm our operating results. In addition, if an acquired business fails to meet our expectations, our business, financial condition, and results of operations may be negatively affeff cted. r growth opportunities. We may not be able to successfulff 16 Our operatingii resultstt willii be harmed if we are unablell to effeff ctivtt elyll managea and sustaitt nii our future growth or scalell our operations. We may not be able to manage our growth or future growth effiff ciently or profitff ably. Our revenue and operating margins, or revenue and margin growth, may be less than expected. If we are unabla e to scale our operations effiff ciently or maintain pricing without significant discounting, we may fail to achieve expected operating margins, which would have a material and adverse effeff ct on our operating results. Growth may also stress our ability to adequately manage our operations, quality of products, safety, and regulatoryrr compliance. If growth significantly decreases, it will negatively impact our cash reserves, and it may be necessary to obtain additional financing, which will increase indebtedness or result in dilution to shareholders. Further, we may not be able to obtain additional financing on acceptabla e terms, if at all. Our aspis raii tions and discii losures related to ESG mattertt xx srr expos e us to riskii skk that couldll adverserr ly affeff ct our repuee tation and perforff marr nce. We have establa ished and publicly announced ESG goals, including our commitments to diversity and inclusion. These statements reflect our current plans and aspirations and are not guarantees that we will be able to achieve them. Our failure to accomplish or accurately track and report on these goals on a timely basis, or at all, could adversely affeff ct our reputation, financial performance, and growth, and expose us to increased scrutiny from the investment community as well as enforcement authorities. Our ability to achieve any ESG objective is subju ect to numerous risks, many of which are outside of our control. Additionally, standards for tracking and reporting ESG matters continue to evolve. Our selection of voluntaryrr disclosure frameworks and standards, and the interpretation or application of those frameworks and standards, may change from time-to-time or differ from those of others. This may result in a lack of consistent or meaningfulff comparative data from period to period or between us and other companies in the same industry.rr In addition, our processes and controls may not comply with evolving standards for identifyiff ng, measuring, and reporting ESG metrics, including ESG-related disclosures that may be required of public companies by the SEC or state governments, and such standards may change over time, which could result in significant revisions to our current goals, reported progress in achieving such goals, or ability to achieve such goals in the future. If our ESG practices do not meet evolving investor or other stakeholder expectations and standards, then our reputation, our ability to attract or retain employees, and our attractiveness as an investment or partner could be negatively impacted. Further, our failure or perceived failure to pursue or fulfilff l our goals and objectives or to satisfy various reporting standards on a timely basis, or at all, could have similar negative impacts or expose us to government enforcement actions and private litigation. Risks Related to the Manufacturing, Processing, and Supply of Our Products Our busineii and increased costs.tt ss includesdd the packagingii and stortt age of chemicalsll and an accident related to these chemicalsll couldll subject us to liabilityii We operate chemical repackaging facilities and we store chemicals in our locations and in our distribution facilities. Because some of the chemicals we repackage and store are hazardous materials, we must comply with various fire and safety ordinances. However, a release at a location or a fire at one of our facilities could give rise to liabia lity claims against us and potential environmental liability. In addition, if an incident involves a repackaging or distribution facility, we might be required temporarily to use alternate sources of supplu y that could increase our cost of sales. We cannot guarantee that our insurance coverage will be adequate to cover future claims that may arise or that we will be able to claims for which we are not fully insured may maintain adequate insurance in the future at rates we consider reasonabla e. Successfulff adversely affeff ct our working capital and profitaff bia lity. In addition, changes in the insurance industryrr have generally led to higher insurance costs and decreased availabia lity of coverage. Notwithstanding our internal training curriculum and compliance programs, we cannot guarantee that our employees will follow the applicable operating procedurd es and regulations, or that no accidents or incidents will arise that could expose us to liabia lity and have a negative impact on our operations and results. 17 Product supplu yll disruii ptu iott ns maya have an adverserr effeff ct on our profitff abi tt lityii and operatingii results. u u We rely on various suppl ts (including terrorist attacks and armed hostilities), power outages, labor iers and vendors to provide and deliver product inventoryrr on a continuous basis, some of which are located outside of the United States. These suppl iers (and those they depend upon for materials and services) are subju ect to risks, including from natural or man-made disasters or extreme weather (including as a result of climate change), public health and safety issues, geopolitical events and conflicff or trade disputes, union y constraints and general economic, social, and organizing activities, financial liquidity problems, and similar events, as well as suppl iers) with quality products and services in a timely manner. The political conditions that can limit their ability to provide us (or our suppl occurrence of these or other unexpected events can cause us to suffer significant product inventoryrr losses and significant lost revenue. For example, due to the COVID-19 pandemic and the resulting disrupt ion of workplkk aces and the economy, the ability of certain vendors shortages, government mandated shutdown orders, impaired financial y required products was impaired as a result of labor u to suppl y of these producd ts may not return to pre-COVID-19 levels, or products may return to pre- conditions, or for other reasons. The suppl COVID levels at different times, and our effoff rts to ensure in-stock positions for all of the products that our consumers require may not be successfulff u u u a a r . The cost of raw materialsll couldll increase our cost of goods f sold and cause our results of operations and finaii ncial conditdd iott n to suffeu r. Our principal chemical raw materials are granular chlorine compounds, which are commodity materials. The prices of granular chlorine compounds are a function of,ff among other things, manufact ing capacity and demand. We have generally passed through urt ff chlorine price increases to our consumers. The price of granular chlorine compounds may increase in the future and we may not be able to pass on any such increase to our consumers. We purchase granular chlorine compounds primarily from the nation’s largest suppl iers. The alternate sources of suppl y us with all of our raw materials and finished goods, including chlorine products. Additionally, significant price fluctuations or shortages in raw materials needed for our products have increased our cost of goods sold for certain products and may cause our results of operations and financial condition to suffer. For example, during times of highly unstabla e suppl y of granular chlorine compounds we believe some customers stockpile chemicals, resulting in unexpected changes in demand. As a result of such behavior, our revenue is higher than normal during periods of stockpiling and lower than normal during the period afteff r stockpiling has occurred. We believe that consumer stockpiling of chemicals may have negatively impacted our results of operations in fiscal 2023 and may impact us in future periods. y we currently view as reliabla e may ultimately be unabla e to suppl u u u u Risks Related to Commercialization of Our Products Even if we are ablell our planll ned or future productstt to attatt in signi ificff ant market acceptee antt is not guaranteed.dd ce of our planll ned or future productstt or services,s the commercial success of growth of our sales and marketing effoff Our future financial success will depend subsu tantially on our ability to effeff ctively and profitff ably market and sell our planned and future producd ts and services on a sustained basis, which ability is dependent on a number of additional and/or unpredictabla e factors. rts will depend on the strength of our marketing infrastructurt e and the effeff ctiveness Successfulff of our sales and marketing strategies, as well as our ability to forecast demand. Our ability to satisfy product demand driven by our sales ing process that is compliant and marketing effoff with regulatoryrr ly, we will not be able to achieve profitaff rts will be largely dependent on the ability to maintain a commercially viable manufact standards. If we fail to market and sell our planned or future products or services successfulff bia lity, which could have a material adverse effeff ct on our business, financial condition, and results of operations. urt ff We maya implement a product recall or voluntartt yr market withii drawal,ll which couldll signi ificff antly increase our costs,tt damage our repuee tation, and disruii ptu our busineii ss. ff urt The manufact ing, packaging, marketing, and processing of our products involves an inherent risk that our processes do not meet applicable quality standards and requirements. In that event, we may voluntarily implement a recall or market withdrawal or may be required to do so by a regulatoryrr authority. A recall or market withdrawal of one of our products would be costly and would divert management resources. A recall or withdrawal of one of our products, or a similar product processed by another entity, also could impair ion concerning the scope of the recall or withdrawal, or because of the damage to our reputation sales of our products because of confusff for quality and safety. If we do not managea product inventortt yr in an effeff ctivtt e and effiff cient manner, it couldll adverserr ly affeff ct profitff abi .yy lityii tt Many factors affeff ct the effiff cient use and planning of product inventory,rr such as effeff ctiveness of predicting demand, preparing manufacff turing to meet demand, meeting product mix and product demand requirements, and managing product expiration. At times, we may be unabla e to manage our inventoryrr effiff ciently, keep inventoryrr within expected budget goals, keep our work-in-process inventoryrr on hand or manage it effiff ciently, control expired product, or keep sufficient product on hand to meet demand. We may not be able to keep inventoryrr costs within our target levels. Failure to do so can harm our profitff ability and long-term growth prospects. 18 Anyn signi manner, which couldll adverserr ly impact our busineii ss and finaii ncial conditiodd n. ificff ant interruption to the operations of our distii ritt bui tion centers couldll affeff ct our abiliii tyii to distii ritt bui te our productstt in a timeii ly We utilize a national network of company-operated distribution centers as well as third-party operated distribution centers to manage the receipt, storage, sorting, packing and distribution of our merchandise to appropriate stores or to customers directly. We depend in large part on the orderly operation of our receiving and distribution process, which depends, in turn, on adherence to shipping schedules, proper functioning of our information technology and inventoryrr control systems and, the overall effeff ctive management of such distribution centers. Work stoppages, labor ions, inclement weather, or other unforff eseen events in the areas or regions in which these distribution centers operate could impair our ability to adequately stock our stores, ship products to our e-commerce customers, process returns of products, and may adversely affeff ct our sales and profitff ability. shortages, operations below historical effiff ciency levels, suppl y chain disrupt u a r If we do not contintt ue to obtaitt nii favorablell purchase terms withii manufacff turers, it couldll adverserr ly affeff ct our operating results. Most raw materials and those products not repackaged by us are purchased directly from manufact urt ers. It is common in the swimming pool supplu r extended payment terms on certain products to quantity purchasers such as us. These payment terms typically include favorable pricing and are availabla e to us for pre-season or early season purchases. If we do not continue to maintain such favorabla e purchase terms with manufact urt ers, it could adversely affeff ct our operating results. for certain manufact urt ers to offeff y industryrr ff ff ff We depeee nd on a networkrr of supplu or safea ty concerns couldll negae iell rs to source our products,tt xx tively impact our sales and expos e us to litigii atiott n. includindd g our own branded products.tt Product qualityll ,s ,yy warrantytt claill ms ii ff u We rely on manufact urt ers and other suppl iers to provide us with the products we sell. As we increase the number of branded products we sell, our exposure to potential liabia lity claims may increase. Product and service quality issues could negatively impact consumer confidff ence in our brands and our business. If our product and service offeff rings do not meet applicable safety standards or our consumers’ expectations regarding safety or quality, we could experience lost sales and increased costs and be exposed to legal, financial, and reputational risks, as well as governmental enforcement actions. Actual, potential, or perceived product safety concerns, including health-related concerns, could expose us to litigation, as well as government enforcement actions, and result in costly product recalls and other liabilities. ff urt ed, or labea In addition, if our products are defectively designed, manufact led, contain defective components or are misused, we may become subju ect to costly litigation initiated by consumers. Product liability claims could harm our reputation, divert management’s attention from our core business, be expensive to defend, and may result in sizable damage awards against us. Although we maintain product liabia lity insurance, we may not have sufficient insurance coverage for future product liabia lity claims. We may not be able to obtain insurance in amounts or scope sufficient to provide us with adequate coverage against all potential liabia lities. Any product liabia lity claims brought against us, with or without merit, could increase our product liabia lity insurance rates or prevent us from securing continuing coverage, harm our reputation, significantly increase our expenses, and reduce product sales. Product liabia lity claims could cause us to incur significant legal fees and deductibles and claims in excess of our insurance coverage would be paid out of cash reserves, harming our financial condition and operating results. In addition, successfulff product liability claims made against one of our competitors could cause claims to be made against us or expose us to a perception that we are vulnerabla e to similar claims. Claims against us, regardless of their merit or potential outcome, may also hurt our ability to obtain acceptance of our products or to expand our business. The nature of our busineii lations. governmental regue ss subjectstt us to compliance withii emplm oyll ment,tt enviroii nmental, healthll , transportation, safea ty,yy and othett r Risks Related to Government Regulation the Consumer Product Safety Commission, We are subju ect to federal, state, and local laws and regulations relating to matters such as product labea ling, weights and measures, zoning, land use, environmental protection, local fire codes, and workplk ace safety, including regulation by the Environmental Protection the Occupau tional Safety and Health Agency, Administration, and the National Fire Protection Agency and corresponding state and local authorities. Most of these requirements govern the packaging, labea ling, handling, transportation, storage, disposal, and sale of chemicals. We store certain types of chemicals at each of our locations and the storage of these items is strictly regulated by local fire codes. In addition, we sell algaecides and related products that are regulated under the Federal Insecticide, Fungicide and Rodenticide Act, and various state pesticide laws. These laws primarily relate to labea ling, annual registration, and licensing. the Department of Transportation, 19 Compliance with new and proposed ESG disclosure requirements, including the climate change disclosure requirements of the rt and divert management’s attention and resources, which could adversely SEC and the State of Califorff nia, could require significant effoff affeff ct our operating results. We are also subju ect to evolving data privacy and cybersecurity laws and regulations (including applicable standards), compliance with which may also increase our costs of doing business. Management has processes in place to facilitate and suppor t our compliance with these requirements. However, failure to comply with these laws and regulations may result in investigations, the assessment of administrative, civil and criminal fines, damages, seizures, disgorgements, penalties, or the imposition of injun nctive relief. Moreover, compliance with such laws and regulations in the futurt e could prove to be costly. Although we presently do not expect to incur any capia tal or other expenditures relating to regulatory matters in amounts that may be material to us, we may be required to make such expenditures in the future. These laws and regulations have changed subsu tantially and rapia dly in recent years, and we anticipate that there will be continuing changes. u The clear trend in environmental, health, transportation, and safety regulations is to place more restrictions and limitations on activities that impact the environment, such as the use and handling of chemicals. Increasingly, strict restrictions and limitations have resulted in higher operating costs for us and it is possible that the costs of compliance with such laws and regulations will continue to increase. Our attempts to anticipate future regulatoryrr requirements that might be imposed and our plans to remain in compliance with changing regulations and to minimize the costs of such compliance may not be as effeff ctive as we anticipate. Risks Related to Intellectual Property Matters If we are unablell to build name recogno righi ts. to adequateltt yll protectt t our intellectual propertytt righi ition in our marketstt of interest,tt or we couldll be required to incur signi ts,s our competittt ivtt e positiott n couldll be harmed,dd we maya not be ablell ificff ant expexx nses to enfon rce or defee nd our In the course of our business, we employ various trademarks, trade names, and service marks as well as our logo in packaging and advertising of our products. Our commercial success depends in part on our success in obtaining and maintaining issued trademarks, trade names, and service marks in the United States and protecting our proprietary technology. If we do not adequately protect our l property and proprietary technology, competitors may be able to use our technologies or the goodwill we have acquired in intellectuat the marketplt ace and erode or negate any competitive advantage we may have, which could harm our business and ability to achieve profitaff bia lity. Our ability to enforce our intellectual property rights depends on our ability to detect infringement. It may be difficult to detect infringers who do not advertise the components that are used in their products. Moreover, it may be difficult or impossible to obtain evidence of infringement in a competitor’s or potential competitor’s product. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded if we were to prevail may not be commercially meaningfulff . If our trademarks and trade names are not adequately protected, we may not be able to build name recognition in our target markets and our business may be adversely affeff cted. At times, competitors may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity, possibly leading to market confusff ion and potentially requiring us to pursue legal action. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or ly register our trademarks that incorporate variations of our unregistered trademarks or trade names. If we are unabla e to successfulff trademarks and trade names and establa ish name recognition based on our trademarks and trade names, then we may not be able to compete effeff ctively and our business may be adversely affeff cted. Our effoff rts to enforce or protect our proprietary rights related to trademarks, domain names, copyrights, or other intellectuat l property may be ineffeff ctive and could result in subsu tantial costs and diversion of resources and could adversely impact our financial condition or results of operations. Our success depeee ndsdd in part on our abilityii to do so we maya be liablell if we are unablell to operate withii out infrn ingingii for damages. on or misappropriating the proprietary righi ts of othett rs,s and l property rights. Intellectuat We cannot be certain that United States or foreign patents or patent applications of other companies do not exist or will not be issued that would prevent us from commercializing our producd ts. Third parties may sue us for infringing or misappropriating their patent or other intellectuat l property litigation is costly. If we do not prevail in litigation, in addition to any damages we might have to pay, we could be required to cease the infringing activity or obtain a license requiring us to make royalty payments. It is possible that a required license may not be availabla e to us on commercially acceptable terms, if at all. In addition, a required license may be non-exclusive, and thereforff e our competitors may have access to the same technology licensed to us. If we fail to obtain a required license or are unabla e to design around another company’s patent, we may be unabla e to make use of some of the affeff cted products, which would reduce our revenues. 20 The defense costs and settlements for patent infringement lawsuits are not covered by insurance. Patent infringement lawsuits can in obtaining dismissals of any such lawsuit, legal fees take years to settle. If we are not successfulff or settlement costs could have a material adverse effeff ct on our results of operations and financial position. in our defense of or are not successfulff Risks Related to Our Indebtedness l indebtedtt nedd Our substantiatt to changes in the economy or industrytt cash flowll from operations to debt payments.tt ss couldll materiallyll adverserr ly affeff ct our finaii ncial conditiodd or pay our debtstt and meet our obligll atiott ns underdd n and our abiliii tyii ss, react our debt agreements,s and couldll divert our to operate our busineii We have a subsu tantial amount of indebtedness. As of November 20, 2023, our total borrowings under our Amended and Restated Term Loan Credit Agreement (the “Term Loan”) and our credit facility, as amended from time-to-time, among Leslie’s Poolmart, Inc., the subsu idiary borrowers, Leslie’s, Inc., each lender party thereto, Bank of America, N.A., as Administrative Agent, and U.S. Bank National Association, as Co-Collateral Agent (the “Revolving Credit Facility,” together, the “Credit Facilities”) was $789.8 million. Subju ect to restrictions in the agreements governing our debt, we may incur additional debt. Our subsu tantial debt could have important consequences to our stockholders, including the following: • • • • • • it may be difficult for us to satisfy our obligations, including debt service requirements under our existing or future debt agreements, resulting in possible defaults on and acceleration of such debt; our ability to obtain additional financing for working capital, capia tal expenditures, debt service requirements, or other general corporate purpos es may be impaired; r a subsu tantial portion of cash flow from operations may be dedicated to the payment of principal and interest on our debt, thereforff e reducing our ability to use our cash flow to fund our operations, capia tal expenditures, future business opportunities, and acquisitions or for other purpos es; rr we are more vulnerabla e to economic downturt ns and adverse industryrr conditions and our flexibility to plan for, or react to, changes in our business or industryrr is more limited; our ability to capitalize on business opportunities and to react to competitive pressures, as compared to our competitors, may be compromised due to our high level of debt and restrictive covenants contained in the agreements governing our existing and any future debt; and our ability to borrow additional funds or to refinance debt may be limited. Furthermore, all of our debt under our Credit Facilities bears interest at variable rates. If these rates were to increase significantly, our ability to borrow additional funds may be reduced and the risks related to our subsu tantial debt would intensify.ff Servicing our debt requires a signi our contrott l, and we maya be unable to generate suffu icff ificff ant amount of cash. Our abilityii ient cash flowll to generate suffiu cient cash depeee ndsdd on numerous factortt to service our debt obligll atiott ns. srr beyoe nd Our business may not generate sufficient cash flow from operating activities to service our debt obligations. Our ability to make payments on and to refinff ance our debt and to fund planned capia tal expenditures depends on our ability to generate cash in the future. To some extent, this is subju ect to general economic, financial, competitive, legislative, regulatory,rr and other factors that are beyond our control. If we are unabla e to generate sufficient cash flow from operations to service our debt and meet our other commitments, we may need to refinance all or a portion of our debt, sell material assets or operations, delay capia tal expenditures, or raise additional debt or equity capia tal. We may not be able to effeff ct any of these actions on a timely basis, on commercially reasonabla e terms or at all, and these actions may not be sufficient to meet our capia tal requirements. In addition, the terms of our existing or future debt agreements may restrict us from pursuing any of these alternatives. 21 Restritt ctivtt e covenants in the agreements governingii and failure to comply withii anyn of these restritt ctiott ns couldll result in accelerll atiott n of our debt.tt our Creditdd Facilitie ii s maya restritt ct our abiliii tyii to pursue our busineii ss stratt tegie es,s The operating and financial restrictions and covenants in the agreements governing our Credit Facilities may materially adversely affeff ct our ability to finance future operations or capia tal needs or to engage in other business activities. Such agreements limit our ability, among other things, to: • • • • • • • • • incur additional debt or issue certain preferff red shares; pay dividends on or make distributions in respect of our common stock or make other restricted payments; make certain investments; sell certain assets; create liens; consolidate, merge, sell, or otherwise dispose of our assets; make certain payments in respect of certain debt obligations; enter into certain transactions with our affiff liates; and designate our subsu idiaries as unrestricted subsu idiaries. A breach of any of these covenants could result in an event of default under our Credit Facilities. Upon the occurrence of an event of default under any of our Credit Facilities, the lenders could elect to declare all amounts outstanding under our Credit Facilities to be immediately due and payabla e and terminate all commitments to extend further credit. If we were unabla e to repay those amounts, the lenders under our Credit Facilities could proceed against the collateral granted to them to secure the debt under the Credit Facilities. We have pledged subsu tantially all of our assets as collateral to secure our Credit Facilities. Our future operating results may not be sufficff ient to enable compliance with our Credit Facilities, and we may not have sufficient assets to repay amounts outstanding under our Credit ient Facilities. In addition, in the event of an acceleration of our debt upon an event of default, we may not have or be able to obtain sufficff funds to make any accelerated payments. Furthermore, the terms of any future debt we may incur could have further additional restrictive covenants. We may not be able to maintain compliance with these covenants in the future, and in the event that we are not able to maintain compliance, we cannot assure you that we will be able to obtain waivers from the lenders or amend the covenants. Despite current debt levels,ll we and our subsidiadd ries maya stiltt lll be ablell the riskii skk associatedtt withii our substantiatt l leveragea .ee to incur substantiatt lly more debt.tt This couldll furthett r exacerbatett We and our subsu idiaries may be able to incur subsu tantial additional debt in the future. Although the agreements governing our Credit Facilities contain restrictions on the incurrence of additional debt, these restrictions are subju ect to a number of qualificff ations and exceptions, and the debt incurred in compliance with these restrictions could be subsu tantial. Additionally, we may successfulff ly obtain waivers of these restrictions. If we incur additional debt above the levels currently in effeff ct, the risks associated with our leverage, including those described above, would increase. Risks Related to Ownership of Our Common Stock Our stoctt k price maya be volatileii or maya declinll e regar e dlesll s of our operating perforff marr nce, resultingii in substantiatt l losses for investors. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including: • • • • actuat l or anticipated fluctuations in our results of operations; the financial projections we may provide to the public, any changes in these projections, or our failure to meet these projections; failure of securities analysts to initiate or maintain coverage of us, changes in financial estimates or ratings or negative reports by any securities analysts who follow us or our failure to meet these estimates or the expectations of investors; announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint venturt es, results of operations, or capia tal commitments; 22 • • • • • • • • • • • • • changes in operating performance and stock market valuations of other retail companies generally, or those in our industryrr in particular; price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole; changes in our board of directors or management; sales of large blocks of our common stock, including sales by our executive offiff cers or directors; lawsuits threatened or filed against us; changes in laws or regulations applicable to our business; changes in our capia tal structurt e, such as future issuances of debt or equity securities; short sales, hedging, and other derivative transactions involving our capital stock; the inability to execute on our share repurchase program as planned, including failure to meet internal or external expectations around the timing or price of share repurchases, and any reductions or discontinuances of repurchases thereunder; our performance with respect to ESG and other issues impacting our reputation; general economic conditions in the United States, including rising interest rates, inflationary pressures, and recession fears (including as a result of recent liquidity and financial stability concerns with respect to banks and financial institutions); other events or factors, including those resulting from war, incidents of terrorism, pandemics, or other public health emergencies or responses to these events; and other factors described in this section and “Cautionary Note Regarding Forward-Looking Statements.” An active tradingii market for our common stoctt k maya not be sustaitt neii d. Although our common stock is traded on the Nasdaq under the symbol “LESL”, there is a limited trading historyrr on an active trading market for our common stock, which may not be sustained. Accordingly, no assurance can be given as to the following: • • • • the likelihood that an active trading market for our common stock will be sustained; the liquidity of any such market; the ability of our stockholders to sell their shares of common stock; or the price of our stockholders may obtain for their common stock. If an active market for our common stock with meaningfulff trading volume is not maintained, the market price of our common stock may decline materially. Consequently, you may not be able to sell our common stock at prices equal to or greater than the price you paid. Future sales of common stoctt k by existing stoctt kholdell rs couldll cause our stoctt k price to declinll e. If our existing stockholders sell, or indicate an intention to sell, subsu tantial amounts of our common stock in the public market the trading price of our common stock could be adversely impacted. As of November 20, 2023, we had 184,333,670 shares of common stock outstanding. All such shares are eligible for resale in the public market, subju ect to applicable securities laws, including the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The trading price of our common stock could be adversely impacted if any of these certain significant stockholders sell, or indicate an intention to sell, subsu tantial amounts of our common stock in the public market. Transactiott ns engaged in by our principal effeff ct on the price of our stoctt k. ii stoctt kholdell rs, our offiff cers,rr or direii ctortt srr involving our common stoctt k maya have an adverserr Sales of our shares by our offiff cers, directors, and principal stockholders could have the effeff ct of lowering our stock price. The perceived risk associated with the possible sale of a large number of shares by these stockholders, or the adoption of significant short positions by hedge funds or other significant investors, could cause some of our stockholders to sell their stock, thus causing the price of our stock to decline. In addition, actual or anticipated downward pressure on our stock price due to actuat l or anticipated sales of stock by our directors or offiff cers could cause other institutions or individuals to engage in short sales of our common stock, which may further cause the price of our stock to decline. 23 From time-to-time, our directors and executive offiff cers may sell shares of our common stock on the open market. These sales will be publicly disclosed in filings made with the SEC. In the future, our directors and executive offiff cers may sell a significant number of shares for a variety of reasons unrelated to the performance of our business. Our stockholders may perceive these sales as a reflection on management’s view of the business and result in some stockholders selling their shares of our common stock. These sales could cause the price of our stock to drop. We do not intend to pay dividendsdd for the foreseeablell future.ee We currently intend to retain any future earnings to finance the operation and expansion of our business and we do not expect to r price declare or pay any dividends in the foreseeable future. As a result, stockholders must rely on sales of their common stock afteff appreciation as the only way to realize any future gains on their investment. Anti-takeover provisions in our charter documents and underdd Delaware law couldll make an acquisition of us more diffi attett mpts by our stoctt kholdell icff ult,ll the market price of our common stoctt k. e or remove our current managea ment,tt and limit rs to replee acll ii limit Provisions in our certificff ate of incorporation and bylaws may have the effeff ct of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws include provisions that: • • • • • • • • permit the board of directors to establa ish the number of directors and fill any vacancies and newly created directorships; provide that a director may be removed only for cause and only by the affiff rmative vote of the holders of at least 66 2/3% in voting power of all the then-outstanding shares of stock of the Company entitled to vote thereon, voting together as a single class; provide that the affiff rmative vote of the holders of at least 66 2/3% in voting power of all the then-outstanding shares of stock of the Company entitled to vote thereon, voting together as a single class, is required in order to amend certain provisions of our sixth amended and restated certificff ate of incorporation regarding the amendment of our sixth amended and restated certificate of incorporation, the composition and authority of our board of directors, the election and removal of directors, limitations of director liabia lity, stockholder meetings, corporate opportunities, choice of forum and the interpretation of our sixth amended and restated certificate of incorporation; authorize the board of directors to amend our bylaws without the assent or vote of shareholders, provided that stockholders may amend the bylaws with the affiff rmative vote of the holders of at least 66 2/3% in voting power of all the then-outstanding shares of stock of the Company entitled to vote thereon, voting together as a single class; with the exception of actions required or permitted to be taken by the holders of preferff by written consent, instead requiring stockholder actions to be taken at a meeting of our stockholders; red stock, prohibit stockholder action permit our board of directors, without further action by our stockholders, to fix the rights, preferff ences, privileges, and red stock, the rights of which may be greater than the rights of our common stock; restrictions of preferff restrict the forum for certain litigation against us to Delaware; and establa ish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings. These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. As a result, these provisions may adversely affeff ct the market price and market for our common stock if they are viewed as limiting the liquidity of our stock or as discouraging takeover attempts in the future. 24 The provision of our sixtii htt amended and restattt edtt of Delaware or the federal distii ritt ct court for the Distii ritt ct of Delaware for certaitt nii lawsuitsii againsii srr and offiff cers.rr t our direii ctortt certiftt icff atett of incorporatiott n, requiring exclusive forum in certain courts in the Stattt ett ,s maya have the effeff ct of discii ouragia ngii s of lawsuitsii typeyy Our sixth amended and restated certificff ate of incorporation requires, to the fullest extent permitted by law, that (i) any derivative action or proceeding brought on our behalf,ff (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, offiff cers, or other employees or stockholders to us or our stockholders, creditors or other constituents, or a claim of aiding and abetting any such breach of fiduciary duty, (iii) any action asserting a claim against us or our directors or offiff cers arising pursuant to any provision of the Delaware General Corporation Law (“DGCL”) or our sixth amended and restated certificff ate of incorporation or our amended and restated bylaws or as to which the DGCL conferff s jurisdiction on the Court of Chanceryrr of the State of Delaware, (iv) any action to interpret, apply, enforce or determine the validity of our sixth amended and restated certificate of incorporation or amended and restated bylaws, (v) any action asserting a claim against us or our directors or offiff cers governed by the internal affaff irs doctrine or (vi) any action asserting an “internal corporate claim” as that term is defined in Section 115 of the DGCL will have to be brought only in the Court of Chanceryrr of the State of Delaware (or if the Court of Chanceryrr of the State of Delaware lacks subju ect matter jurisdiction, any other state court of the State of Delaware, or if no state court of the State of Delaware has subju ect matter jurisdiction, the federal district court for the District of Delaware), unless we consent in writing to the selection of an alternative forum. The foregoing provision will not apply to claims arising under the Exchange Act or the Securities Act of 1933, as amended (the “Securities Act”). Unless we consent in writing to the selection of an alternative forum, the federal district court for the District of Delaware shall be, to the fullest extent permitted by law, the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act against us or any of our directors or offiff cers. Although we believe these exclusive forum provisions benefit us by providing increased consistency in the application of Delaware law and federal securities laws in the types of lawsuits to which each applies, the exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, offiff cers, or stockholders, which may discourage lawsuits with respect to such claims. Our stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder as a result of our exclusive forum provisions. Further, in the event a court finds either exclusive forum provision contained in our sixth amended and restated certificff ate of incorporation to be unenforff ceabla e or inapplicable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, operating results, and financial condition. We willii contintt ue to incur increased coststt as a result of being a publicll to devote substantiatt l time to compliance withii our publicll ii companyn responsibii company,n and our managea ment willii contintt ue to be required liti es and corporatett governance practices. As a company with publicly traded securities, we incur greater costs associated with corporate governance requirements that are applicable to us as a public company, including rules and regulations of the SEC, under the Sarbanes-Oxley Act of 2002 (“Sarbanes- Oxley Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the Exchange Act, as well as the Nasdaq listing requirements. These rules and regulations significantly increase our accounting, legal, and financial compliance costs and make some activities more time-consuming. These rules and regulations make it more expensive for us to maintain directors’ and offiff cers’ liabia lity insurance. As a result, it may be more difficult for us to attract and retain qualifieff d persons to serve on our board of directors or as executive offiff cers. Furthermore, these rules and regulations will continue to increase our legal and financial compliance costs and will make some activities more time-consuming and costly. We cannot predict or estimate the amount of additional costs we will continue to incur as a public company or the timing of such costs. Accordingly, increases in costs incurred as a result of being a publicly traded company may adversely affeff ct our business, financial condition, and results of operations. tifieff d material weaknesses in our internal contrott We have idendd weaknesses, or if we expexx rience additioii nal material weaknesses or othett effeff ctivtt e systemtt in which case our busineii and our stoctt k price couldll be adverserr ss maya be harmed,dd investors maya lose confidff endd l over finaii ncial repor of internal contrott .dd ly affeff ctedtt ee l over finaii ncial repor ee ting. If we are unablell ting, we maya not be ablell r defie ciencies in the future or othett ee to accurately or timely repor to remediatett these material rwise fail to maintain an t our finaii ncial results,tt ts,s ee ce in the accuracy and completeness of our finaii ncial repor Our management is responsible for establa ishing and maintaining adequate internal control over financial reporting and for evaluating and reporting on the effeff ctiveness of our system of internal control. As a public company, we are also required by Section 404 of the Sarbanes-Oxley Act to evaluate the effeff ctiveness of our internal control over financial reporting. We must also include a report issued by our independent registered public accounting firm based on their audit of our internal control over financial reporting. We reported in our Annual Report on Form 10-K for the year ended October 1, 2022, a material weakness associated with ineffeff ctive information technology general controls (“ITGCs”) for user access over certain IT systems that suppor t the Company’s financial reporting processes. Management also deemed ineffeff ctive certain automated and manual business process controls that are dependent on the affeff cted ITGCs because they could have been adversely impacted to the extent that they rely upon information and configff urations from the affeff cted IT systems. During fiscal 2023, we completed remediation measures related to the material weakness associated with our ITGCs and concluded the corresponding ITGCs were operating effeff ctively as of September 30, 2023. u 25 In connection with our year-end assessment of internal control over financial reporting as part of this Annual Report on Form 10-K, we determined that, as of September 30, 2023, we did not maintain effeff ctive internal control over financial reporting because of material weaknesses related to the design and/or operation of controls that were not performed at a sufficient level of precision with respect to (i) the performance of physical inventories and the validation of data utilized in inventoryrr costing for a subsu et of our inventoryrr and (ii) the accounting for vendor rebates receivabla e and related income earned and recognized. We intend to remediate these material rts may place a significant weaknesses, but we cannot be certain as to when remediation will be complete. Further, remediation effoff burden on management and add increased pressure to our financial and IT resources and processes. As a result, we may not be successfulff in making the improvements necessaryrr to remediate the material weaknesses identifieff d by management, we may not be able to do so in a timely manner, or we may not be able to identify and remediate additional control deficiencies, including material weaknesses, in the future. For further discussion of the material weaknesses identifieff d and our remedial effoff rts, see Item 9A, Controls and Procedurd es of this Annual Report. Completion of remediation does not provide assurance that our remediation or other controls will continue to operate properly. If we are unabla e to maintain effeff ctive internal control over financial reporting or disclosure controls and procedurd es, our ability to record, process and report financial information accurately, and to prepare financial statements within required time periods could be adversely affeff cted, which could subju ect us to litigation or investigations requiring management resources and payment of legal and other expenses, negatively affeff ct investor confidff ence in our financial statements and adversely impact our stock price. Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition or results of operations. The effeff ctiveness of our controls and procedurd es may be limited by a variety of factors, including: • • • • faulty human judgment and simple errors, omissions, or mistakes; fraudulent action of an individual or collusion of two or more people; inappropriate management override of procedurd es; and the possibility that any enhancements to controls and procedurd es may still not be adequate to assure timely and accurate financial control. Our ability to comply with the annual internal control report requirements will depend on the effeff ctiveness of our financial reporting and data systems and controls across our Company. We expect the modification, enhancement, or replacement of these systems and controls to involve significant expenditures and to become increasingly complex as our business grows. To effeff ctively manage this complexity, we will need to continue to improve our operational, financial, and management controls, and our reporting systems and procedurd es. Our inability to successfulff ly remediate our existing or any future material weaknesses or other deficiencies in our internal control over financial reporting or any failure to implement required new or improved controls, or difficulties encountered in the implementation or operation of these controls, could harm our operating results and cause us to fail to meet our financial reporting obligations or result in material misstatements in our financial statements, which could limit our liquidity and access to capital markets, adversely affeff ct our business and investor confidff ence in us, and reduce our stock price. 26 Item 1B. Unresolved Staffff Comments. None. Item 2. Properties. Properties As of September 30, 2023, we had over 1,000 locations in 39 states, two manufacff turing facilities, and six distribution centers ting our residential locations. In addition, we contract with third-party logistic providers under short-term agreements for r significant flexibility as they can be located tyle centers, and shopping centers. Our current physical network of locations is suppor u additional capacity as needed. Most of our locations operate on five-year leases, which offeff in a variety of venues, including strip centers, lifesff summarized in the chart below: State Alabama Arizona Arkansas Califorff nia Colorado Connecticut Delaware Florida Georgia Illinois Indiana Iowa Kansas Kentuct ky Louisiana Maryland Massachusetts Michigan Mississippi Missouri Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina Tennessee Texas Utah Virginia Washington Wisconsin Total Locations 27 Number of Locations 8 98 3 169 4 16 4 93 34 10 11 1 6 6 17 11 11 6 4 13 2 26 3 34 3 34 14 17 22 8 46 2 9 13 215 3 18 12 2 1,008 Our corporate offiff ces are located in Phoenix, Arizona. The 92,669 square foot offiff ce building has a current lease term through ry 28, 2027, with our ability to exercise two five-year renewal options. Februar Item 3. Legal Proceedings. On September 8, 2023, a class action complaint for violation of federal securities laws was filed by West Palm Beach Police Pension Fund in the U.S. District Court for the District of Arizona against us, our Chief Executive Offiff cer and our former Chief Financial Offiff cer. The complaint alleges that we violated federal securities laws by issuing materially false and misleading statements that failed to disclose adverse facts about our financial guidance, business operations and prospects, and seeks class certification, damages, interest, attorneys’ fees, and other relief. Due to the early stage of this proceeding, we cannot reasonabla y estimate the potential range of loss, if any. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in this matter. We are subju ect to other litigation, claims, and other proceedings that arise from time-to-time in the ordinary course of business. We believe these actions are routine and incidental to the business. As of September 30, 2023, we had establa ished reserves for claims that are probabla e and estimabla e and such reserves were not significant. While we cannot feasibly predict the outcome of these matters with certainty, we believe, based on examination of these matters, experience to date and discussions with counsel, that the ultimate liabia lity, individually or in the aggregate, will not have a material adverse effeff ct on our business, financial position, results of operations, or cash flows. Item 4. Mine Safety Disclosures. Not applicable. 28 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Our common stock is listed on Nasdaq under the “LESL” symbol and began “regular way” trading on Nasdaq on October 29, 2020. Prior to that date, there was no publu ic trading market for our common stock. As of November 20, 2023, there were three stockholders of record, although there is a much larger number of beneficial holders. The actual number of stockholders is greater than the number of record holders stated above, and includes stockholders who are beneficial owners, but whose shares are held in “street name” by brokers and other nominees. Stock Perforff mance Chart This performance graph shall not be deemed “filed” with the SEC for purpos by reference into any filing of Leslie’s, Inc. under the Securities Act or the Exchange Act. r es of Section 18 of the Exchange Act or incorporated The graph below presents our cumulative total shareholder returns on our common stock relative to the performance of the Nasdaq Global Composite Index and the S&P SmallCap 600 Index. The graph assumes $100 was invested at the market close on October 29, 2020, which was the first day our common stock began trading and its relative performance is tracked through September 30, 2023. Data for the Nasdaq Global Composite Index, S&P 500 Index, and S&P SmallCap 600 Index assume reinvestment of dividends. The graph uses the closing market price on October 29, 2020 of $21.70 per share as the initial value of our common stock. The comparisons in the graph below are based upon historical data and are not indicative of,ff nor intended to forecast, future performance of our common stock: Dividends We have never declared nor paid any cash dividends on our common stock. We currently do not expect to pay any dividends on our common stock in the foreseeabla e future. Any future determination relating to our dividend policy will be made by our board of l and projected financial condition, liquidity, and results of directors and will depend on a number of factors, including: our actuat operations; our capital levels and needs; tax considerations; any acquisitions or potential acquisitions; statutt oryrr and regulatoryrr prohibitions and other limitations; the terms of any credit agreements or other borrowing arrangements that restrict the amount of cash dividends that we can pay; general economic conditions; and other factors deemed relevant by our board of directors. We are not obligated to pay dividends on our common stock. 29 None. Recent Sales of Unregistered Securities Repurchase of Equity Securities On December 3, 2021, the board of directors authorized a share repurchase program for up to an aggregate of $300 million of the Company’s outstanding shares of common stock over a period of three years, expiring December 31, 2024. During the quarter ended September 30, 2023, there were no repurchases under our program and as of September 30, 2023, approximately $147.7 million remained availabla e for future purchases under our share repurchase program. Item 6. [Reserved]. 30 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discii ussion and analysll consolidatdd ed financial statements and related notes, which are included elsell where in this Annual Repor maya contain forward-looking statements based upon current expectations that involve riskii maya diffei factors,rr Septe ember 30, 2023. r materially from those anticipated in these forward-looking statements, which are subject to riskii including those described in Part I, Item 1A, “Risk Factors”rr is of our financial condition and resultstt of operations shouldll be read together with our t on Form 10-K. This discii ussion skk and uncertainties. Actual resultstt or outcomes s,kk uncertainties, and other t on Form 10-K for the fiscii al year ended of this Annual Repor e e 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 to Septe ember 30th. In a 52-week fiscal year, each quarter contains 13 weekskk of operations; in a 53-week fiscal year,r each of the firstrr ,t second, and third quarters includes 13 weeks of operations and the fourth quarter includes 14 weeks of operations. Refee rences to fiscal 2023, 2022, and 2021 refee r to the fiscal years ended Septe ember 30, 2023, October 1, 2022, and October 2, 2021, respectively.ll Fiscii al 2023, 2022, and 2021 included 52 weeks of operations. Our Company We are the largest and most trusr ted direct-to-consumer brand in the $15 billion United States pool and spa care industry,rr serving sional consumers. Founded in 1963, we are the only direct-to-consumer pool and spa care brand with national residential and profesff scale, operating an integrated marketing and distribution ecosystem powered by a physical network of over 1,000 branded locations and a robust digital platform. We offeff sional-grade products, the majoa rity of which are exclusive to Leslie’s, as well as certifieff d 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 confidff ently maintain and enjon y 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 effiff ciently reach and service everyrr pool and spa in the continental United States. r an extensive assortment of profesff We operate primarily in the pool and spa afteff rmarket industry,rr which is one of the most fundamentally attractive consumer categories given its scale, predictabia lity, and growth outlook. More than 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 offeff r important essential services, sional pool operators. Consumers receive the benefit of such as equipment installation and repair for residential consumers and profesff extended vendor warranties on purchased products from our locations and on installations or repairs from our certifieff d in-field commercial-grade in-store water testing and analysis via our proprietary AccuBlue® system, technicians. We offeff which increases consumer engagement, conversion, basket size, and loyalty, resulting in higher lifetff ime 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 ted water treatment service provider in the industry. Due to the non-discretionary nature of our products and services, us as the most trusr our business has historically delivered strong, uninterruptu ed growth and profitaff bia lity in all market environments, including through the Great Recession and the COVID-19 pandemic. r complimentary,rr r We have a legacy of leadership and disrupt ive innovation. Since our founding in 1963, we have been the leading innovator in our categoryrr and have provided our consumers with the most advanced pool and spa care availabla e. As we have scaled, we have leveraged l property to develop new value-added capaa bia lities. our competitive advantages to strategically reinvest in our business and intellectuat Over the course of our history,rr we have pioneered complimentaryrr in-store equipment s first loyalty program, and developed an expansive platform of owned and exclusive brands. repair services, introduced the industry’rr 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 profesff sional, whenever, wherever, and however they choose to engage with us. in-store water testing, offeff red complimentaryrr 31 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 generally accepted accounting principles (“GAAP”) are sales, gross profitff and gross margin, selling, general, and administrative expenses (“SG&A”), and operating income (loss). The key non-GAAP measures and other operating measures we use are comparable sales, comparable sales growth, Adjud sted EBITDA, Adjud sted net income (loss), and Adjud sted earnings per share. Sales We offeff r 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 offeff ring 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 profesff sional 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 perforff med, 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 availabia lity, as well as promotional and competitive activities and the spending habia ts of our consumers. Growth of our sales is primarily driven by comparable sales growth and expansion of our locations in existing and new markets. Comparablell Sales and Comparablell 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 marketplt aces. Comparable sales growth 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 afteff r it has completed one year of sales. Closed locations become non-comparabla e 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, is 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 buildouts, fixturt es, and equipment, which we amortize over time as well as cash required for inventory.rr As of September 30, 2023, we operated over 1,000 locations in 39 states across the 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, availabia lity 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 profitff ability. sales to our extensive network of remaining locations and Our limited investment costs in individual locations and our ability to transferff e-commerce websites allows us to improve profitaff bia lity as a result of any strategic closures. Gross Profitff and Gross Margin Gross profitff is equal to our sales less our cost of merchandise and services sold. Cost of merchandise and services sold reflects , costs to the direct cost of purchased merchandise, costs to package certain chemical products, including direct materials and labor provide services, including labor and materials, as well as distribution and occupau ncy costs. The direct cost of purchased merchandise includes vendor rebates. We recognize vendor rebates based on an estimated recognition pattern using historical data. Distribution costs include warehousing and transportation expenses, including costs associated with third-party fulfillff ment centers used to ship merchandise to our e-commerce consumers. Occupau ncy 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 proportionate to our growth. a a 32 Gross margin is gross profitff as a percentage of our sales. Gross margin is impacted by merchandise costs, pricing and promotions, product mix and availabia lity, inflation, and service costs, which can vary. Our proprietary brands, custom-formulated producd ts, and vertical integration provide us with cost savings, as well as greater control over product availabia lity and quality as compared to other companies in the industry.rr Gross margin is also impacted by the costs of distribution and occupau ncy costs, which can vary. Our gross profitff 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 profitff and gross margin may not be comparable to similar data made availabla e by other companies. Sellingii ,gg General and Admidd niii stii ratt tive Expexx nses Our SG&A includes selling and operating expenses across our retail locations and digital platform, and our corporate-level general and administrative expenses. Selling and operating expenses at retail locations include payroll, bonus and benefit costs for personnel, ies, and credit and debit card processing costs. Corporate expenses include payroll, bonus, and benefit costs for our corporate and suppl u t functions, equity-based compensation, marketing and advertising, insurance, utilities, occupau ncy costs related to our u field suppor corporate offiff ce facilities, profesff sional 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 t our are generally not directly proportional to sales and the change in the number of locations, but may increase over time to suppor growth and public company obligations. The components of our SG&A may not be comparable to the components of similar measures of other companies. u Operatintt g Income (Loss) Operating income (loss) is gross profitff extinguishment, income tax expense (benefit)ff productivity of our business and our ability to manage expenses. less SG&A. Operating income (loss) excludes interest expense, loss on debt , and other (income) expenses, net. We use operating income (loss) as an indicator of the Adjudd stedtt EBITDADD Adjud sted EBITDA is defined as earnings before interest (including amortization of debt issuance costs), taxes, depreciation and amortization, management fees, equity-based compensation expense, loss (gain) on debt extinguishment, loss (gain) on asset and contract dispositions, executive transition costs, severance, costs related to equity offeff rings, strategic project costs, merger and acquisition costs, and other non-recurring, non-cash or discrete items. Adjud sted EBITDA is a key measure used by management and our board of directors to assess our financial performance. Adjud sted EBITDA is also frequently used by analysts, investors, and other interested parties to evaluate companies in our industry,rr when considered alongside other GAAP measures. We use Adjud sted EBITDA to suppl ement GAAP measures of performance to evaluate the effeff ctiveness of our business strategies, to make budgeting decisions, u and to compare our performance against that of other companies using similar measures. Adjud sted 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. Adjud sted EBITDA is not calculated in the same manner by all companies, and accordingly, is not necessarily comparable to similarly titled measures of other companies and may not be an appropriate measure for performance relative to other companies. Adjud sted EBITDA should not be construer d as an indicator of a company’s operating performance in isolation from, or as a subsu titute for, net income (loss), cash flows from operations or cash flow data, all of which are emental disclosure because we believe it prepared in accordance with GAAP. We have presented Adjud sted EBITDA solely as suppl allows for a more complete analysis of results of operations. Adjud sted EBITDA is not intended to represent, and should not be considered more meaningfulff 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 Adjud sted EBITDA. Our presentation of Adjud sted EBITDA should not be construer d as an inference that our future results will be unaffected by these items. u 33 Adjudd stedtt Net Income (Loss) and Adjudd stedtt Earnings per Share Adjud sted net income (loss) and Adjud sted earnings per share are additional key measures used by management and our board of directors to assess our financial performance. Adjud sted net income (loss) and Adjud sted earnings per share are also frequently used by analysts, investors, and other interested parties to evaluate companies in our industry,rr when considered alongside other GAAP measures. Adjud sted net income (loss) is defined as net income (loss) adjud sted to exclude management fees, equity-based compensation expense, loss (gain) on debt extinguishment, loss (gain) on asset and contract dispositions, executive transition costs, severance, costs related to equity offeff rings, strategic project costs, merger and acquisition costs, and other non-recurring, non-cash, or discrete items. Adjud sted diluted earnings per share is defined as Adjud sted net income (loss) divided by the diluted weighted average number of common shares outstanding. Factors Affeff cting the Comparability of our Results of Operations Our reported results have been affeff cted 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. Impacm t of Macroeconomic Events and Uncertaitt ntii iett s Our financial performance and condition may be impacted to varying extents from period to period by macroeconomic and geopolitical developments, including public health crises, escalating global conflicff a market constraints, rising rates of inflation, rising interest rates, general economic slowdown, and potential failures among financial institutions. The direct and indirect impact COVID-19 has had on our financial and operating performance since 2020 has made period-to-period analysis and accurate forecasting difficult. Due to the non-discretionary nature of our products and services, our business delivered strong growth and profitff ability throughout the pandemic, despite restrictions on the operation of our locations and distribution facilities. Significant disrupt y chain for products we sell, as a result of COVID-19, geopolitical confliff ct or otherwise, can also have a material r impact on our sales and earnings and cause unpredictabla e changes in results. ion to our suppl y chain disrupt ions, labor u ts, suppl u rr An additional uncertainty that can impact our results of operation is consumer purchasing patterns. Due to the highly unstabla e suppl y of granular chlorine compounds, we believe some customers stockpile chemicals, resulting in unexpected changes in demand. u As a result of such behavior, our revenue is higher than normal during the periods of stockpiling and lower than normal during period afteff r stockpiling has occurred. We believe that consumer stockpiling of chemicals may have negatively impacted our results of operations in fiscal 2023 and may impact us in future periods. Busineii ss Acquisitions See Note 3—Business Combinations to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for information regarding our business acquisitions. 34 Results of Operations We derived our consolidated statements of operations for fiscal 2023, 2022, and 2021 from our consolidated financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future. The following tabla e 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): Statements of Operations Data: Sales Cost of merchandise and services sold Gross profitff Selling, general and administrative expenses Operating income Other expense: Interest expense Loss on debt extinguishment Other expenses, net Total other expense Income before taxes Income tax expense Net income Earnings per share Basic Diluted Weighted average shares outstanding Basic Diluted Percentage of Sales(1) Sales Cost of merchandise and services sold Gross margin Selling, general and administrative expenses Operating income Other expense: Interest expense Loss on debt extinguishment Other expenses, net Total other expense Income before taxes Income tax expense Net income Other Financial and Operations Data: Number of new and acquired locations, net Number of locations open at end of period Comparable sales growth(2) Adjud sted EBITDA(3) Adjud sted EBITDA as a percentage of sales(3) Adjud sted net income(3) Adjud sted diluted earnings per share September 30, 2023 Year Ended October 1, 2022 October 2, 2021 $ $ $ $ 1,451,209 902,986 548,223 446,044 102,179 65,438 — — 65,438 36,741 9,499 27,242 0.15 0.15 183,839 184,716 (%) 100.0 62.2 37.8 30.7 7.0 4.5 — — 4.5 2.5 0.7 1.9 $ $ $ $ 1,562,120 888,379 673,741 434,987 238,754 30,240 — 397 30,637 208,117 49,088 159,029 0.86 0.85 184,347 186,148 (%) 100.0 56.9 43.1 27.8 15.3 1.9 — 0.1 2.0 13.3 3.1 10.2 1,342,917 747,757 595,160 386,075 209,085 34,410 9,169 2,377 45,956 163,129 36,495 126,634 0.68 0.67 185,412 190,009 (%) 100.0 55.7 44.3 28.7 15.6 2.6 0.7 0.2 3.4 12.1 2.7 9.4 18 1,008 (11.0)% 168,149 11.6% 51,113 0.28 $ $ $ 38 990 10.6% 292,276 18.7% 176,391 0.95 $ $ $ 16 952 21.5% 270,613 20.2% 161,478 0.85 $ $ $ $ $ $ $ (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.” The tabla es below provide a reconciliation from our net income to Adjud sted EBITDA and net income to Adjud sted net income for fiscal 2023, 2022, and 2021 (in thousands). (3) 35 Net income Interest expense Income tax expense Depreciation and amortization expense(1) Management fees(2) Equity-based compensation expense(3) Loss on debt extinguishment(4) Loss (gain) on asset and contract dispositions(5) Executive transition costs(6) Costs related to equity offeff Strategic project costs(8) Other non-recurring costs(9) Adjud sted EBITDA rings(7) Net income Management fees(2) Equity-based compensation expense(3) Loss on debt extinguishment(4) Loss (gain) on asset and contract dispositions(5) Executive transition costs(6) Costs related to equity offeff Strategic project costs(8) Other non-recurring costs(9) Tax effeff cts of these adjud stments(10) Adjud sted net income rings(7) September 30, 2023 Year Ended October 1, 2022 October 2, 2021 $ $ $ $ 27,242 65,438 9,499 34,142 — 12,067 — 6,379 6,160 — 3,004 4,218 168,149 September 30, 2023 27,242 — 12,067 — 6,379 6,160 — 3,004 4,218 (7,957) 51,113 $ $ $ $ 159,029 30,240 49,088 30,769 — 11,922 — 426 883 550 4,960 4,409 292,276 Year Ended October 1, 2022 159,029 — 11,922 — 426 883 550 4,960 4,409 (5,788) 176,391 $ $ $ $ 126,634 34,410 36,495 26,553 382 25,621 9,169 (1,643) — 10,444 — 2,548 270,613 October 2, 2021 126,634 382 25,621 9,169 (1,643) — 10,444 — 2,548 (11,677) 161,478 (1) Includes depreciation related to our distribution centers and locations, which is reported in cost of merchandise and services sold in our consolidated statements of operations. (2) Represents amounts paid or accruerr d 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 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 consolidated statements of operations. (5) (4) Represents non-cash expense due to the write-offff of deferred financing costs related to our Term Loan modification and the repayment of our senior unsecured notes in fiscal 2021 and are reported in loss on debt extinguishment in our consolidated statements of operations. Includes losses (gains) on asset and contract dispositions, which are reported in SG&A in our consolidated statements of operations. Includes executive transition costs and severance associated with corporate restructurt consolidated statements of operations. Includes costs incurred for follow-on equity offeff statements of operations. rings, which are reported in other (income) expenses, net in our consolidated ing, which are reported in SG&A in our (7) (6) (8) Represents non-recurring costs, such as third-party consulting costs, which are not part of our ongoing operations and are incurred (9) to execute differentiated, strategic projects, and are reported in SG&A in our consolidated statements of operations. Includes merger and acquisition costs, and other non-recurring, non-cash, or discrete items as determined by management, which are reported in SG&A in our consolidated statements of operations. (10) Represents the tax effeff ct of the total adjud stments based on our combined U.S. federal and state statutt oryrr tax rates. Amounts are reported in income tax expense in our consolidated statements of operations. 36 Comparison of Fiscal 2023 and 2022 Sales Sales decreased to $1,451.2 million in fiscal 2023 compared to $1,562.1 million in fiscal 2022, a decrease of $110.9 million, or 7.1%. Comparable sales decreased $170.5 million, or 11.0%, compared to fiscal 2022, primarily driven by traffiff c declines. Non- comparable sales including acquisitions and new stores were $59.6 million compared to the prior year period. Gross Profitff and Gross Margin Gross profitff decreased to $548.2 million in fiscal 2023 compared to $673.7 million in fiscal 2022, a decrease of $125.5 million or 18.6%. Gross margin decreased to 37.8% compared to 43.1% in fiscal 2022, a decrease of 530 basis points. The decrease in gross margin was primarily driven by a decrease in retail chemical pricing retail in June 2023, adjud stments associated with year-end physical inventoryrr results, adjud stments to product rebates based on reduced equipment purchases, and occupau ncy deleverage associated with the decrease in comparable sales. Sellingii ,gg General and Admidd niii stii ratt tive Expexx nses SG&A increased to $446.0 million in fiscal 2023 compared to $435.0 million in fiscal 2022, an increase of $11.0 million or 2.5%. This increase in SG&A was primarily related to a $5.5 million increase in executive transition and other costs related to severance payments associated with the elimination of non-customer facing positions and a $6.1 million increase in connection with the costs incurred from the discontinued use of certain software product subsu criptions. Total Othett r Expexx nse Total other expense increased to $65.4 million in fiscal 2023 compared to $30.6 million in fiscal 2022, an increase of $34.8 million. These increases in total other expense were primarily related to the increase in interest expense of $35.2 million for fiscal 2023 compared to fiscal 2022, due to higher interest rates on our Term Loan and Revolving Credit Facility and increased borrowings on our Revolving Credit Facility. Income Taxeaa s Income tax expense decreased to $9.5 million in fiscal 2023 compared to $49.1 million in fiscal 2022, a decrease of $39.6 million. This decrease was primarily attributable to lower pretax income. Our effeff ctive tax rate was 25.9% for fiscal 2023 compared to 23.6% for fiscal 2022. Net Income and Earnings per Share Net income decreased to $27.2 million in fiscal 2023 compared to $159.0 million in fiscal 2022, a decrease of $131.8 million. Diluted earnings per share decreased to $0.15 in fiscal 2023 compared to $0.85 in fiscal 2022. Adjud sted net income decreased to $51.1 million in fiscal 2023 compared to $176.4 million in fiscal 2022, a decrease of $125.3 million. Adjud sted diluted earnings per share decreased to $0.28 in fiscal 2023 compared to $0.95 in fiscal 2022. Adjudd stedtt EBITDADD Adjud sted EBITDA decreased to $168.1 million in fiscal 2023 compared to $292.3 million in fiscal 2022, a decrease of $124.2 million. This decrease was primarily due to the decrease in gross profitff . Comparison of Fiscal 2022 and 2021 Sales Sales increased to $1,562.1 million in fiscal 2022 from $1,342.9 million in fiscal 2021, an increase of $219.2 million or 16.3%. The increase was primarily driven by comparable sales growth of $143.1 million, or 10.6%, in fiscal 2022 as well as non-comparable sales of $76.1 million, driven by acquisitions and new locations open for less than 52 weeks. 37 Gross Profitff and Gross Margin Gross profitff increased to $673.7 million in fiscal 2022 from $595.2 million in fiscal 2021, an increase of $78.5 million or 13.2%. Gross margin decreased to 43.1% compared to 44.3% in fiscal 2021, a decrease of 120 basis points. The increase in gross profitff was primarily due to increased sales. The decrease in gross margin was primarily due to shiftsff in business mix, decreased product margin related to promotions and higher product cost, partially offsff et by distribution and occupau ncy leverage. Sellingii ,gg General and Admidd niii stii ratt tive Expexx nses SG&A increased to $435.0 million in fiscal 2022 from $386.1 million in fiscal 2021, an increase of $48.9 million or 12.7%. This increase in SG&A was primarily related to a $57.0 million increase associated with higher sales, inflationary costs associated with payroll and digital marketing expenses and non-comparable SG&A associated with our acquisitions; a $5.0 million increase related to strategic project costs incurred during fiscal 2022; a $4.9 million increase associated with executive transition costs, losses (gains) on disposition of fixed assets, merger and acquisition costs and other non-recurring, non-cash or discrete items; and a $3.9 million increase associated with higher depreciation and amortization expense. These increases were offsff et by lower non-cash equity-based compensation expense of $13.7 million compared to fiscal 2021 and certain one-time payments of contractuat l amounts of $8.2 million made in fiscal 2021, both of which were primarily incurred in connection with our IPO. Total Othett r Expexx nse Total other expenses decreased to $30.6 million in fiscal 2022 from $46.0 million in fiscal 2021, a decrease of $15.4 million. The decrease in other expenses was primarily related to a $9.2 million non-cash loss on debt extinguishment related to the refinancing of the Term Loan and repayment of our senior unsecured notes during fiscal 2021, a decrease in interest expense of $4.2 million in fiscal 2022 ring costs incurred due to the repayment of our senior unsecured notes with the proceeds of our IPO and $2.0 million of follow-on offeff in fiscal 2021. Income Taxeaa s Income tax expense increased to $49.1 million in fiscal 2022 from $36.5 million in fiscal 2021, an increase of $12.6 million. Our effeff ctive tax rate was 23.6% for fiscal 2022 compared to 22.4% for fiscal 2021, reflecting lower income tax benefits attributable to equity-based compensation awards and research and development credits. Net Income and Earnings per Share Net income increased to $159.0 million in fiscal 2022 from $126.6 million in fiscal 2021, an increase of $32.4 million. Diluted earnings per share increased to $0.85 in fiscal 2022 from $0.67 in fiscal 2021. Adjud sted net income increased to $176.4 million in fiscal 2022 from $161.5 million in fiscal 2021, an increase of $14.9 million. Adjud sted diluted earnings per share increased to $0.95 in fiscal 2022 compared to $0.85 in fiscal 2021. Adjudd stedtt EBITDADD Adjud sted EBITDA increased to $292.3 million in fiscal 2022 from $270.6 million fiscal 2021, an increase of $21.7 million. This increase was due primarily to the increase in comparable sales and gross profit.ff Seasonality and Quarterly Fluctuations Our business is highly seasonal. 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. Sales are subsu tantially lower during our first and second fiscal quarters when we typically generate net losses and we realize negative operating cash flows. We have a long track record of investing in our business throughout the year, including in operating expenses, working capia tal, 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 on our earnings and cash flow during our first and second fiscal quarters. We typically experience a build-upu of inventoryrr and accounts payabla e during the first and second fiscal quarters in anticipation of iers as we receive y selling season. We negotiate extended payment terms with certain of our primary suppl the peak swimming pool suppl merchandise in December through March, and we pay for merchandise in April through July. u u 38 The principal external factor affeff cting our business is weather. Hot weather can increase purchases of chemicals and other non- discretionary products as well as purchases of discretionary products and can drive increased purchases of installation and repair services. Unseasonabla y 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 producd ts and services. In addition, unseasonabla y early or late warming trends can increase or decrease the length of the pool season and impact timing around pool openings and closings and, thereforff e, our total sales and timing of our sales. We generally open new locations before our peak selling season begins and we generally close locations afteff r 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. Overview Liquidity and Capital Resources Our primary sources of liquidity are net cash provided by operating activities and borrowing availabia lity 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 $55.4 million and $112.3 million as of September 30, 2023 and October 1, 2022, respectively. As of September 30, 2023 and October 1, 2022, we did not have any outstanding borrowings under our Revolving Credit Facility. Our primaryrr working capital requirements are for the purchase of inventory,rr 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 inventoryrr purchases. Our capia tal expenditures are primarily related to infrastructurt e-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 capia tal 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 availabia lity under our Revolving Credit Facility will be adequate to finance our working capia tal requirements, planned capital expenditures, strategic acquisitions, share repurchases, and debt service over the next 12 months. If cash provided by operating activities and borrowings under our Revolving Credit Facility are not sufficff ient or availabla e to meet our capia tal requirements, then we may need to obtain additional equity or debt financing. There can be no assurance that equity or debt financing will be availabla e to us if we need it or, if availabla e, whether the terms will be satisfacff tory to us. As of September 30, 2023, outstanding standby letters of credit totaled $11.4 million, and afteff r considering borrowing base restrictions, we had $238.6 million of availabla e borrowing capacity under the terms of the Revolving Credit Facility. As of September 30, 2023, we were in compliance with the covenants under the Revolving Credit Facility and our Term Loan agreements. Summary of Cash Flowll s A summary of our cash flows from operating, investing, and financing activities is presented in the following tabla e (in thousands): Net cash provided by operating activities Net cash used in investing activities Net cash (used in) provided by financing activities Net (decrease) increase in cash and cash equivalents September 30, 2023 6,470 $ (52,539) (10,804) (56,873) $ $ $ Year Ended October 1, 2022 October 2, 2021 66,644 (138,981) (158,868) (231,205) $ $ 169,272 (35,355) 53,780 187,697 39 Cash Provideddd by Operatintt g Activities Net cash provided by operating activities was $6.5 million in fiscal 2023 compared to $66.6 million in fiscal 2022. This decrease was primarily driven by lower net income in the current year and changes in working capital. Net cash provided by operating activities decreased to $66.6 million in fiscal 2022 compared to $169.3 million in fiscal 2021. This decrease was primarily driven by changes in working capital related to business acquisitions and strategic investment in product inventories to meet heightened customer demand across product categories. Cash Used in Investintt g Activities Net cash used in investing activities was $52.5 million in fiscal 2023 compared to $139.0 million in fiscal 2022. This decrease was driven by lower investments for business acquisitions. Net cash used in investing activities was $139.0 million in fiscal 2022 compared to $35.4 million in fiscal 2021. This increase was primarily driven by higher investments for business acquisitions. Cash (UseUU d in)n Provideddd s by Finaii ncing Activitieii Net cash used in financing activities was $10.8 million in fiscal 2023 compared to $158.9 million in fiscal 2022. This decrease was primarily driven by repurchases and retirement of common stock that occurred in fiscal 2022. Net cash used in financing activities was $158.9 million in fiscal 2022 and was primarily related to the repurchase and retirement of common stock of $152.1 million. Net cash provided by financing activities was $53.8 million in fiscal 2021 and was primarily related to net proceeds raised during our IPO in November 2020 of $458.6 million, partially offsff et by a $396.1 million repayment of long-term debt. Share Repuee rchase Program On December 3, 2021, the board of directors authorized a share repurchase program for up to an aggregate of $300 million of the Company’s outstanding shares of common stock over a period of three years, expiring December 31, 2024. As of September 30, 2023, approximately $147.7 million remained availabla e for future purchases under our share repurchase program (see Note 16—Share Repurchase Program to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K). Contractual Obligations and Other Commitments The following tabla e summarizes our contractuat l cash obligations as of September 30, 2023 (in thousands): Long-term debt, net (1) Purchase commitments (2) Operating lease obligations (3) Total Total $ 789,750 174,018 306,281 $ 1,270,049 2024 $ 6,075 79,941 76,361 $ 162,377 $ 2025 10,125 78,327 70,356 $ 158,808 Payments Due By Period 2026 $ $ 8,100 7,838 61,616 77,554 $ $ 2027 8,100 5,705 41,139 54,944 2028 $ 757,350 2,207 22,036 $ 781,593 Thereafter — $ — 34,773 34,773 $ (1) We are required to pay a commitment fee of 0.25% based on the unused portion of the Revolving Credit Facility, which is not (2) (3) Operating lease obligations relate to our locations, offiff ce, distribution, and manufact included in the tabla e above due to the unknown nature of future borrowings. Purchase obligations include all legally binding contracts and primarily relate to firm commitments for inventoryrr purchases. Purchase orders that are not binding agreements are excluded from the tabla e above. ff ing facilities. We are obligated to make cash payments in connection with various lease obligations and purchase commitments and all obligations require cash payments to be made by us over varying periods of time. Certain leases are renewabla e at our option typically for periods of five or more years and some require payments upon early termination. urt 40 Critical Accounting Estimates The preparation of our consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affeff ct the reported amounts of assets and liabilities, disclosures of contingent assets and liabia lities at the date of the financial statements, and the reported amounts of sales and expenses during the reported periods. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of a company’s financial condition and results of operations, and which require a company to make its most difficult and subju ective judgments. Based on this definition, we have identified the critical accounting policies and judgments, which are disclosed in this Annual Report on Form 10-K for the fiscal year ended September 30, 2023. We base these estimates on historical results and various other assumptions we believe to be reasonabla e, all of which form the basis for making estimates concerning the carrying values of assets and liabia lities that are not readily availabla e from other sources. Actual results may differ from these estimates. Vendordd Rebatestt Many of our vendor arrangements provide for us to receive specified amounts of consideration when we achieve various measures. These measures generally relate to the volume level of purchases. We calculate the amount earned based on actuat l purchases, recorded as a reduction of the prices of the vendor’s products and thereforff e a reduction of inventoryrr at the end of each period based on a detailed analysis of inventoryrr and of the facts and circumstances of various contractuat l agreements with vendors. We recognize rebates based on an estimated recognition pattern using historical data, and we record this as a reduction of cost of merchandise and services sold in our consolidated statements of operations. We do not believe there is a reasonabla e likelihood there will be a material change in the future estimates or assumptions we use to calculate our reduction of inventory.rr Inventories Inventories are stated at the lower of cost or market or net realizable value. We value inventoryrr using the weighted-average cost method. We evaluate inventoryrr for excess and obsolescence and record necessary reserves. We provide provisions for losses related to inventories based on management’s judgement regarding historical purchase cost, selling price, margin, and current business trends. If l demand or market conditions are different than those projected by management, future margins may be unfavff orably or favorably actuat affeff cted by adjud stments to these estimates. When an inventoryrr item is sold or disposed, the associated reserve is released at that time. We do not believe there is a reasonabla e likelihood that there will be a material change in the future estimates or assumptions used to calculate our inventoryrr reserve. Busineii ss Combinatiott ns We account for business combinations using the acquisition method of accounting. This method requires that the purchase price of the acquisition be allocated to the assets acquired and liabia lities assumed using the fair values determined by management as of the acquisition date. The excess of the purchase price over the amounts allocated to assets acquired and liabilities assumed is recorded as goodwill. The accounting for business combinations requires us to make estimates and assumptions at the acquisition date with respect to lives of those acquired intangible assets. Critical estimates the fair value of assets acquired and liabia lities assumed as well as the usefulff in valuing certain of the intangible assets and goodwill we have acquired include but are not limited to; future expected cash flows, historical and expected customer attribution rates and royalty and discount rates. Unanticipated events and circumstances may occur that may affeff ct the accuracy or validity of such assumptions, estimates or actual results. In addition, the consideration for an acquisition may include future payments that are contingent upon the occurrence of a particular event. We record a contingent consideration at fair value on the acquisition date. We estimate the fair values through valuation models that incorporate probabia lity adjud sted assumptions related to the achievement of the milestones and the likelihood of making related payments. The fair value is remeasured at the end of each period and changes in fair value are recorded in within SG&A in the consolidated statements of operations. Determining the fair value of the contingent consideration requires management to make assumptions and judgments. We do not believe there is a reasonabla e likelihood that there will be a material change in the future estimates or assumptions used to calculate the values of our acquired intangible assets contingent considerations liabilities. 41 Recent Accounting Pronouncements For information regarding recent accounting pronouncements, see Note 2—Summary of Significant Accounting Policies to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Interest Rate Riskii The interest rates on borrowings under our Revolving Credit Facility and Term Loan were LIBOR-based rates prior to March 2023 and June 2023, respectively. Due to the discontinuation of LIBOR-based rates, we have transitioned the impacted interest rate benchmarks to Term SOFR-based rates. See Note 10—Long-Term Debt, Net to our consolidated financial statements for additional information. Accordingly, we are subju ect to interest rate risk in connection with borrowings under our Revolving Credit Facility and Term Loan, both of which bear interest at variable rates. As of September 30, 2023, we had $789.8 million outstanding on our Term Loan. No amounts were outstanding on our Revolving Credit Facility as of such date. The impact of a 1.0% rate change on our outstanding balance less contractuat l amortization would total approximately $7.9 million over the next 12 months. Impacm t of Infln atll iott n and Defle atll iott n We experience inflation and deflation related to our purchase of certain products. This price volatility could potentially have a material impact on our financial condition and/or our results of operations. We actively manage the impact of inflation, including tariffs, through strong relationships with our diverse suppl ier base, vendor negotiation, and promotion management. We also strategically invest through inventoryrr purchases in order to obtain favorable pricing ahead of any vendor price increases. In order to mitigate price volatility, we monitor price fluctuations and may adjud st our selling prices accordingly; however, our ability to recover higher costs through increased pricing may be limited by the competitive environment in which we operate. Although we may experience periodic effeff cts on sales, gross profit,ff gross margins, and cash flows as a result of changing prices, we do not expect the effeff ct of inflation or deflation to have a material impact on our ability to execute our long-term business strategy. We currently do not use derivative instruments to manage these risks. u 42 Item 8. Financial Statements and Supplementary Data. LESLIE’S, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Auditeii d Consolidll atdd edtt Finaii ncial Stattt emtt ents for the fiscii al years ended Septee emtt ber 30, 2023, October 1, 2022, and October 2, 2021 Report of Independent Registered Publu ic Accounting Firm (PC(( Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Stockholders’ Deficit Consolidated Statements of Cash Flow Notes to Consolidated Financial Statements AOCC BOO ID: 42) Page 44 46 47 48 49 50 43 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Leslie’s, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Leslie’s, Inc. (the Company) as of September 30, 2023 and October 1, 2022, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the three years in the period ended September 30, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at September 30, 2023 and October 1, 2022, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2023, in conforff mity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Publu ic Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of September 30, 2023, based on criteria establa ished in Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated November 29, 2023 expressed an adverse opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonabla e assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedurd es to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedurd es that respond to those risks. Such procedurd es included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonabla e basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subju ective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Vendordd Rebatestt ion of the Descripti Matter As discussed in Note 2, certain of the Company’s arrangements with vendors provide for consideration, such consideration is generally based on purchase volume. The Company generally accounts for vendor rebate programs as a reduction of the prices of the vendor’s producd ts and thereforff e a reduction of the cost of inventory.rr The Company estimates the recognition pattern of vendor rebate income based on historical trending and data and recognizes such consideration as a reduction of cost of merchandise and services sold. The Company had $4.7 million of vendor rebate receivabla es as of September 30, 2023. Auditing vendor rebates was challenging due to the extent of audit effoff rt required resulting from the volume of individual transactions and complexities in evaluating the Company’s compliance with the terms of the vendor agreements. 44 How we Addrdd essed the Matter in Our Audit To test the vendor rebates, we perforff med audit procedurd es that included, among others, assessing the estimation methodology used by management. We tested a sample of vendor rebate agreements by evaluating the inputs used and the terms of the contracts. We recalculated the amount of vendor rebate income earned and the related reduction of the carrying cost of inventoryrr based on the inputs and the terms of the agreements. We tested the Company’s pattern of recognition of vendor rebate income as a reduction of cost of merchandise and services sold and tested deferred rebate income for appropriateness and consistency with authoritative accounting guidance. We also performed sensitivity analyses over the historical time period used in part to determine the recognition pattern of vendor rebate income, to evaluate the significance of changes that would result from changes in the assumption used. In addition, we selected a sample of vendor rebate receivables and confirff med the amount outstanding directly with the vendors. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2000. Phoenix, Arizona November 29, 2023 45 LESLIE’S, INC. CONSOLIDATED BALANCE SHEETS (Amounts in Thousands, Except Share and Per Share Amounts) September 30, 2023 October 1, 2022 Assets Current assets Cash and cash equivalents Accounts and other receivabla es, net Inventories Prepaid expenses and other current assets Total current assets Property and equipment, net Operating lease right-of-use assets Goodwill and other intangibles, net Deferred tax assets Other assets Total assets Liabilities and stockholders’ deficit Current liabilities Accounts payabla e and accruer d expenses Operating lease liabia lities Income taxes payabla e Current portion of long-term debt Total current liabia lities Operating lease liabia lities, noncurrent Long-term debt, net Other long-term liabia lities Total liabia lities Commitments and contingencies Stockholders’ deficit Common stock, $0.001 par value, 1,000,000,000 shares authorized and 184,333,670 and 183,480,545 issued and outstanding as of September 30, 2023 and October 1, 2022, respectively. Additional paid in capia tal Retained deficit Total stockholders’ deficit Total liabia lities and stockholders’ deficit $ $ $ $ $ $ $ 55,420 29,396 311,837 23,633 420,286 90,285 251,460 218,855 7,598 45,951 1,034,435 149,154 62,794 5,782 8,100 225,830 193,222 773,276 3,469 1,195,797 112,293 45,295 361,686 23,104 542,378 78,087 236,477 213,701 1,268 37,720 1,109,631 266,972 60,373 12,511 8,100 347,956 179,835 779,726 65 1,307,582 184 99,280 (260,826) (161,362) 1,034,435 $ 183 89,934 (288,068) (197,951) 1,109,631 See accompanying notes which are an integre al part of these consolidatdd ed financial statements. 46 LESLIE’S, INC. CONSOLIDATED STATEMENTS OF OPERATRR IONS (Amounts in Thousands, Except Per Share Amounts) Sales Cost of merchandise and services sold Gross profitff Selling, general and administrative expenses Operating income Other expense: Interest expense Loss on debt extinguishment Other expenses, net Total other expense Income before taxes Income tax expense Net income Earnings per share: Basic Diluted Weighted average shares outstanding: Basic Diluted September 30, 2023 Year Ended October 1, 2022 October 2, 2021 $ $ $ $ $ $ $ $ 1,451,209 902,986 548,223 446,044 102,179 65,438 — — 65,438 36,741 9,499 27,242 0.15 0.15 183,839 184,716 $ $ $ $ 1,562,120 888,379 673,741 434,987 238,754 30,240 — 397 30,637 208,117 49,088 159,029 0.86 0.85 184,347 186,148 1,342,917 747,757 595,160 386,075 209,085 34,410 9,169 2,377 45,956 163,129 36,495 126,634 0.68 0.67 185,412 190,009 See accompanying notes which are an integre al part of these consolidatdd ed financial statements. 47 LESLIE’S, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT (Amounts in Thousands) Balance, October 3, 2020 ring costs Issuance of common stock upon initial public offeff net of offeff Issuance of common stock under the Plan Equity-based compensation Net income ring, Balance, October 2, 2021 Issuance of common stock under the Plan Equity-based compensation Repurchase and retirement of common stock Net income Balance, October 1, 2022 Issuance of common stock under the Plan Equity-based compensation Restricted stock units surrendered in lieu of withholding taxes Net income Balance, September 30, 2023 Common Stock Shares 156,500 $ 30,000 3,321 — — 189,821 1,160 — (7,500) — 183,481 1,057 — (204) — 184,334 $ $ $ Amount 157 30 3 — — 190 1 — (8) — 183 1 — — — 184 Additional Paid in Capital it) (Deficff Retained Deficit $ (278,063) $ (549,093) $ (826,999) Total Stockholders’ Deficit 458,557 — 24,217 — 204,711 1,377 11,346 (127,500) — 89,934 — 11,703 — — — 126,634 458,587 3 24,217 126,634 $ (422,459) $ (217,558) 1,378 11,346 (152,146) 159,029 $ (288,068) $ (197,951) 1 11,703 — — (24,638) 159,029 — — (2,357) — 99,280 — 27,242 (2,357) 27,242 $ (260,826) $ (161,362) $ $ $ See accompanying notes which are an integre al part of these consolidatdd ed financial statements. 48 LESLIE’S, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in Thousands) September 30, 2023 Year Ended October 1, 2022 October 2, 2021 $ 27,242 $ 159,029 $ 126,634 Operating Activities Net income Adjud stments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Equity-based compensation Amortization of deferred financing costs and debt discounts Provision for doubtful accounts Deferred income taxes Loss (gain) on asset dispositions Loss on debt extinguishment Changes in operating assets and liabilities: Accounts and other receivabla es Inventories Prepaid expenses and other current assets Other assets Accounts payabla e and accruerr d expenses Income taxes payabla e Operating lease assets and liabilities, net Net cash provided by operating activities Investing Activities Purchases of property and equipment Business acquisitions, net of cash acquired Proceeds from asset dispositions Net cash used in investing activities Financing Activities Borrowings on Revolving Credit Facility Payments on Revolving Credit Facility Repayment of long-term debt Issuance of long-term debt Payment of deferred financing costs Proceeds from options exercised Repurchase and retirement of common stock Proceeds from issuance of common stock upon initial public offeff Payments of employee tax withholdings related to restricted stock vesting ring, net Net cash (used in) provided by financing activities Net (decrease) increase in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Supplemental Information: Interest Income taxes, net of refunds received $ $ 34,142 11,703 2,100 193 (6,330) 6,396 — 16,101 54,331 (3,466) (9,990) (120,048) (6,729) 825 6,470 (38,577) (15,549) 1,587 (52,539) 264,000 (264,000) (8,100) — (347) — — — (2,357) (10,804) (56,873) 112,293 55,420 63,059 22,559 $ $ 30,769 11,346 1,982 1,186 2,466 466 — (7,621) (143,147) (1,476) (12,670) 23,841 5,566 (5,093) 66,644 (31,726) (107,663) 408 (138,981) 45,000 (45,000) (8,100) — — 1,378 (152,146) — — (158,868) (231,205) 343,498 112,293 32,617 41,149 $ $ 26,553 24,217 2,483 2,105 2,848 (1,606) 9,169 (9,484) (47,787) 2,674 (11,164) 35,756 5,088 1,786 169,272 (28,931) (8,868) 2,444 (35,355) — — (396,135) 907 (9,579) — — 458,587 — 53,780 187,697 155,801 343,498 36,408 28,559 See accompanying notes which are an integre al part of these consolidatdd ed financial statements. 49 LESLIE’S, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note 1—Business and Operations Leslie’s, Inc. (“Leslie’s,” “we,” “our,” “us,” “its,” or the “Company”) is the leading direct-to-consumer pool and spa care ies and related products and services, which primarily consist of maintenance items brand. We market and sell pool and spa suppl such as chemicals, equipment and parts, and cleaning accessories, as well as safety, recreational, and fitness-related products. We currently market our products through over 1,000 company-operated locations in 39 states and e-commerce websites. u Note 2—Summary of Significff ant Accounting Policies Basisii of Presentation and Principlii esll of Consolidll atdd iott n We prepared the accompanying consolidated financial statements following GAAP. The financial statements include all for a fair presentation of our financial position and operating results. The normal and recurring adjud stments that are necessaryrr consolidated financial statements include the accounts of Leslie’s, Inc. and our subsu idiaries. All significant intercompany accounts and transactions have been eliminated. Fiscii al Periods 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 to September 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 2023, 2022, and 2021 refer to the 52 weeks ended September 30, 2023, October 1, 2022, and October 2, 2021, respectively. Segme ee ent Repor tingii Our Chief Operating Decision Maker is our Chief Executive Offiff cer, who reviews financial information presented on a es of allocating resources and assessing performance. We operate all of our locations in the United r consumers similar products, services, and methods of distribution through our retail locations and e-commerce consolidated basis for purpos States and offeff websites. As a result, we have a single reportabla e segment. r Seasonalityll Our business is highly seasonal. Sales and earnings are highest during our third and fourth fiscal quarters, being April through September, which represent the peak months of swimming pool use. Sales are subsu tantially lower during our first and second fiscal quarters. Use of Estimates Management is required to make certain estimates and assumptions during the preparation of the consolidated financial statements in accordance with GAAP. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. They also impact the reported amount of net income (loss) during any period. Actual results could differ from those estimates. Significant estimates underlying the accompanying consolidated financial statements include inventoryrr reserves, lease assumptions, vendor rebate programs, our loyalty program, the determination of income taxes payabla e and deferred income taxes, sales returns reserve, self-iff nsurance liabia lities, the recoverabia lity of intangible assets and goodwill, fair value of assets acquired in a business combination, and contingent consideration related to business combinations. Cash and Cash Equivalentstt Cash and cash equivalents include cash on hand, demand deposits, money market funds and credit and debit card transactions. Our cash balance at financial institutt ions may exceed the FDIC insurance coverage limit. We consider all investments with an original maturity of three months or less and money market funds to be cash equivalents. All credit card and debit card transactions that process in less than seven days are classified as cash and cash equivalents. 50 Fair Value Measurements We use fair value measurements to record the fair value of certain assets and to estimate the fair value of financial instruments not recorded at fair value but required to be disclosed at fair value. To determine the fair value, we maximize the use of observabla e inputs and minimize the use of unobservabla e inputs by requiring that the most observabla e inputs be used when availabla e. Observable inputs are inputs market participants would use to value an asset or liabia lity and are developed based on market data obtained from independent sources. Unobservabla e inputs are inputs based on assumptions about the factors market participants would use to value an asset or liabia lity. The fair value hierarchy is as follows, of which the first two are considered observabla e and the last unobservabla e: • Level 1—Quoted prices in active markets for identical assets or liabia lities. • Level 2—Inputs other than Level 1 that are observabla e for the asset or liabia lity, either directly or indirectly, such as quoted prices for similar assets and liabia lities in active markets; quoted prices for identical or similar assets or liabia lities in markets that are not active; or other inputs that are observabla e or can be corroborated by observabla e market data by correlation or other means. • Level 3—Unobservabla e inputs that are suppor ted by little or no market activity and that are significff ant to the fair value of the assets or liabilities. Value is determined using pricing models, discounted cash flow methodologies, or similar techniques and also includes instruments for which the determination of fair value requires significant judgment or estimation. u As of September 30, 2023 and October 1, 2022, we held no assets that were required to be measured at fair value on a recurring basis. There were no transferff s between levels in the fair value hierarchy during fiscal 2023, 2022, and 2021, respectively. The fair value of our Amended and Restated Term Loan Credit Agreement (“Term Loan”) due in 2028 was determined to be $774.9 million and $760.0 million as of September 30, 2023 and October 1, 2022, respectively. These fair value estimates, determined to be Level 2, are subju ective in nature and involve uncertainties and matters of judgment and thereforff e cannot be determined with precision. Changes in assumptions could significantly affeff ct these estimates. The Company’s measurement of contingent consideration is categorized as Level 3 within the fair value hierarchy. Refer to “Business Combinations” herein Note 2—Summary of Significant Accounting Policies below for the fair value measurement of its contingent consideration. The carrying amounts of cash, cash equivalents, accounts receivabla e, accounts payabla e and accruer d expenses approximate fair value due to the short-term maturity of these instruments. Vendordd Rebatestt Many of our vendor arrangements provide for us to receive specified amounts of consideration when we achieve various measures. These measures generally relate to the volume level of purchases. We calculate the amount earned based on actuat l purchases, recorded as a reduction of the prices of the vendor’s products and thereforff e a reduction of inventoryrr at the end of each period based on a detailed analysis of inventoryrr and of the facts and circumstances of various contractuat l agreements with vendors. We recognize rebates based on an estimated recognition pattern using historical data, and we record this as a reduction of cost of merchandise and services sold in our consolidated statements of operations. Accounts and other receivabla es include vendor rebate receivabla es of $4.7 million and $16.6 million as of September 30, 2023 and October 1, 2022, respectively. Alloll wance for Doubtfulff Accounts Allowance for doubtful accounts is calculated based on historical experience, counterparr rty credit risk, consumer credit risk and application of the specificff identificff ation method. 51 Inventories Inventories are stated at the lower of cost or market or net realizable value. We value inventoryrr using the weighted-average cost method. We evaluate inventoryrr for excess and obsolescence and record necessary reserves. We provide provisions for losses related to inventories based on management’s judgment regarding historical purchase cost, selling price, margin, movements, and l demand or market conditions are different than those projected by management, futurt e margins current business trends. If actuat item is sold or disposed, the may be unfavff orably or favorably affeff cted by adjud stments to these estimates. When an inventoryrr associated reserve is released at that time. Busineii ss Combinatiott ns We account for business combinations using the acquisition method of accounting. This method requires that the purchase price of the acquisition be allocated to the assets acquired and liabia lities assumed using the fair values determined by management as of the acquisition date. The excess of the purchase price over the amounts allocated to assets acquired and liabilities assumed is recorded as goodwill. We use our best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabia lities assumed as of the acquisition date. Our estimates are inherently uncertain and subju ect to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjud stments to the assets acquired and liabilities assumed, with the corresponding offsff et to goodwill to the extent we identifyff adjud stments to the preliminaryrr purchase price allocation. Upon the conclusion of the measurement period or final determination of the fair values of the assets acquired or liabia lities assumed, whichever comes first, any subsu equent adjud stments are recorded in our consolidated statements of operations. Our consolidated financial statements include the results of operations from the date of acquisition for each business combination. The consideration for an acquisition may include future payments that are contingent upon the occurrence of a particular event. We record contingent consideration at fair value on the acquisition date. We estimate the fair values through valuation models that incorporate probabia lity adjud sted assumptions related to the achievement of the milestones and the likelihood of making related payments. The fair value is remeasured at each reporting date and changes in fair value are recorded within SG&A in our consolidated statements of operations. Determining the fair value of the contingent consideration requires management to make certain assumptions and judgments, primarily based on the achievement of certain performance metrics specifieff d in the purchase agreements. We expense all acquisition-related costs as incurred within SG&A expenses in our consolidated statements of operations. Propertytt and Equipmii ent, Net Property and equipment are stated at cost, less accumulated depreciation and amortization. Costs of normal maintenance and repairs are charged to expense as incurred. Majoa r replacements or improvements of property and equipment are capia talized. When items are sold or otherwise disposed of,ff the cost and related accumulated depreciation or amortization are removed from the accounts, and any resulting gain or loss is included in our consolidated statements of operations. Depreciation and amortization are computed using the straight-line method. These charges are based on the following range of usefulff lives: Building and improvements Vehicles, machineryrr and equipment Offiff ce furniturt e, computers and software Leasehold improvements 5-39 years 3-10 years 3-7 years 5-10 years, not to exceed the lease lifeff We evaluate our long-lived assets for potential impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverabla e. The evaluation for long-lived assets (asset group) is performed at the lowest level of identifiaff bla e cash flows, which, for location assets, is the individual location level. The assets of a physical location with indicators of impairment are evaluated for recoverabia lity by comparing its undiscounted future cash flows with its carrying value. If the carrying value is greater than the undiscounted future cash flows, we then measure the asset’s fair value to determine whether an impairment loss should be recognized. If the resulting fair value is less than the carrying value, an impairment loss is recognized for the difference between the carrying value and the estimated fair value. Impairment charges are recorded in SG&A in our consolidated statements of operations. There was no impairment charge in fiscal 2023, 2022, or 2021. 52 Cloull d Computintt g Arrangements From time-to-time, we enter into various agreements with unaffiliated third parties for assistance with technical development work related to our security-related software and systems and other ongoing projects. Expenditures for implementation, set-up, and other upfroff nt costs incurred in a cloud computing arrangement that is hosted by the vendor are capia talized generally in the same manner as internal use software and are recorded as other assets in our consolidated balance sheets. Such costs are amortized over the lifeff of the related cloud computing arrangement. As of September 30, 2023 and October 1, 2022, approximately $5.9 million and $9.7 million associated with these agreements are included in prepaid expenses and other current assets in our consolidated balance sheets, respectively. Approximately $44.1 million and $35.7 million associated with these agreements are included in other assets in our consolidated balance sheets as of September 30, 2023 and October 1, 2022, respectively. In addition, for the year ended September 30, 2023, the Company recognized $6.3 million of expense in connection with the discontinued use of certain software subsu criptions which is recorded in SG&A in our consolidated statements of operations and a corresponding $4.4 million liabia lity for future obligations associated with these subsu criptions. Goodwill and Othett r Intangibles, Net Goodwill and intangible assets are recorded at their estimated fair values at the date of acquisition. We review goodwill and indefinite-lived intangible assets for impairment annually (in the fourth quarter) or more frequently if impairment indicators arise. Goodwill can be evaluated for impairment, at our option, by first performing a qualitative assessment to determine whether a If it is determined, based on qualitative factors, the fair value of the reporting unit may be quantitative goodwill test is necessary.rr more likely than not less than the carryirr ng amount, a quantitative goodwill impairment test would be required. Additionally, we can elect to forgo a qualitative assessment and perform a quantitative test. The quantitative test is to identifyff if a potential impairment exists by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds the fair value, an impairment loss is recognized in an amount equal to that excess, not to exceed the carrying amount of goodwill. If a quantitative test is performed, we would estimate the value considering the use of various valuation techniques which may use significant unobservabla e inputs, or Level 3 inputs, as defined by the fair value hierarchy. We include assumptions about sales growth, operating margins, discount rates and valuations multiples which consider our budgets, business plans, economic projections and marketplt ace data, and are believed to reflect market participant views which would exist in an exit transaction. Some of the inherent estimates and assumptions used in this analysis are outside the control of management, including cost of capia tal, tax rates and market EBITDA comparables. Finite-lived intangible assets are amortized to reflect the pattern of economic benefits consumed. We evaluate amortizable intangible assets for potential impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverabla e. Intangible assets usefulff lives are reviewed annually. For our indefinite lifeff intangible assets, a qualitative assessment can also be performed to determine whether the existence of events and circumstances indicates it is more likely than not the intangible asset is impaired. Similar to goodwill, we can also elect to forgo a qualitative test for indefinite lifeff intangible assets and perform a quantitative test. Upon performing the quantitative test, if the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. We evaluate whether certain trade names continue to have an indefinite life annually. Afteff r we made our assessments, it was determined that there was no impairment related to goodwill or other intangible assets during fiscal 2023, 2022, and 2021. Leases We enter into contractuat l arrangements for the utilization of certain non-owned assets which are evaluated as finance or operating leases upon commencement and are accounted for accordingly. Specifically, a contract is or contains a lease when (1) the contract contains an explicitly or implicitly identifieff d asset and (2) we obtain subsu tantially all of the economic benefits from the use of that underlying asset and direct how and for what purpos e the asset is used during the term of the contract in exchange rr for consideration. We assess whether an arrangement is or contains a lease at inception of the contract. 53 We lease certain retail locations, warehouse and distribution space, offiff ce space, equipment, and vehicles. A subsu tantial majoa rity of our leases have an initial lease term of five years, typically with the option to extend the lease for at least one additional five-year term. Some of our leases may include the option to terminate in less than five years. The lease term used to calculate the right-of-use asset and lease liabia lity at commencement includes the impacts of options to extend or terminate the lease when it is reasonabla y certain that we will exercise that option. When determining whether it is reasonabla y certain that we will exercise an option at commencement, we consider various existing economic factors, including market conditions, real estate strategies, the nature, length, and terms of the agreement, as well as the uncertainty of the condition of leased equipment at the end of the lease term. Based on these considerations, we generally conclude that the exercise of renewal options would not be reasonabla y certain in calculating our operating lease liabia lity at commencement. The discount rate used to calculate the present value of lease payments is the rate implicit in the lease, when readily determinable. As the rate implicit in the lease is rarely readily determinable, we use a secured incremental borrowing rate, which is updated on a periodic basis as the discount rate for the present value of lease payments. Real estate taxes, insurance, maintenance, and operating expenses applicable to the leased property are generally our obligations under our lease agreements. In instances where these payments are fixed, they are included in the measurement of our lease liabia lities, and when variable, are excluded and recognized in the period in which the obligation for those payments is incurred. For variable payments dependent upon an index or rate, we apply the active index or rate as of the lease commencement date. Variable lease payments not based on an index or rate are not included in the measurement of our operating lease liabia lities as they cannot be reasonabla y estimated and are recognized in the period in which the obligation for those payments is incurred. Leases that have a term of 12 months or less upon commencement are considered short-term in nature and as such are not included in the measurement of our operating lease right-of-use assets and operating lease liabia lities on the consolidated balance sheets and are expensed on a straight-line basis over the lease term. In addition, we separate lease and non-lease components (e.g., common area maintenance). Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. Revenue Recogno itiott n Revenue is recognized when control of the promised goods or services is transferff red to our customer, in an amount that reflects the consideration we expect to be entitled to in exchange for such goods or services. Revenue from merchandise sales at retail locations is recognized at the point of sale and revenue from services is recognized when the services are rendered. Revenue from e-commerce merchandise sales is recognized either at the time of pick-upu at one of our locations or at the time of shipment, depending on the customer’s order designation. Revenue is recorded net of related discounts, loyalty point deferrals, and sales tax. Payment from retail customers is generally at the point of sale and payment terms for profesff sional pool operators 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. Shipping and handling are treated as costs to fulfillff the contract and not a separate performance obligation. We estimate a liabia lity for sales returns based on current sales levels and historical return trends. At each financial reporting date, we assess our estimates of expected returns, and a corresponding adjud stment to cost of sales for our right to recover the goods returned by the customer, net of any expected recovery cost. Adjud stments related to changes in return estimates were immaterial in all periods presented. Our loyalty program, Pool Perks®, allows members to earn reward points based on their purchases. Once a loyalty member achieves a certain point level, the member earns an award that may be used on future purchases. Points and awards are valid for 12 months from issuance. We defer revenue related to earned points and awards that have not yet been redeemed. The amount of deferred revenue is based on the estimated standalone selling price of points and awards earned by members and reduced by the percentage of points and awards expected to be redeemed. Estimating future redemption rates requires judgment based on current trends and historical patterns. Revenue is recognized when the rewards are redeemed and expired. To the extent we have a change in our breakage estimates, the corresponding amount of change is recognized in revenue. As of September 30, 2023 and October 1, 2022, deferred revenue related to the loyalty program was $5.6 million and $4.6 million, respectively, and is included in accounts payabla e and accruer d expenses in our consolidated balance sheets. Cost of Merchandisdd e 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 and materials, as well as distribution and , costs to provide services, including labor occupau ncy costs. Distribution costs include warehousing and transportation expenses, including costs associated with third-party fulfillff ment centers. Occupau ncy costs include the rent, common area maintenance, real estate taxes, and depreciation and amortization costs of all retail locations. a a 54 Sellingii ,gg General and Admidd niii stii ratt tive Expexx nses Our SG&A includes 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, suppl ies, and credit and debit card processing costs. Corporate expenses include payroll, bonus, and benefit costs for our corporate and field t functions, equity-based compensation, marketing and advertising, insurance, utilities, occupau ncy costs related to our suppor u sional services, and depreciation and amortization for all assets, except those related to our retail corporate offiff ce facilities, profesff locations and distribution operations, which are included in cost of merchandise and services sold. u Adverdd tising We expense advertising costs as incurred. Advertising costs for fiscal 2023, 2022, and 2021 were approximately $35.1 million, $38.0 million, and $25.4 million, respectively. Income Taxeaa s We account for income taxes under the asset and liabia lity method, which requires the recognition of deferred tax assets and liabia lities for the future tax consequences attributable to differences between the financial statement carrying amounts and tax bases of existing assets and liabia lities. Deferred tax assets, including the benefit of net operating loss and tax credit carryforwards, are evaluated based on the guidelines for realization and are reduced by a valuation allowance if it is deemed more likely than not that such assets will not be realized. We consider several factors in evaluating the realizability of our deferred tax assets, including the nature, frequency and severity of recent losses, the remaining years availabla e for carryfrr orff wards, changes in tax laws, the future profitaff bia lity of the operations in the jurisdiction, and tax planning strategies. Our judgments and estimates concerning realizability of deferred tax assets could change if any of the evaluation factors change, resulting in an increase or decrease to income tax expense in any period. The ultimate realization of deferred tax assets can be dependent upon the generation of future taxabla e income during the periods in which the associated temporaryrr differences become deductible. On a quarterly basis, we evaluate whether it is more likely than not that our deferred tax assets will be realized in the future and conclude whether a valuation allowance must be establa ished. We record a liabia lity for uncertain tax positions to the extent a tax position taken or expected to be taken in a tax return does not meet certain recognition or measurement criteria. Considerable management judgment is necessary to assess the inherent uncertainties related to the interpretations of complex tax laws, regulations and taxing authority rulings. Our judgments and estimates may change as a result of the evaluation of new information, such as the outcome of tax audits or changes to or further interpretations of tax laws and regulations, resulting in an increase or decrease to income tax expense in any period. Interest and penalties accruerr d, if any, relating to uncertain tax positions will be recognized as a component of the income tax provision. We determined there were no material uncertain tax positions as of September 30, 2023 and October 1, 2022. Equityii -Based Compensation Stock-based compensation expense is measured at grant date, based on the fair value of the award, and is recognized on a straight-line basis over the requisite service period for awards expected to vest. See Note 17—Equity-Based Compensation for further discussion. Self-Iff nsII urance Reserves We are self-iff nsured for losses relating to workers’ compensation, general liabia lity, and employee medical. Stop-loss coverage has been purchased to limit exposure to any material level of claims. Liabilities for self-iff nsurance reserves are estimated based on independent actuat rial estimates, which are based on historical information and assumptions about future events. We utilize various techniques, including analysis of historical trends and actuarial valuation methods, to estimate the cost to settle reported claims and claims incurred but not yet reported as of the balance sheet date. The actuat rial valuation methods consider loss development factors, which include the development time frame and expected claim reporting and settlement patterns, and expected loss costs, which include the expected frequency and severity of claim activity. 55 Earnings per Share Basic earnings per share is calculated by dividing net income by the weighted average number of shares outstanding during the period. Dilutive earnings per share is computed giving effeff ct to all potentially dilutive shares, unless their effeff ct is antidilutive. We apply the treasuryrr stock method for dilutive share-based awards. Performance-based share-based awards are included in diluted shares only if the related performance conditions have been considered satisfied as of the end of the reporting period. Recent Accountintt g Pronouncements In March 2020, January 2021 and December 2022, the FASB issued ASU No. 2020-04, 2021-01 and 2022-06, respectively, regarding Reference Rate Reform (collectively “Topic 848”). This collective guidance was in response to accounting concerns regarding contract modifications and hedge accounting because of rate reform associated with structurt al risks of interbank offeff red rates, and particularly, the risk of cessation of the London Inter-Bank Offeff r Rate (“LIBOR”) related to regulators in several jurisdictions around the world having undertaken reference rate reform initiatives to identifyff alternative reference rates. In addition, Topic 848 provided optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affeff cted by reference rate reform if certain criteria were met. The guidance was effeff ctive upon issuance and may be applied through December 31, 2024, afteff r which entities will no longer be permitted to apply the relief in Topic 848. The primary contracts for which LIBOR were used were our Revolving Credit Facility and Term Loan (as defined in Note 10—Long-Term Debt, Net). The Company transitioned from a LIBOR-based rate to a Term Secured Overnight Financing Rate (“Term SOFR”)- based rate for our Revolving Credit Facility and Term Loan and elected the optional expedients under the standard as of the first day of the second and third quarters, respectively. This adoption did not have a material impact to our condensed consolidated financial statements. Note 3—Business Combinations Our consolidated financial statements include the results of operations of these acquisitions from the date of acquisition. The total purchase consideration was allocated to the tangible and intangible assets acquired and the liabilities assumed at their estimated fair values as of each acquisition date, with the excess recorded to goodwill. The goodwill resulting from these acquisitions is expected to be deductible for income tax purpos es. During the measurement periods, which will not exceed one year from each closing, we will continue to obtain information to assist us in finalizing the acquisition date fair values. Any qualifyiff ng changes to our preliminaryrr estimates will be recorded as adjud stments to the respective assets and liabia lities, with any residual amounts allocated to goodwill. rr Fiscii al 2023 Acquisitiott ns In fiscal 2023, we acquired five businesses for an aggregate purchase price of $15.5 million, net of cash acquired. These int and added 12 new locations across Arizona, Califorff nia, Florida, and Louisiana. acquisitions expanded our pool and spa footprt The purchase accounting for these acquisitions has not yet been completed and thereforff e the purchase price allocations are preliminary.rr Total purchase consideration, net of cash acquired Fair value of assets acquired and liabia lities assumed: Inventories Finite-lived intangible assets Other assets and liabilities, net Total assets acquired, net of liabia lities assumed Goodwill $ $ Total 15,549 4,518 2,700 152 7,370 8,179 56 Fiscii al 2022 Acquisitiott ns In fiscal 2022, we acquired six businesses for an aggregate purchase price of $107.7 million, inclusive of contingent considerations of up to $4.0 million if certain performance metrics are achieved within one to three years of the respective closing dates. Contingent considerations are remeasured to fair value at each reporting period until the contingency is resolved. As of September 30, 2023, the fair value of fiscal 2022 contingent consideration is $3.0 million and is included in accounts payabla e and int and added 27 new accruerr d expenses in our consolidated balance sheets. These acquisitions expanded our pool and spa footprt locations as well as expanded our manufact ing capaa bia lities. The following tabla e sets forth the purchase price allocation of these acquisitions, net of immaterial measurement period adjud stments, in the aggregate (in thousands). The purchase accounting for these acquisitions is complete. urt ff Total purchase consideration, net of cash acquired Fair value of assets acquired and liabia lities assumed: Inventories Finite-lived intangible assets Other assets and liabilities, net Total assets acquired, net of liabia lities assumed Goodwill Note 4—Goodwill and Other Intangibles, Net Goodwill The following tabla e details the changes in goodwill (in thousands): Balance at beginning of the year Acquisitions, net of measurement period adjud stments Balance at the end of the year Othett r Intangible Assets $ $ Total 107,663 20,050 15,200 3,086 38,336 69,327 September 30, 2023 173,513 $ 7,185 180,698 $ $ $ October 1, 2022 101,114 72,399 173,513 Other intangible assets consisted of the following as of September 30, 2023 (in thousands, except weighted average remaining usefulff : life)ff Accumulated Amortization $ (7,958) $ — (7,585) (15,317) (6,476) (37,336) $ $ Net Carrying Amount 18,782 9,350 1,098 8,783 144 38,157 Trade name and trademarks (finite life) Trade name and trademarks (indefinite life)ff Non-compete agreements Consumer relationships Other intangibles Total Weighted Average Remaining Usefulff Life (in Years) 9.8 Indefinite 5.4 7.4 5.1 Gross Carrying Value 26,740 9,350 8,683 24,100 6,620 75,493 $ $ 57 Other intangible assets consisted of the following as of October 1, 2022 (in thousands, except weighted average remaining life): usefulff Trade name and trademarks (finite life) Trade name and trademarks (indefinite life)ff Non-compete agreements Consumer relationships Other intangibles Total Weighted Average Remaining Usefulff Life (in Years) 11.0 Indefinite 6.5 7.9 6.2 Gross Carrying Value 24,440 9,350 8,683 24,100 6,620 73,193 $ $ Accumulated Amortization $ (5,907) $ — (7,379) (13,339) (6,380) (33,005) $ Net Carrying Amount 18,533 9,350 1,304 10,761 240 40,188 Other intangible assets consisted of the following as of October 2, 2021 (in thousands, except weighted average remaining life): usefulff Trade name and trademarks (finite life) Trade name and trademarks (indefinite life)ff Non-compete agreements Consumer relationships Other intangibles Total Weighted Average Remaining Usefulff Life (in Years) 6.6 Indefinite 7.5 6.4 7.0 Gross Carrying Value 5,940 17,750 8,633 19,000 6,620 57,943 $ $ Accumulated Amortization $ (5,274) $ — (7,123) (11,688) (5,952) (30,037) $ Net Carrying Amount 666 17,750 1,510 7,312 668 27,906 $ $ Amortization expense was $4.3 million, $3.0 million, and $2.2 million in fiscal 2023, 2022, and 2021, respectively. No impairment of goodwill or other intangible assets was recorded during fiscal 2023, 2022, and 2021. In fiscal 2022, an $8.4 million indefinite-lived trade name intangible asset was reclassified to a finite-lived intangible asset due to a change in the way the asset will be utilized in the future. Prior to reclassifying the trade name to a finite-lived intangible asset, the Company tested it for impairment and determined that the fair value of the asset exceeded the carrying value. This trade name was assigned a 10-year estimated usefulff life and will be amortized over its usefulff lifeff on a prospective basis. The following tabla e summarizes the estimated future amortization expense related to finite-lived intangible assets on our consolidated balance sheet as of September 30, 2023 (in thousands): 2024 2025 2026 2027 2028 Thereafter Total Amount 3,693 3,596 3,350 3,226 2,273 12,669 28,807 $ $ 58 Note 5—Accounts and Other Receivables, Net Accounts and other receivabla es, net consisted of the following (in thousands): Vendor and other rebates receivabla e Customer receivables Other receivables Allowance for doubtful accounts Total Note 6—Inventories Inventories consisted of the following (in thousands): Raw materials Finished goods Total September 30, 2023 6,818 $ 18,334 5,900 (1,656) 29,396 $ September 30, 2023 3,076 $ 308,761 311,837 $ Changes in inventoryrr excess and obsolescence reserves were as follows (in thousands): Fiscal 2023 Fiscal 2022 Fiscal 2021 Balance at Beginning of Period Additions Charged to Costs and Expenses Deductions Sale or Disposal of Inventories $ $ $ 5,871 5,856 4,939 $ $ $ 4,387 865 1,993 $ $ $ (3,334) (850) (1,076) $ $ $ Note 7—Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consisted of the following (in thousands): Prepaid insurance Prepaid occupau ncy costs Prepaid sales tax Prepaid other Other current assets Total Note 8—Property and Equipment Property and equipment consist of the following (in thousands): Land Buildings and improvements Vehicles, machineryrr and equipment Leasehold improvements Offiff ce furniturt e, computers and software Construcrr tion in process Less: accumulated depreciation and amortization Total 59 September 30, 2023 1,236 $ 1,967 4,060 6,239 10,131 23,633 $ September 30, 2023 5,401 $ 10,063 42,663 200,968 178,733 12,389 450,217 (359,932) 90,285 $ $ October 1, 2022 24,546 17,708 4,553 (1,512) 45,295 October 1, 2022 9,065 352,621 361,686 Balance at End of Period 6,924 5,871 5,856 October 1, 2022 1,110 1,840 2,874 4,847 12,433 23,104 October 1, 2022 5,813 10,135 42,394 187,876 168,988 5,741 420,947 (342,860) 78,087 $ $ $ $ $ $ $ $ $ Depreciation and amortization expense on property and equipment was $29.8 million, $27.8 million, and $26.6 million in tion in process primarily consisted of leasehold improvements related to new tion had not been completed by the end of the period and internal use software as of fiscal 2023, 2022, and 2021, respectively. Construcr or remodeled locations where construcrr September 30, 2023 and October 1, 2022, respectively. Capia talized software additions placed into service were $5.2 million, $6.5 million, and $2.8 million in fiscal 2023, 2022, and 2021, respectively. Capia talized software accumulated amortization totaled approximately $22.0 million and $20.9 million as of September 30, 2023 and October 1, 2022, respectively. Capia talized software and development costs remaining to be amortized were approximately $11.6 million and $7.6 million as of September 30, 2023 and October 1, 2022, respectively. Note 9—Accounts Payable and Accrued Expenses Accounts payabla e and accruer d expenses consisted of the following (in thousands): Accounts payabla e Accruer d payroll and employee benefits Customer deposits Interest Inventoryrr Loyalty and deferred revenue Sales tax Self-iff nsurance reserves Other accrued liabia lities Total related accruals September 30, 2023 58,556 $ 18,558 7,356 581 13,843 6,785 9,146 9,138 25,191 149,154 $ $ $ October 1, 2022 156,456 34,010 13,250 342 16,034 5,541 9,130 9,280 22,929 266,972 As of September 20, 2023, October 1, 2022, and October 2, 2021, approximately $1.5 million, $1.1 million, and $1.5 million of capital expenditures were included in other accruerr d liabilities, respectively. Note 10—Long-Term Debt, Net Our long-term debt, net consisted of the following (in thousands, except interest rates): Term Loan Revolving Credit Facility Total long-term debt Less: current portion of long-term debt Less: unamortized discount Less: deferred financing charges Total long-term debt, net Effeff ctive Interest Rate (1) 8.20% (2) $ —% (3) September 30, 2023 789,750 — 789,750 (8,100) (2,316) (6,058) 773,276 $ October 1, 2022 797,850 — 797,850 (8,100) (2,805) (7,219) 779,726 $ $ Effective interest rates as of September 30, 2023. (1) (2) Carries interest at a specifieff d margin over Term SOFR between 2.50% and 2.75% with a minimum SOFR of 0.50% plus a SOFR adjud stment. (3) Carries interest at a specific margin between 0.25% and 0.75% with respect to Base Rate loans and between 1.25% and 1.75% with respect to Term SOFR loans, with a SOFR adjud stment. 60 Term Loan In June 2023, we entered into Amendment No. 1 (“Term Loan Amendment”) to our Term Loan. The Term Loan Amendment (i) replaced the existing LIBOR-based interest rate benchmark with a Term SOFR-based benchmark and (ii) amended certain other related terms and provisions, including the addition of a SOFR adjud stment of (a) 0.11448% per annum for one-month, (b) 0.26161% per annum for three months, and (c) 0.42826% per annum for six months. The other material terms of the Term Loan remained subsu tantially unchanged. The Term Loan provides for an $810.0 million secured term loan facility with a maturity date of March 9, 2028. Borrowings under the Term Loan have an initial applicable rate, at our option, of (i) 2.75% for loans that are Term SOFR loans and (ii) 1.75% for loans that are ABR loans (the “Applicable Rate”). The Applicable Rate of the Term Loan is based on our first lien leverage ratio as follows: (a) if the first lien leverage ratio is greater than 2.75 to 1.00, the applicable rate will be 2.75% for Term SOFR loans and 1.75% for ABR loans and (b) if the first lien leverage ratio is less than or equal to 2.75 to 1.00, the applicable rate will be 2.50% for Term SOFR loans and 1.50% for ABR loans. For Term SOFR loans, the loans will bear interest at the Term SOFR- based benchmark rate plus the Applicable Rate and the SOFR adjud stment, as defined above. Revolving Creditdd Faciliii tyii In March 2023, we entered into Amendment No. 6 to our $200.0 million credit facility (“Revolving Credit Facility”) maturing on August 13, 2025 (the “Amendment”). The Amendment (i) increased the revolving credit commitments under the Revolving Credit Facility in the amount of $50.0 million, such that the aggregate commitments are $250.0 million and (ii) replaced the existing LIBOR-based rate with a Term SOFR-based rate, as an interest rate benchmark. The Revolving Credit Facility has (i) an applicable margin on Base Rate loans with a range of 0.25% to 0.75%, (ii) an applicable margin on Term SOFR loans with a range of 1.25% and 1.75%, (iii) a SOFR Adjud stment of 0.10% for all borrowing periods, (iv) a floor of 0% per annum, and (v) a commitment fee rate of 0.25% per annum. The other material terms of the Revolving Credit Facility prior to the Amendment remained subsu tantially unchanged. As of September 30, 2023 and October 1, 2022, no amounts were outstanding under the Revolving Credit Facility. The amount availabla e under our Revolving Credit Facility was reduced by $11.4 million and $10.0 million of existing standby letters of credit as of September 30, 2023 and October 1, 2022, respectively. Repree esentations and Covenants Subsu tantially all of our assets are pledged as collateral to secure our indebtedness. The Term Loan does not require us to comply with any financial covenants. The Term Loan and the Revolving Credit Facility contain customaryrr representations and warranties, covenants, and conditions to borrowing. No events of default occurred as of September 30, 2023 and October 1, 2022, respectively. s Future Debt Maturitieii The following tabla e summarizes the debt maturities and scheduled principal repayments of our indebtedness as of September 30, 2023 (in thousands): 2024 2025 2026 2027 2028 Thereafter Total Amount 6,075 10,125 8,100 8,100 757,350 — 789,750 $ $ 61 Note 11—Leases Operatintt g Leases We lease certain locations, offiff ce, distribution, and manufact ing facilities under operating leases that expire at various ff dates through December 2048. We are obligated to make cash payments in connection with various lease obligations and purchase commitments. All of these obligations require cash payments to be made by us over varying periods of time. Certain leases are renewabla e at our option typically for periods of five or more years. Certain of these arrangements are cancelabla e on short notice and others require payments upon early termination. We do not have any finance leases. urt The following tabla e summarizes the components of lease expense (in thousands): Operating lease expense Variable lease expense Total net lease expense September 30, 2023 79,741 $ — 79,741 $ $ $ Year Ended October 1, 2022 October 2, 2021 72,922 — 72,922 $ $ 68,130 1,129 69,259 As of September 30, 2023 and October 1, 2022, operating lease right-of-use assets obtained in exchange for operating lease liabia lities totaled $11.1 million and $32.6 million, respectively. The following tabla e presents the weighted-average remaining lease term and discount rate for operating leases: Weighted-average remaining lease term Weighted-average discount rate September 30, 2023 5.0 years 6.2% October 1, 2022 4.4 years 5.5% The following tabla e summarizes the future annual minimum lease payments as of September 30, 2023 (in thousands): 2024 2025 2026 2027 2028 Thereafter Total Less: amount of lease payments representing imputed interest Present value of future minimum lease payments Less: current operating lease liabia lities Operating lease liabia lities, noncurrent Note 12—Income Taxes The provision for income taxes consists of the following (in thousands): Amount 76,361 70,356 61,616 41,139 22,036 34,773 306,281 50,265 256,016 62,794 193,222 $ $ $ Current: Federal State Total Current Deferred: Federal State Total Deferred Total income tax provision September 30, 2023 Year Ended October 1, 2022 October 2, 2021 13,425 2,404 15,829 (5,608) (722) (6,330) 9,499 $ $ 37,886 8,736 46,622 2,556 (90) 2,466 49,088 $ $ 25,914 7,733 33,647 2,633 215 2,848 36,495 $ $ 62 A reconciliation of the provision for income taxes to the amount computed at the federal statutt oryrr rate is as follows (in thousands): rate Federal income tax at statutt oryrr Equity-based compensation Section 162(m) limitation Permanent differences Change in valuation allowance State taxes, net of federal benefit Other Total income tax provision September 30, 2023 Year Ended October 1, 2022 October 2, 2021 $ $ 7,716 129 520 82 — 1,109 (57) 9,499 $ $ 43,705 (1,025) 805 96 — 6,734 (1,227) 49,088 $ $ 34,257 (2,360) 2,826 564 (5,425) 7,072 (439) 36,495 Our effeff ctive income tax rate for fiscal 2023 was 25.9% as compared to 23.6% in fiscal 2022. The tax effeff cts of temporaryrr differences that give rise to significant portions of deferred tax assets and liabia lities are summarized below (in thousands): Deferred tax assets: ls Compensation accruar Inventories Lease liabilities Equity-based compensation Reserves and other accruar ls Interest limitation Capia talized research expenditures Total deferred tax assets Deferred tax liabia lities: Property, plant, and equipment Intangibles Lease assets Deferred financing cost Other Total deferred tax liabilities Deferred tax assets (liabia lities), net September 30, 2023 October 1, 2022 $ $ 1,878 1,237 64,619 2,503 2,696 7,615 2,017 82,565 (4,387) (6,109) (61,835) (253) (2,383) (74,967) 7,598 $ $ 4,067 3,496 58,710 2,151 1,059 — — 69,483 (4,066) (4,302) (57,798) (310) (1,739) (68,215) 1,268 Management assesses the availabla e positive and negative evidence to estimate if sufficient future taxabla e income will be generated to utilize the existing deferred tax assets. The interest expense limitation passed in the Coronavirus Aid, Relief,ff and Economic Security Act (the “CARES Act”) created a deferred tax asset for the fiscal year ended October 3, 2020 that we did not anticipate realizing in the immediate future; as a result, a valuation allowance was recorded. The $5.4 million valuation allowance was removed during the first quarter of fiscal 2021 as the realization of the CARES Act deferred tax asset was deemed probabla e due to the Company's paydown of debt with proceeds from the IPO, which decreased interest expense. We are subju ect to United States federal and state taxes in the normal course of business and our income tax returns are subju ect to examination by the relevant tax authorities. We are no longer subju ect to United States federal examinations by taxing authorities for calendar years before 2019 and no longer subju ect to state examinations for calendar years before 2018. We have not identifieff d any material uncertain tax positions. In August 2022, the Inflation Reduction Act of 2022 was signed into law and contains provisions effeff ctive January 1, 2023 which were not material to the Company’s income tax provision. 63 Note 13—Commitments & Contingencies Contintt gencies On September 8, 2023, a class action complaint for violation of federal securities laws was filed by West Palm Beach Police Pension Fund in the U.S. District Court for the District of Arizona against us, our Chief Executive Offiff cer and our former Chief Financial Offiff cer. The complaint alleges that we violated federal securities laws by issuing materially false and misleading statements that failed to disclose adverse facts about our financial guidance, business operations and prospects, and seeks class certificff ation, damages, interest, attorneys’ fees, and other relief.ff Due to the early stage of this proceeding, we cannot reasonabla y estimate the potential range of loss, if any. We dispute the allegations of wrongdoing and intend to defend ourselves vigorously in this matter. We are also defendants in lawsuits or potential claims encountered in the normal course of business. When the potential liabia lity from a matter can be estimated and the loss is considered probabla e, we record the estimated loss. Due to uncertainties related to the resolution of lawsuits, investigations and claims, the ultimate outcome may differ from the estimates. We do not expect that the resolutions of any of these matters will have a material effeff ct to our consolidated financial position or results of operations. We did not record any material loss contingencies as of September 30, 2023, October 1, 2022, and October 2, 2021, respectively. Our workers’ compensation insurance program, general liabia lity insurance program, and employee group medical plan have self-iff nsurance retention featurt es of up to $0.4 million per event as of September 30, 2023 and October 1, 2022. We had standby letters of credit outstanding in the amount of $11.4 million and $10.0 million as of September 30, 2023 and October 1, 2022, respectively, for the purpos e of securing such obligations under our workers’ compensation self-iff nsurance programs. rr Purchase Commitments In addition to our lease obligations, we maintain future purchase commitments related to inventoryrr and operational requirements. The following tabla e summarizes the future minimum purchase commitments as of September 30, 2023 (in thousands): 2024 2025 2026 2027 2028 Thereafter Total Note 14—401(K) Plan Amount 79,941 78,327 7,838 5,705 2,207 — 174,018 $ $ We provide for the benefit of our employees a voluntaryrr defined contribution retirement plan under Section 401(k) of the Internal Revenue Code. The plan covers all eligible employees and provides for a matching contribution by us of 50% of each participant’s contribution of up to 4% of the individual’s compensation as defined. The expenses related to this plan were $1.5 million, $1.4 million, and $0.8 million in fiscal 2023, 2022, and 2021, respectively. Note 15—Related Party Transactions On December 14, 2021, the Company entered into a share repurchase agreement with Bubbl es Investor Aggregator, L.P. and Explorer Investment Pte. Ltd. (together, the “Selling Stockholders”), each a greater than 5% beneficial owner of the Company’s common stock at the time of the transaction, providing for the repurchase by the Company from the Selling Stockholders of an aggregate of 7.5 million shares of common stock, conditioned on the closing of a contemporaneous secondary public offeff ring (the “Offering”). The price per share of repurchased common stock paid by the Company was $20.25, which represents the per share ring less the underwriting discount. The repurchase price at which shares of common stock were sold to the public in the Offeff u 64 transaction closed on December 16, 2021. See Note 16—Share Repurchase Program for detailed information regarding our share repurchase program. Note 16—Share Repurchase Program On December 3, 2021, the board of directors authorized a share repurchase program for up to an aggregate of $300 million of the Company’s outstanding shares of common stock over a period of three years, expiring December 31, 2024. The amount, price, manner, and timing of repurchases are determined by the Company in its discretion and depends on a number of factors, including legal requirements, price, economic and market conditions, the Company’s financial condition, capia tal requirements, cash flows, results of operations, future business prospects, and other factors our management may deem relevant. The share repurchase program may be amended, suspended, or discontinued at any time. Shares may be repurchased from time-to-time using a variety of methods, including on the open market and/or in privately negotiated transactions, including under plans complying with Rule 10b5-1 under the Exchange Act, as part of accelerated share repurchases, and other methods. On December 16, 2021, the Company repurchased and retired 7.5 million shares of common stock at a price per share of $20.25 under the program. The Company paid $151.9 million ($152.1 million including offeff ring costs) to fund the share repurchase using existing cash on hand. The Company accounted for the share repurchase and retirement of shares under the cost method by deducting its par value from common stock, reducing additional paid-in-capital by $127.5 million (using the share price when the shares were originally issued), and increasing retained deficit by the remaining excess cost of $24.4 million. As of September 30, 2023, approximately $147.7 million remained availabla e for future purchases under our share repurchase program. The following tabla e presents information about our repurchases of common stock under our share repurchase program (in thousands): Total number of shares repurchased Total amount paid for shares repurchased Note 17—Equity-Based Compensation Equityii -Based Compensation 2020 Omnibus Incentive Plan Year Ended September 30, 2023 — — $ $ October 1, 2022 7,500 151,875 In October 2020, we adopted the Leslie’s, Inc. 2020 Omnibus Incentive Plan (the “Plan”). The Plan provides for various types of awards, including non-qualified stock options to purchase Leslie’s common stock (each, a “Stock Option”), restricted stock units (“RSUs”) and performance stock units (“PSUs”) which may settle in Leslie’s, Inc. common stock to our directors, executives, and eligible employees of the Company. As of September 30, 2023, we had approximately 7.7 million shares of common stock availabla e for future grants under the Plan. As of September 30, 2023, the aggregate unamortized value of all outstanding equity-based compensation awards was approximately $22.6 million, which is expected to be recognized over a weighted average period of approximately 2.4 years. 65 Stoctt k Options Stock Options granted under the Plan generally expire ten years from the date of grant and consist of Stock Options that vest tion of time-based requirements. The following tabla es summarize our Stock Option activity under the Plan (in upon satisfacff thousands, except per share amounts): Year Ended September 30, 2023 October 1, 2022 Number of Options p Weighted Average Exercise Price Number of Options p Weighted Average Exercise Price 3,780 — — (472) 3,308 1,980 $ $ $ 18.24 — — 19.25 18.10 18.18 Outstanding, Beginning Granted Exercised Forfeited/Expired Balance, Ending Vested and exercisabla e as of September 30, 2023 Aggregate intrinsic value of Stock Options outstanding Unamortized value of unvested Stock Options Weighted average years that expense is expected to be recognized Weighted average remaining contractuat l years outstanding Restritt ctedtt Stoctt k Unitstt and Perforff marr nce Unitstt 4,877 — (81) (1,016) 3,780 1,349 $ $ $ 18.22 — 17.00 18.22 18.24 18.28 September 30, 2023 $ $ — 4,072 1.1 7.5 RSUs represent grants that vest ratabla y upon the satisfaction of time-based requirements. PSUs represent grants potentially issuable in the future based upon the Company’s achievement of certain performance conditions. The fair value of our RSUs and PSUs are calculated based on the Company’s stock price on the date of the grant. The following tabla e summarizes our RSU and PSU activity under the Plan (in thousands, except per share amounts): Outstanding, Beginning Granted (1) Vested Forfeited Balance, Ending Year Ended September 30, 2023 October 1, 2022 Number of RSUs/PSUs Weighted Average Grant Date Fair Value Number of RSUs/PSUs Weighted Average Grant Date Fair Value 2,297 1,487 (1,057) (643) 2,084 $ $ 10.04 11.19 7.00 11.58 11.92 3,135 631 (1,079) (390) 2,297 $ $ 6.90 18.57 5.99 9.82 10.04 (1) Includes 0.3 million PSUs granted in December 2022 subju ect to the Company achieving certain adjud sted net income and sales performance targets on a cumulative basis during each of fiscal years 2023, 2024, and 2025. The criteria are based on a range of these performance targets in which participants may earn between 0% to 200% of the base number of awards granted. The weighted average grant date fair value of the PSUs was $12.04. The Company assesses the attainment of target payout rates each reporting period. Equity-based compensation expense is recognized for awards deemed probabla e of vesting. Unamortized value of unvested RSUs/PSUs Weighted average period (years) expense is expected to be recognized $ September 30, 2023 18,527 2.7 During the fiscal year ended September 30, 2023, equity-based compensation expense was $11.7 million. During the fiscal year ended October 1, 2022, equity-based compensation expense was $11.3 million. Equity-based compensation expense is reported in SG&A in our consolidated statements of operations. 66 Note 18—Earnings Per Share The following is a reconciliation of basic weighted average common shares outstanding to diluted weighted average common shares outstanding (in thousands, except per share amounts): Numerator: Net income Denominator: Weighted average shares outstanding - basic Effeff ct of dilutive securities: Stock Options RSUs Weighted average shares outstanding - diluted September 30, 2023 Year Ended October 1, 2022 October 2, 2021 $ 27,242 $ 159,029 $ 126,634 183,839 — 877 184,716 184,347 — 1,801 186,148 185,412 567 4,030 190,009 0.68 0.67 Basic earnings per share Diluted earnings per share $ $ 0.15 0.15 $ $ 0.86 0.85 $ $ The following number of weighted-average potentially dilutive shares were excluded from the calculation of diluted earnings per share because the effeff ct of including such shares would have been antidilutive (in thousands): Stock Options RSUs Total September 30, 2023 3,539 2,154 5,693 Year Ended October 1, 2022 October 2, 2021 4,020 601 4,621 321 2 323 67 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. Item 9A. Controls and Procedures. Managea ment’s Evaluation of Discii losure Contrott ls and Procedures Our disclosure controls and procedurd es (as defined in Rules 13a-15(e) and 15d-15(e)) are designed to ensure that information required to be disclosed by us in reports we file or submu it under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the appropriate time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Offiff cer and Chief Financial Offiff cer, as appropriate, to allow timely discussions regarding required disclosure. We, under the supeu rvision of and with the participation of our management, including our Chief Executive Offiff cer and Chief Financial Offiff cer, have evaluated the effeff ctiveness of our disclosure controls and procedurd es. Based on that evaluation, our Chief Executive Offiff cer (Principal Executive Offiff cer) and Chief Financial Offiff cer (Principal Financial Offiff cer and Principal Accounting Offiff cer) have concluded that our disclosure controls and procedurd es were not effeff ctive as of September 30, 2023, due to the material weaknesses in our internal control over financial reporting as described below. ii Limi taii tions on Effeff ctivtt eness of Contrott ls and Procedures In designing and evaluating the disclosure controls and procedurd es, management recognizes that any controls and procedurd es, no matter how well designed and operated, can provide only reasonabla e, not absolute, assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedurd es must reflect the fact that there are resource constraints and management is required to apply its judgment in evaluating the benefits of possible controls and procedurd es relative to their costs. The design of any disclosure controls and procedurd es is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Managea ment’s Repoee rt on Internal Contrott l over Finaii ncial Repoee rtintt g rr Our management is responsible for establa ishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonabla e assurance regarding the reliabia lity of financial reporting and the preparation of financial statements for external purpos es in accordance with GAAP and includes those policies and procedurd es that (i) pertain to the maintenance of records that in reasonabla e detail accurately and fairly reflect our transactions and the dispositions of our assets; (ii) provide reasonabla e assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that our receipts and expenditures are being made only in accordance with appropriate authorizations; and (iii) provide reasonabla e assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effeff ct on our financial statements. Under the supeu rvision of and with the participation of our management, we assessed the effeff ctiveness of our internal control over financial reporting as of September 30, 2023, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework (2013). Based on our assessment, our management concluded that we did not maintain effeff ctive internal control over financial reporting as of September 30, 2023 due to the material weaknesses described below. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonabla e possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. We identifieff d a material weakness in the Company’s internal control over financial reporting related to the operation of controls over the performance of a subsu et of the Company’s physical inventories held at certain locations to validate inventoryrr existence and the completeness and accuracy of data used in validating the appropriateness of inventoryrr costing for a subsu et of the Company’s inventories and inventoryrr reserves. We also identifieff d a material weakness in the Company’s internal control over financial reporting related to the design and operation of controls over the Company’s vendor rebate process, including the timing of when rebates are recognized within the consolidated statement of operations. 68 These material weaknesses did not result in any identifieff d material misstatements to the financial statements, and there were no changes to previously released financial results. However, the deficiencies created a reasonabla e possibility that material misstatements to the consolidated financial statements would not be prevented or detected on a timely basis. Management has analyzed the material weaknesses and performed additional analysis and procedurd es in preparing our consolidated financial statements. We have concluded that our consolidated financial statements fairly present, in all material respects, our financial condition, results of operations and cash flows at and for the periods presented. Ernst & Young LLP, an independent registered public accounting firm who audited and reported on our consolidated financial statements included in this report, has issued an adverse report on the effeff ctiveness of our internal control over financial reporting as of September 30, 2023, u included in their report under Item 8, Financial Statements and Suppl ementary Data of this Annual Report. Remediatiott n Effoff rtstt We took steps to remediate the control deficiencies contributing to the material weakness relating to information technology general controls (“ITGCs”) first identified in Part II, Item 9A of our Annual Report on Form 10-K for the fiscal year ended October 1, 2022, such that these controls are designed, implemented and operating effeff ctively. Specifically, during the year ended September 30, 2023, management: (i) engaged a consulting firm to assist with the design and assessment of the internal control environment, (ii) developed a detailed project plan which included all critical tasks, owners and due dates to properly design and execute controls adequately and effeff ctively, (iii) re-designed controls and delivered training to key control owners to ensure a sustainabla e and effeff ctive control environment, (iv) created a steering committee who was responsible and accountable for validating the establa ished project plan and testing performed over key controls was on track and effeff ctive, which helped oversee and prioritize the remediation activities. The effoff rts detailed above allowed management to conclude that the Company’s internal controls over ITGCs that were deemed to be ineffeff ctive in management’s report on internal control over financial reporting as of October 1, 2022 are effeff ctive and the corresponding material weakness has been remediated during the year ended and as of September 30, 2023. We will design and implement new processes and enhanced controls to address the underlying causes of the unremediated material weaknesses related to inventoryrr and vendor rebates as of September 30, 2023. Our planned remediation actions include the following: • • • • • • examination of our current controls and identifying the root cause(s) for the deficiencies; examination and enhancement of the procedurd es over certain of our annual physical inventoryrr counts, including the augmentation of training and validation of system generated reports utilized in performing certain annual physical counts and clear instruction as to the process for the recording of adjud stments to inventoryrr as a result of physical counts and validation of data used in inventoryrr costing; enhanced supeu rvision of personnel during and subsu equent to physical inventoryrr counts to ensure compliance with establa ished Company policies; examination and enhancement of the procedurd es over the completeness and accuracy of data utilized in computing inventoryrr reserves; implementing and executing enhanced controls operating at the level of precision necessary to detect potential material misstatements in the data utilized to calculate vendor rebates earned and timing of vendor rebate income recognition, to aid in the detection of potential deviations that may be relied upon in our financial reporting processes; and engagement with outside consultants and/or other personnel to assist with the identificff ation, implementation, and review of changes to our suite of internal controls related to inventoryrr and vendor rebates, as necessary. We intend to remediate these material weaknesses as soon as possible, and we believe the measures described above will remediate the material weaknesses and strengthen our internal control over financial reporting. These material weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded through testing that the controls are operating effeff ctively. We anticipate that the remediation will be completed during fiscal year 2024. We are committed to continuing to improve our internal control processes, and, as we continue to evaluate and work to improve our internal control over financial reporting, we may take additional measures to address control deficiencies, or we may modify certain of the remediation measures described above. 69 Changes in Internal Contrott l Over Finaii ncial Repor ee ting Our Chief Executive Offiff cer and Chief Financial Offiff cer, with other members of management, evaluated the changes in our internal control over financial reporting during the quarter ended September 30, 2023. Except as described above, we determined that there were no changes in our internal control over financial reporting during the quarter ended September 30, 2023 that materially affeff cted, or are reasonabla y likely to materially affeff ct, our internal control over financial reporting. 70 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Leslie’s, Inc. Opinion on Internal Control over Financial Reporting We have audited Leslie’s, Inc’s internal control over financial reporting as of September 30, 2023, based on criteria establa ished in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, because of the effeff ct of the material weakness described below on the achievement of the objectives of the control criteria, Leslie’s, Inc. (the Company) has not maintained effeff ctive internal control over financial reporting as of September 30, 2023, based on the COSO criteria. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonabla e possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses were identifieff d and included in management’s assessment. Management has identified material weaknesses in controls related to the Company’s vendor rebate process and inventoryrr process. We also have audited, in accordance with the standards of the Publu ic Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of September 30, 2023 and October 1, 2022, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the three years in the period ended September 30, 2023, and the related notes. These material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of the fiscal 2023 consolidated financial statements, and this report does not affeff ct our report dated November 29, 2023 which expressed an unqualifieff d opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effeff ctive internal control over financial reporting and for its assessment of the effeff ctiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonabla e assurance about whether effeff ctive internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effeff ctiveness of internal control based on the assessed risk, and performing such other procedurd es as we considered necessary in the circumstances. We believe that our audit provides a reasonabla e basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonabla e assurance regarding the reliabia lity of financial reporting and the preparation of financial statements for external purpos accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedurd es that (1) pertain to the maintenance of records that, in reasonabla e detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonabla e assurance that transactions are recorded as necessaryrr to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonabla e assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effeff ct on the financial statements. es in accordance with generally r 71 Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effeff ctiveness to future periods are subju ect to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedurd es may deteriorate. /s/ Ernst & Young LLP Phoenix, Arizona November 29, 2023 72 Item 9B. Other Information. (a)a Infon rmation Required to be Discii losed on Form 8-K None. (b)b Trading Plans During the quarter ended September 30, 2023, no director or Section 16 offiff cer adopted or terminated any Rule 10b5-1 trading arrangements or non-Rule 10b5-1 trading arrangements (in each case, as defined in Item 408(a) of Regulation S-K). Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. Not applicable. 73 Item 10. Directors, Executive Offiff cers and Corporate Governance. PART III Except as indicated below, information responsive to this item is incorporated herein by reference to our Proxy Statement r the end of our fiscal year ate Governance,” “Proposal 1: Election of with respect to our 2024 Annual Meeting of Shareholders to be filed with the SEC within 120 days afteff covered by this Annual Report on Form 10-K, including under the headings “Corpor Directors,” “Inforff mation about Our Executive Offiff cers,” and, if applicable, “Delinquent Section 16(a) Reports.” r We have adopted a Code of Ethics that applies to all of our directors, offiff cers, and employees, including our Principal Executive, Principal Financial, and Principal Accounting Offiff cers, or persons performing similar functions. Our Code of Ethics is posted on the investor relations page of our website: www.lesliespool.com. We intend to disclose future amendments to certain provisions of the Code of Ethics, and waivers of the Code of Ethics granted to executive offiff cers and directors, on the website within four business days following the date of the amendment or waiver. Item 11. Executive Compensation. Information responsive to this item is incorporated herein by reference to our Proxy Statement with respect to our 2024 r the end of our fiscal year covered by this Annual Annual Meeting of Shareholders to be filed with the SEC within 120 days afteff Report on Form 10-K, including under the headings “Compensation Discussion and Analysis” and “Compensation Committee Interlocks and Insider Participation.” Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. Information responsive to this item is incorporated herein by reference to our Proxy Statement with respect to our 2024 r the end of our fiscal year covered by this Annual ial Ownership of Securities” and “Compensation Discussion and Annual Meeting of Shareholders to be filed with the SEC within 120 days afteff Report on Form 10-K, including under the headings “Beneficff Analysis.” Item 13. Certain Relationships and Related Transactions, and Director Independence. Information responsive to this item is incorporated herein by reference to our Proxy Statement with respect to our 2024 Annual Meeting of Shareholders to be filed with the SEC within 120 days afteff r the end of our fiscal year covered by this Annual Report on Form 10-K, including under the headings “Certain Relationships and Related Party Transactions” and “Director Independence.” Item 14. Principal Accountant Fees and Services. Information responsive to this item is incorporated herein by reference to our Proxy Statement with respect to our 2024 Annual Meeting of Shareholders to be filed with the SEC within 120 days afteff r the end of our fiscal year covered by this Annual Report on Form 10-K, including under the heading “Proposal 2: Ratification of Appointment of Independent Registered Publu ic Accounting Firm.” 74 Item 15. Exhibits, Financial Statements Schedules. PART IV (a) (1) (2) (3) Exhibit Number 3.1 3.2 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 10.1# 10.2# 10.3# 10.4# 10.5# 10.6# 10.7# 10.8# 10.9# The following documents are filed as a part of this report: Financial Statements. The Company’s financial statements are included in Part II, Item 8, Financial Statements and u Suppl ementary Data. Financial Statements Schedules. All schedules are omitted since they are not applicable, not required, or the information required to be set forth therein is included under Part II, Item 8, Financial Statements and Suppl ementary Data. u Exhibits. The exhibits listed in the Exhibit Index immediately below are filed as part of this Annual Report on Form 10-K. Exhibit Description u u u tee tee tee ry 3, 2017, by and among emental Indenturt e, dated as of Februar emental Indenturt e, dated as of October 26, 2016, by and among es Investor Aggregator, L.P., Explorer Investment Pte. Ltd. and certain other Sixth Amended and Restated Certificff ate of Incorporation, effeff ctive as of March 16, 2023 Amended and Restated Bylaws, effeff ctive as of August 1, 2023 Indenturt e, dated as of August 16, 2016, by and among Leslie’s Poolmart, Inc., Leslie’s Holdings, Inc., the other guarantors party thereto and U.S. Bank National Association, as Trusr First Suppl Leslie’s Poolmart, Inc., Leslie’s Holdings, Inc., the other guarantors party thereto and U.S. Bank National Association, as Trusr Second Suppl Leslie’s Poolmart, Inc., Leslie’s Holdings, Inc., the other guarantors party thereto and U.S. Bank National Association, as Trusr Form of Registration Rights and Lock-upu Agreement between Leslie’s, Inc., Bubbl u investors First Amendment to Registration Rights and Lock-upu Agreement between es Investor Aggregator, L.P. Leslie’s, Inc. and Bubbl Second Amendment to Registration Rights and Lock-upu Agreement between Leslie’s, Inc. and Bubbl es Investor Aggregator, L.P. Third Amendment to Registration Rights and Lock-upu Agreement between Leslie’s, Inc. and Bubbl es Investor Aggregator, L.P. Description of Securities Registered under Section 12 of the Securities Exchange Act of 1934 Form of Indemnificff ation Agreement between Leslie’s, Inc. and its directors and offiff cers 2020 Omnibus Incentive Plan Form of Stock Option Agreement pursuant to 2020 Omnibus Incentive Plan Form of Restricted Stock Unit Agreement pursuant to 2020 Omnibus Incentive Plan Form of Performance Unit Award Agreement pursuant to 2020 Omnibus Incentive Plan Amended and Restated Employment Agreement, dated as of October 19, 2020, by and between Leslie’s, Inc. and Michael R. Egeck Second Amended and Restated Employment Agreement, dated as of October 19, 2020, by and between Leslie’s, Inc. and Steven M. Weddell Offeff and Paula Baker Form of Director Designation Agreement, by and among Leslie’s, Inc., Bubbl es r Investor Aggregator, L.P., and each other person that becomes party thereafteff r Letter, dated as of October 11, 2019, by and between Leslie’s Poolmart, Inc. u u u 75 Incorporated by Reference Form Exhibit 8-K 3.1 Filing Date/ Period End Date 3/16/2023 10-Q 3.1 S-1/A 4.1 8/3/2023 10/22/2020 S-1/A 4.2 10/22/2020 S-1/A 4.3 10/22/2020 S-1/A 4.4 10/28/2020 S-1 S-1 8-K 4.5 4.6 4.1 2/8/2021 6/7/2021 10/26/2021 10-K 4.5 12/23/2020 S-1/A 10.1 10/22/2020 S-1/A 10.2 S-1/A 10.3 10-Q 10.2 10/22/2020 10/22/2020 2/3/2023 10-Q 10.3 2/3/2023 S-1/A 10.5 10/22/2020 S-1/A 10.7 10/22/2020 S-1/A 10.8 10/22/2020 S-1/A 10.11 10/22/2020 10.10 10.11 10.12 10.13 10.14 10.15 10.16 10.17 10.18 10.19 10.20 10.21 10.22 ry 16, 2017, to the Term Loan Credit ry 27, 2018, to the Term Loan Credit Term Loan Credit Agreement, dated as of August 16, 2016, among Leslie’s Poolmart, Inc., Leslie’s Holdings, Inc., the lenders party thereto from time-to-time and Nomura Corporate Funding Americas, LLC, as administrative agent and as collateral agent Incremental Amendment No. 1, dated as of January 26, 2017, to the Term Loan Credit Agreement among Leslie’s Poolmart, Inc., Leslie’s Holdings, Inc., the lenders party thereto from time-to-time and Nomura Corporate Funding Americas, LLC, as administrative agent and as collateral agent Amendment No. 2, dated as of Februarr Agreement among Leslie’s Poolmart, Inc., Leslie’s Holdings, Inc., the lenders party thereto from time-to-time and Nomura Corporate Funding Americas, LLC, as administrative agent and as collateral agent Amendment No. 3, dated as of Februarr Agreement among Leslie’s Poolmart, Inc., Leslie’s Holdings, Inc., the lenders party thereto from time-to-time and Nomura Corporate Funding Americas, LLC, as administrative agent and as collateral agent Credit Agreement entered into as of October 16, 2012, among Leslie’s Poolmart, Inc., the subsu idiary borrowers from time-to-time party thereto, Leslie’s Holdings, Inc., each lender from time-to-time party thereto, Bank of America, N.A., as Administrative Agent, and U.S. Bank National Association, as Co-Collateral Agent Amendment No. 1, dated as of August 16, 2016, to the Credit Agreement among Leslie’s Poolmart, Inc., the subsu idiary borrowers from time-to-time party thereto, Leslie’s Holdings, Inc., each lender from time-to-time party thereto, Bank of America, N.A., as Administrative Agent, and U.S. Bank National Association, as Co-Collateral Agent Amendment No. 2, dated as of September 29, 2016, to the Credit Agreement among Leslie’s Poolmart, Inc., the subsu idiary borrowers from time-to-time party thereto, Leslie’s Holdings, Inc., each lender from time-to-time party thereto, Bank of America, N.A., as Administrative Agent, and U.S. Bank National Association, as Co-Collateral Agent Amendment No. 3, dated as of January 13, 2017, to the Credit Agreement among Leslie’s Poolmart, Inc., the subsu idiary borrowers from time-to-time party thereto, Leslie’s Holdings, Inc., each lender from time-to-time party thereto, Bank of America, N.A., as Administrative Agent, and U.S. Bank National Association, as Co-Collateral Agent Amendment No. 4, dated as of August 13, 2020, to the Credit Agreement among Leslie’s Poolmart, Inc., the subsu idiary borrowers from time-to-time party thereto, Leslie’s Holdings, Inc., each lender from time-to-time party thereto, Bank of America, N.A., as Administrative Agent, and U.S. Bank National Association, as Co-Collateral Agent Amendment No. 5, dated as of April 12, 2021, to the Credit Agreement among Leslie’s Poolmart, Inc., the subsu idiary borrowers from time-to-time party thereto, Leslie’s, Inc., each lender from time-to-time party thereto, Bank of America, N.A., as Administrative Agent, and U.S. National Association, as Co-Collateral Agent Amendment No. 6, dated as of March 15, 2023, to the Credit Agreement among Leslie’s Poolmart, Inc., Leslie’s, Inc., and the subsu idiary borrowers named therein, Bank of America, N.A., as Administrative Agent, and U.S. Bank National Association, Co-Collateral Agent Amended & Restated Term Loan Credit Agreement, dated as of March 9, 2021, by and among the Company, Leslie’s Poolmart, Inc., the lenders from time-to-time party thereto and Nomura Corporate Funding Americas, LLC, as administrative agent for the Lenders and as collateral agent for the Secured Parties Amendment No. 1, dated as of June 8, 2023, to the Amended and Restated Term Loan Credit Agreement by and among Leslie’s Poolmart, Inc., Leslie’s, Inc., the lenders from time to time party thereto and Nomura Corporate Funding Americas, LLC, as administrative agent and collateral agent S-1/A 10.12 10/22/2020 S-1/A 10.13 10/22/2020 S-1/A 10.14 10/22/2020 S-1/A 10.15 10/22/2020 S-1/A 10.16 10/22/2020 S-1/A 10.17 10/22/2020 S-1/A 10.18 10/22/2020 S-1/A 10.19 10/22/2020 S-1/A 10.20 10/22/2020 10-Q 10.2 5/10/2021 8-K 10.1 3/16/2023 8-K 10.1 3/10/2021 8-K 10.1 6/13/2023 76 10-Q 10.1 10-K 10.23 2/3/2023 11/30/2022 10-K 10.24 11/30/2022 10-K 10.25 11/30/2022 10-Q 10.2 8/3/2023 10-Q 10.3 8/3/2023 8-K 10.1 9/20/2023 10.26# 10.28# 10.27# 10.25# 10.29# 10.31#* 10.30#* 10.32#* 10.23# 10.24# r Letter, dated as of July 7, 2023, by and between Leslie’s Poolmart, Inc. and Leslie’s, Inc. Annual Incentive Plan Executive Severance Pay Plan, dated April 11, 2022, by and between Leslie’s Poolmart, Inc. and Paula Baker Executive Severance Pay Plan, dated April 11, 2022, by and between Leslie’s Poolmart, Inc. and Brad Gazaway Executive Severance Pay Plan, dated April 11, 2022, by and between Leslie’s Poolmart, Inc. and Moyo LaBode Offeff Scott Bowman Executive Severance Pay Plan, dated July 17, 2023, by and between Leslie’s Poolmart, Inc. and Scott Bowman Transition Agreement between the Company and Paula Baker with an effeff ctive date of September 19, 2023 Executive Severance Pay Plan, dated April 11, 2022, by and between Leslie’s Poolmart, Inc. and Mike Afriff ca Executive Severance Pay Plan, dated October 19, 2022, by and between Leslie’s Poolmart, Inc. and Naomi Cramer Executive Severance Pay Plan, dated June 29, 2023, by and between Leslie’s Poolmart, Inc. and Dave Caspers Subsu idiaries of Registrant Consent of Independent Registered Publu ic Accounting Firm Certificff ation of Principal Executive Offiff cer Pursuant to Rules 13a-14(a) and 15d- 14(a) under the Securities Exchange Act of 1934 Certificff ation of Principal Financial Offiff cer Pursuant to Rules 13a-14(a) and 15d- 14(a) under the Securities Exchange Act of 1934 Certificff ation of Principal Executive Offiff cer Pursuant to 18 U.S.C. Section 1350 32.1+ Certificff ation of Principal Financial Offiff cer Pursuant to 18 U.S.C. Section 1350 32.2+ Leslie’s, Inc. Compensation Recovery Policy 97.1#* 101.INS* Inline XBRL Instance Document 101.SCH* Inline XBRL Schema Document 101.CAL* Inline XBRL Calculation Linkbase Document 101.LAB* Inline XBRL Labea 101.PRE* 101.DEF* 104* Inline XBRL Presentation Linkbase Document Inline XBRL Definition Linkbase Document The cover page from the Company’s Annual Report on Form 10-K for the year ended September 30, 2023, formatted in Inline XBRL (included as Exhibit 101) l Linkbase Document 21.1* 23.1* 31.1* 31.2* * Filed herewith. # Indicates a management contract or compensatory plan or arrangement. + Furnished herewith and not deemed to be “filff ed” for purpos es of Section 18 of the Securities Exchange Act of 1934, as amended, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. r Item 16. Form 10-K Summary. None. 77 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES Date: November 29, 2023 By: LESLIE’S, INC. /s/ Michael R. Egeck Michael R. Egeck Chief Executive Offiff cer (Principal Executive Offiff cer) Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Name /s/ Steven L. Ortega Steven L. Ortega /s/ Michael R. Egeck Michael R. Egeck /s/ Scott Bowman Scott Bowman /s/ Yolanda Daniel Yolanda Daniel /s/ Seth Estep Seth Estep /s/ Eric Kufel Eric Kufel /s/ Susan O’Farrell Susan O’Farrell /s/ James R. Ray, Jr. James R. Ray, Jr. /s/ Claire Spoffoff rd Claire Spofford /s/ John Strain John Strain Chairman Title Date November 29, 2023 Chief Executive Offiff cer (Principal Executive Offiff cer) and Director November 29, 2023 Chief Financial Offiff cer (Principal Financial Offiff cer and Principal Accounting Offiff cer) Director Director Director Director Director Director Director November 29, 2023 November 29, 2023 November 29, 2023 November 29, 2023 November 29, 2023 November 29, 2023 November 29, 2023 November 29, 2023 78 BOARD OF DIRECTORS Steven L. Ortega Chairman of the Board Leslie’s, Inc. Michael R. Egeck Chief Executive Officer Leslie’s, Inc. Yolanda Daniel Former Vice President, Finance Federal Reserve Bank of Chicago Seth Estep EVP, Chief Merchandising Officer Tractor Supply Company Claire Spofford Chief Executive Officer & President J.Jill, Inc. Eric Kufel Former Chief Executive Officer West Marine, Inc. Susan O’Farrell Former Chief Financial Officer Blue Linx Holdings, Inc. John Strain Former Head of e-Commerce & Technology Gap, Inc. EXECUTIVE OFFICERS Michael R. Egeck Chief Executive Officer Mike Africa Chief Digital & Technology Officer Scott Bowman Chief Financial Officer & Treasurer Dave Caspers Chief Stores Officer Naomi Cramer Chief People Officer Brad Gazaway Chief Legal, Real Estate & Sustainability Officer Moyo LaBode Chief Merchandising & Supply Chain Officer Corporate Headquarters 2005 East Indian School Road Phoenix, Arizona 85016 Stock Exchange The Nasdaq Global Select Market Ticker Symbol: LESL OTHER INFORMATION Transfer Agent Computershare Trust Company, N.A. Media Relations FGS Global Investor Relations ICR Farah Soi & Caitlin Churchill investorrelations@lesl.com Robert Rendine & Jenny Gore & David Isaacs media@lesl.com 2005 East Indian School Road Phoenix, Arizona 85016 ©2024 Leslie’s, Inc. | lesliespool.com 

Continue reading text version or see original annual report in PDF format above