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What changed in Leslie's, Inc.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Leslie's, Inc.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+275 added−277 removedSource: 10-K (2023-11-29) vs 10-K (2022-11-30)

Top changes in Leslie's, Inc.'s 2023 10-K

275 paragraphs added · 277 removed · 226 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

63 edited+4 added−4 removed46 unchanged
Biggest changeThe vast majority of our assortment features non-discretionary products that are shelf-stable and generally not prone to either obsolescence or shrinkage, which could occur from changing technology or consumer buying habits. As the trusted one-stop destination for all aftermarket pool and spa needs, we provide an extensive and highly differentiated product offering.
Biggest changeHistorically, more than 80% of our assortment has been comprised of essential and non-discretionary products that are needed by residential and professional consumers to care for pools and spas. The vast majority of our assortment features non-discretionary products that are shelf-stable and generally not prone to either obsolescence or shrinkage, which could occur from changing technology or consumer buying habits.
We plan to continue that legacy by continuously developing and introducing capabilities that create value for our consumers. Present areas of focus include water testing, maintenance prescriptions, new product offerings, and our product distribution ecosystem. 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 plan to continue that legacy by developing and introducing capabilities that create value for our consumers. Present areas of focus include water testing, maintenance prescriptions, new product offerings, and our product distribution ecosystem. 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.
Comprehensive assortment of proprietary brands with recurring, essential, superior product formulations, and trusted, solution-based services for all consumers. We offer a comprehensive product assortment, consisting of more than 30,000 products across chemicals, equipment and parts, cleaning and maintenance equipment, and safety, recreational, and fitness-related categories. Approximately 80% of our product sales are non-discretionary and recurring in nature.
Comprehensive assortment of proprietary brands with recurring, essential, superior product formulations, and trusted, solution-based services for all consumers. We offer a comprehensive product 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.
Using the new, industry-leading AccuBlue Home TM connected device and the Leslie’s mobile app, program members can test all critical aspects of their water chemistry with ease and generate a custom treatment plan tailored to the specifications of their pool or spa.
Using the new, industry-leading AccuBlue Home ® connected device and the Leslie’s mobile app, program members can test all critical aspects of their water chemistry with ease and generate a custom treatment plan tailored to the specifications of their pool or spa.
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 TM , Pool Perks TM , and our logo, in packaging and advertising our products.
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.
Leslie’s ® , AccuBlue ® , AccuBlue Home TM , Pool Perks TM , 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.
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.
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 subject to uncertainties, and actual events or circumstances may differ materially from events and circumstances reflected in this information. 9 Table of Contents
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 subject to uncertainties, and actual events or circumstances may differ materially from events and circumstances reflected in this information. 8 Table of Contents
Using these raw materials, we manufacture and package a wide selection of final SKUs, including, but not limited to, chlorine products, pH adjusters, and filter cleaners.
Using these raw materials, we manufacture and package a wide selection of final products, including, but not limited to, chlorine products, pH adjusters, and filter cleaners.
Over the last three years, approximately 70% 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.
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.
Our well-balanced executive management team is comprised of leaders with decades of experience in the pool and spa care industry as well as recently-hired executives who bring new expertise and capabilities to Leslie’s from outside industries. Our management team is uniquely capable of executing upon our strategic vision and successfully continuing to create long-term shareholder value.
Our well-balanced executive leadership team is comprised of leaders with decades of experience in the pool and spa care industry as well as recently-hired executives who bring new expertise and capabilities to Leslie’s from outside industries. Our leadership team is uniquely capable of executing upon our strategic vision and successfully continuing to create long-term shareholder value.
Our vertically integrated supply chain enables us to produce and package products at our Company-operated packaging plants and third-party contract packaging facilities.
Our vertically integrated supply chain enables us to produce and package products at our company-operated packaging facilities and third-party contract packaging facilities.
We have a market-leading share of approximately 15% of residential aftermarket product spend as of 2021, 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 as large as that of our largest digital competitor.
We have a market-leading share of approximately 15% of residential aftermarket 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 as large as that of our largest digital competitor.
We also employ the industry’s largest network of in-field technicians who perform on-site evaluations, installation, and repair services for residential consumers and professional pool operators. 3 Table of Contents Attractive financial profile characterized by consistent, profitable growth, and strong cash flow conversion offering multiple levers to drive shareholder value.
We also employ the industry’s largest network of in-field technicians who perform on-site evaluations, installation, and repair services for residential consumers and professional pool operators. Attractive financial profile characterized by consistent, profitable growth, and strong cash flow conversion offering multiple levers to drive shareholder value.
Through these strategies, we plan to increase brand awareness and continue profitably acquiring new consumers. 7 Table of Contents Our Competition The United States aftermarket pool and spa care industry is fragmented and competitive. We compete against a wide range of manufacturers, retailers, distributors, and service providers in the residential and professional pool and spa care market.
Through these strategies, we plan to increase brand awareness and continue profitably acquiring new consumers. Our Competition The United States aftermarket pool and spa care industry is fragmented and competitive. We compete against a wide range of manufacturers, retailers, distributors, and service providers in the residential and professional pool and spa care market.
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 have begun to assemble an affiliated network of qualified pool professionals through our PRO Partner program, extending the Leslie’s name into water maintenance.
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 affiliated network of qualified pool professionals through our PRO Partner program, extending the Leslie’s name into water maintenance.
This group generally does not directly serve the end-consumer, but rather serves as an intermediary that supplies product to retailers as well as the professional channel. Our competitors offer pool care products and services of varied quality and across a wide range of retail price points.
This group generally does not directly serve the end-consumer, but rather serves as an intermediary that supplies product to retailers as well as the professional channel. 7 Table of Contents Our competitors offer pool care products and services of varied quality and across a wide range of retail price points.
The remainder of the industry is highly fragmented across both offline and online providers. Direct relationships with more than 12 million pool and spa owners and professionals, generating durable, annuity-like economics. We are the largest national pool and spa care brand with a direct relationship with pool and spa owners and the professionals who serve them.
The remainder of the industry is highly fragmented across both offline and online providers. 2 Table of Contents Direct relationships with more than 12 million pool and spa owners and professionals, generating durable, annuity-like economics. We are the largest national pool and spa care brand with a direct relationship with pool and spa owners and the professionals who serve them.
In addition to operating two manufacturing plants, we operate a national network of Company-operated distribution centers as well as 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 quantities and are capable of replenishing inventory throughout our physical network.
In addition to operating two manufacturing 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 quantities and are capable of replenishing inventory throughout our physical network.
For 59 years, we have been dedicated to addressing our consumers’ pool needs so that they can spend less time maintaining and more time enjoying their pools.
For 60 years, we have been dedicated to addressing our consumers’ pool needs so that they can spend less time maintaining and more time enjoying their pools.
At these locations, we offer an expanded assortment of merchandise and services specifically catering to current and prospective spa owners. Our Vertically Integrated Model We operate a vertically integrated supply chain, packaging, and distribution model, which represents a significant competitive advantage.
At these locations, we offer an expanded assortment of merchandise and services specifically catering to current and prospective spa owners. 6 Table of Contents Our Vertically Integrated Model We operate a vertically integrated supply chain, packaging, and distribution model, which represents a significant competitive advantage.
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. 2 Table of Contents Undisputed direct-to-consumer market leader in the aftermarket pool and spa care industry.
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. Undisputed direct-to-consumer market leader in the aftermarket pool and spa care industry.
We plan to assess each market independently and determine the most capital efficient way to serve these trade areas using a mix of digital assets and locations. Continue to introduce disruptive innovation. Leslie’s has a legacy of disruptive innovation in the pool and spa care industry.
We plan to assess each market independently and determine the most capital efficient way to serve these trade areas using digital assets, new locations, or acquired locations. Continue to introduce disruptive innovation. Leslie’s has a legacy of disruptive innovation in the pool and spa care industry.
Founded in 1963, we are the only direct-to-consumer pool and spa care brand with national scale, operating an integrated marketing and distribution ecosystem powered by a physical network of 990 branded locations and a robust digital platform.
Founded in 1963, we are the only direct-to-consumer pool and spa care brand with national scale, operating an integrated marketing and distribution ecosystem powered by a physical network of over 1,000 branded locations and a robust digital platform.
Due to the non-discretionary nature of our products and services, our business has historically delivered strong, uninterrupted growth and profitability in all market environments, including through the Great Recession and the ongoing COVID-19 pandemic. We have a legacy of leadership and disruptive innovation.
Due to the non-discretionary nature of our products and services, our business has historically delivered strong, growth and profitability in challenging market environments, including through the Great Recession and the COVID-19 pandemic. We have a legacy of leadership and disruptive innovation.
Our research suggests that small and mid-size pool professionals value convenience and referrals, both of which we are uniquely positioned to offer given our 990 locations and industry’s largest consumer file. We plan to expand our physical network of PRO locations, which specifically cater to pool professionals, by opening new locations and selectively remodeling existing residential locations.
Our research suggests that small and mid-size pool professionals value convenience and referrals, both of which we are uniquely positioned to offer given our over 1,000 locations and the industry’s largest consumer file. We plan to expand our physical network of PRO locations, which specifically cater to pool professionals, by opening new locations and selectively remodeling existing residential locations.
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 three acquisitions during fiscal 2021, six acquisitions during fiscal 2022, and continue to look for opportunities that will strategically benefit our business.
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.
The vast majority of these competitors operate single stores and, due to relative economies of scale, this group generally offers a limited SKU selection, charges higher prices and invests less resources in marketing; • Home Improvement Retailers . Includes national home improvement retailers, such as Home Depot, Lowe’s, and local and regional hardware stores.
The vast majority of these competitors operate single stores and, due to relative economies of scale, this group generally offers limited product assortment, charges higher prices and invests less resources in marketing; • Home Improvement Retailers . Includes national home improvement retailers, such as Home Depot, Lowe’s, and local and regional hardware stores.
This group generally employs a seasonal strategy, offering a limited SKU selection during select spring and summer months, does not offer services, and does not employ associates with the pool and spa care expertise; • Mass-Market Retailers . Includes larger, scaled players, such as Amazon, Walmart, and Costco.
This group generally employs a seasonal strategy, offering limited product assortment during select spring and summer months, does not offer services, and typically does not employ associates with the pool and spa care expertise; • Mass-Market Retailers . Includes larger, scaled players, such as Amazon, Walmart, and Costco.
This group generally offers a limited SKU selection, often on a seasonal basis, and does not offer services or pool and spa care expertise; and • Wholesale Distributors . Includes large wholesalers, such as Heritage Pool Supply Group and Pool Corp.
This group generally offers limited product assortment, often on a seasonal basis, and does not offer services or pool and spa care expertise; and • Wholesale Distributors . Includes large wholesalers, such as Heritage Pool Supply Group and Pool Corp.
We believe that this initiative represents a natural adjacency and will resonate with existing residential consumers as well as help attract new residential consumers. Utilize strategic M&A to consolidate share and further enhance capabilities. The aftermarket pool and spa industry remains highly fragmented, which offers attractive opportunities to utilize strategic M&A to drive consolidation.
We believe that this initiative represents a natural adjacency and will resonate with existing residential consumers as well as help attract new residential consumers. 4 Table of Contents Utilize strategic M&A to consolidate share and further enhance capabilities. The aftermarket pool and spa industry is highly fragmented, which offers attractive opportunities to utilize strategic M&A to drive consolidation.
In addition, approximately 55% of our total sales and 85% of our chemical sales are derived from proprietary brands and custom-formulated products, which allows us to create an entrenched consumer relationship, optimize our supply chain, and capture attractive margins.
In addition, more than 55% of our total sales and 80% of our chemical sales are derived from proprietary brands and custom-formulated products, which allows us to create an entrenched consumer relationship, optimize our supply chain, and capture attractive margins.
We have delivered 59 consecutive years of sales growth, demonstrating our ability to deliver strong financial results through all economic cycles. Our growth has been broad-based across residential pool, residential spa, and professional pool consumers and has been driven by strong retention and profitable acquisition of sticky, long-term consumer relationships.
We historically have had strong sales growth, demonstrating our ability to deliver strong financial results through all economic cycles. Our growth has been broad-based across residential pool, residential spa, and professional pool consumers and has been driven by strong retention and profitable acquisition of sticky, long-term consumer relationships.
The unprecedented scale of our integrated marketing and distribution ecosystem, which is powered by our direct-to-consumer network, uniquely enables us to efficiently reach and service every pool and spa in the continental United States – capabilities no competitor can match.
The unprecedented scale of our integrated marketing and distribution ecosystem, which is powered by our direct-to-consumer network, uniquely enables us to efficiently reach and service every pool and spa in the continental United States.
Of these employees, approximately 3,150 work in our physical network, approximately 350 work as in-field service technicians, approximately 350 work in our corporate office, and approximately 350 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.
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 office, 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.
In addition, due to the seasonality of the aftermarket pool and spa care industry, several competitors only stock related products during the summer months, and their product assortment tends to be limited to basic offerings. Human Capital Resources As of October 1, 2022, we employed approximately 4,200 employees.
In addition, due to the seasonality of the aftermarket pool and spa care industry, several competitors only stock related products during the summer months, and their product assortment tends to be limited to basic offerings. Human Capital Resources As of September 30, 2023, we employed approximately 4,100 employees.
To further benefit pool care professionals, we launched our Leslie’s PRO e-commerce website in June 2021. This website provides all of the online tools needed for professionals to serve their respective communities and grow their pool care businesses.
To further benefit pool care professionals, we also have a dedicated Leslie’s PRO e-commerce website. This website provides all of the online tools needed for professionals to serve their respective communities and grow their pool care businesses.
Accordingly, in fiscal 2021 we successfully launched a pilot of our AccuBlue Home TM program, a subscription-based offering that enables pool and spa owners to confidently test and treat their pools and spas without ever having to leave their backyard.
Accordingly, in fiscal 2023 we completed the commercial launch of our AccuBlue Home ® program, a subscription-based offering that enables pool and spa owners to confidently test and treat their pools and spas without ever having to leave their backyard.
Our residential locations are supported 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.
Our residential locations are supported 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. Our residential locations have service counters through which we also provide products and services to professional consumers. • Digital Network .
We have identified more than 700 underserved residential pool and spa care markets in the continental United States. With our omni-channel capabilities, successful track record of new location openings, and targeted digital marketing tactics, we believe we are well positioned to capitalize on this meaningful whitespace opportunity.
We have identified more than 800 markets in the continental United States that we can address through our store densification strategy. With our omni-channel capabilities, successful track record of new location openings, location acquisitions, and targeted digital marketing tactics, we believe we are well positioned to capitalize on this meaningful whitespace opportunity.
Seasonality 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 substantially lower during our first and second fiscal quarters.
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.
Approximately 80% of our assortment is comprised of non-discretionary products essential to the care of residential and commercial pools and spas. Our assortment includes chemicals, equipment and parts, cleaning and maintenance equipment, and safety, recreational, and fitness-related products. We also offer important essential services, such as equipment installation and repair for residential consumers and professional pool operators.
Our assortment includes chemicals, equipment and parts, cleaning and maintenance equipment, and safety, recreational, and fitness-related products. We also offer important essential services, such as equipment installation and repair for residential consumers and professional pool operators.
Our portfolio of proprietary e-commerce websites includes Leslie’s and In the Swim . In addition to our owned e-commerce websites, we sell through online marketplaces such as Amazon, Walmart, and eBay. • PRO Locations . Our PRO locations are conveniently situated along popular service routes and carry additional SKUs targeting the professional consumer.
In addition to our owned e-commerce websites, we sell through online marketplaces such as Amazon, Walmart, and eBay. • PRO Locations . Our PRO locations are conveniently situated along popular service routes and carry a product assortment that targets the professional consumer.
Item 1. Bu siness. 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 subsidiaries. We filed a registration statement on Form S-1, as amended, with the SEC which was declared effective on October 28, 2020.
Item 1. Bu siness. 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 subsidiaries.
All other trademarks, trade names, and service marks appearing in this Annual Report on Form 10-K are the property of their respective owners. 8 Table of Contents Available Information Our website address is www.lesliespool.com.
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 source a variety of raw materials and chemicals directly from a diversified supplier base; we maintain strong relationships with these suppliers. During fiscal 2022, we made strategic investments in inventory, and two suppliers each represented more than 10% of our annual purchases.
We source a variety of raw materials and chemicals directly from a diversified supplier base; we maintain strong relationships with these suppliers. As of September 30, 2023, we had one supplier that represented more than 10% of our annual purchases.
This drives an annuity-like stream of demand for the chemicals and products necessary to properly maintain a pool or spa. 5 Table of Contents While we benefit from the growth in the installed base, our business is not dependent on new pool construction activity and can generate strong growth from a fixed installed base through increased pool usage, more frequent sanitization, and recurring maintenance needs.
While we benefit from the growth in the installed base, our business is not dependent on new pool construction activity and can generate strong growth from a fixed installed base through increased pool usage, more frequent sanitization, and recurring maintenance needs. Seasonality Our business is highly seasonal.
Specifically, we believe there is an opportunity with products targeted to spa owners, who have historically been underserved. 4 Table of Contents Grow additional share in the professional market. We believe we have a significant opportunity to grow our sales with pool care professionals, who individually spend more than 25x as much as residential consumers on pool supplies and equipment.
We believe we have a significant opportunity to grow our sales with pool care professionals, who individually spend more than 25x as much as residential consumers on pool supplies and equipment.
Our residential locations have service counters through which we also provide products and services to professional consumers. 6 Table of Contents • Digital Network . Our complementary platform of branded proprietary e-commerce websites and marketplace storefronts allows us to seamlessly serve the needs of all digital consumers through curated pricing and targeted merchandising strategies.
Our complementary platform of branded proprietary e-commerce websites and marketplace storefronts allows us to seamlessly serve the needs of all digital consumers through curated pricing and targeted merchandising strategies. Our portfolio of proprietary e-commerce websites includes Leslie’s and In the Swim .
We aim to fulfill the needs of our residential and professional consumers with our comprehensive assortment, in-stock inventory, and product selection across a broad range of premium third-party and proprietary brands. Since our inception in 1963, we have offered a portfolio of owned and exclusive brands.
As the trusted one-stop destination for all aftermarket pool and spa needs, we provide an extensive and highly differentiated product offering. We aim to fulfill the needs of our residential and professional consumers with our comprehensive assortment, in-stock inventory, and product selection across a broad range of premium third-party and proprietary brands.
Pool service professionals specialize in maintenance and equipment repair for DIFM homeowners, businesses, and government entities. Professional pool operators manage approximately 250,000 pools across hotels, motels, apartment complexes, and water parks. This market represents a total aftermarket sales opportunity of $4.4 billion.
Professional pool operators manage approximately 250,000 pools across hotels, motels, apartment complexes, and water parks. This market represents a total aftermarket sales opportunity of $4.4 billion. Our Product and Service Offering We offer 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.
On October 29, 2020, our common stock began “regular-way” trading on The Nasdaq Global Select Market (“Nasdaq”) under the “LESL” symbol. On November 2, 2020, we completed our initial public offering (“IPO”). Our Company We are the largest and most trusted direct-to-consumer brand in the $15 billion United States pool and spa care industry, serving residential and professional consumers.
Our Company We are the largest and most trusted direct-to-consumer brand in the $15 billion United States pool and spa care industry, serving residential and professional consumers.
We have observed considerable recent acceleration in new pool and hot tub installations, bringing new consumers to our market. We intend to bolster consumer file growth by deploying targeted marketing tactics to win an outsized share of this new consumer cohort. Increase share of wallet among existing 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 existing consumers. We believe we have a significant opportunity to increase spend from existing consumers and drive higher lifetime value.
Within this market, the DIY aftermarket spend represents roughly 70% of total spend while DIFM services 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. • Residential Spa .
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. • Residential Spa . The residential spa market consists of nearly 5.5 million spas or hot tubs representing a $0.9 billion aftermarket sales opportunity for chemicals and equipment.
Due to our scale, vertical integration, and operational excellence, we maintain high profitability. Due to our low maintenance capital intensity, we generate strong cash flows. As a result of our attractive financial profile, we have significant flexibility with respect to capital allocation, giving us the ability to drive long-term shareholder value through various operating, investing, and financial strategies.
As a result of our attractive financial profile, we have significant flexibility with respect to capital allocation, giving us the ability to drive long-term shareholder value through various operating, investing, and financial strategies. 3 Table of Contents Highly experienced and visionary leadership team that combines deep industry expertise and advanced direct-to-consumer capabilities.
We believe these initiatives will drive higher transaction frequency and basket size, which will result in increased category spend and higher lifetime 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 will explore opportunities to drive interest by selectively offering special incentives and rewards as well as introducing new value-added features. We believe these initiatives will drive higher transaction frequency and basket size, which will result in increased category spend and higher lifetime value with existing consumers. • Enhance retention marketing.
The residential spa market consists of nearly 5.5 million spas or hot tubs representing a $0.9 billion aftermarket sales opportunity for chemicals and equipment. Including the $1.4 billion market for new spas, residential spa represents a total addressable market of approximately $2.3 billion. • Professional Pool . The professional pool market consists of pool service professionals and professional pool operators.
Including the $1.7 billion market for new spas, residential spa represents a total addressable market of approximately $2.6 billion. • Professional Pool . The professional pool market consists of pool service professionals and professional pool operators. Pool service professionals specialize in maintenance and equipment repair for DIFM homeowners, businesses, and government entities.
We plan to do this by more actively leveraging our consumer database to personalize the consumer experience with targeted messaging and product recommendations. • Expand our product and service offering. We plan to expand our offering by introducing new and innovative products and services in our existing categories and by expanding into adjacent categories.
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 database to personalize the consumer experience with targeted messaging and product recommendations. • Expand our product and service offering.
Highly experienced and visionary management team that combines deep industry expertise and advanced direct-to-consumer capabilities. Our strategic vision and culture are directed by our executive management team under the leadership of our Chief Executive Officer, Michael R. Egeck, and our Executive Vice President and Chief Financial Officer, Steven M. Weddell.
Our strategic vision and culture are directed by our executive leadership team under the leadership of our Chief Executive Officer, Michael R. Egeck, and our Chief Financial Officer, Scott Bowman.
We operate primarily in the pool and spa aftermarket industry, which is one of the most fundamentally attractive consumer categories given its scale, predictability, and growth outlook. We have a highly predictable, recurring revenue model, as evidenced by our 59 consecutive years of sales growth.
We operate primarily in the pool and spa aftermarket industry, which is one of the most fundamentally attractive consumer categories given its scale, predictability, and growth outlook. More than 80% of our assortment is comprised of non-discretionary products essential to the care of residential and commercial pools and spas.
We believe we have a significant opportunity to increase spend from existing consumers and drive higher lifetime 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.
We plan to do this by executing on the following strategies: • Increase loyalty membership penetration and introduce program upgrades.
We continue to expand our selection of exclusive offerings through innovation, most recently with the launch of the Jacuzzi® (Jacuzzi is a registered trademark of Jacuzzi, Inc. used under a license agreement) and our RightFit® brands in 2016. Our exclusive brands and products account for approximately 55% of total sales and 85% of chemical sales.
Since our inception in 1963, we have offered a portfolio of owned and exclusive brands. We continue to expand our selection of exclusive offerings through innovation. Our exclusive brands and products account for more than 55% of total sales and 80% of chemical sales.
In May 2021, we launched our updated loyalty program, Pool Perks TM , in order to offer more value-added features to further drive member enrollment and engagement. We will explore opportunities to drive interest by selectively offering special incentives and rewards as well as introducing new value-added features.
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 ® , in order to offer more value-added features to further drive member enrollment and engagement.
Our Consumers We strategically serve all consumers within the aftermarket pool and spa care industry including Residential Pool, Residential Spa, and Professional Pool consumers. • Residential Pool . The residential pool market consists of 8.7 million pools representing a total aftermarket sales opportunity of $8.5 billion.
Sales are substantially lower during our first and second fiscal quarters when we typically generate net losses and we realized negative operating cash flows. 5 Table of Contents Our Consumers We strategically serve all consumers within the aftermarket pool and spa care industry including Residential Pool, Residential Spa, and Professional Pool consumers. • Residential Pool .
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Over the last five fiscal years, we have spent more than $215 million in foundational investments across new technologies and capabilities focused on transforming our consumer experience and advancing our industry leadership.
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Due to our scale, vertical integration, and operational excellence, we maintain high profitability. Due to our low maintenance capital intensity, we generate strong cash flows.
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Our Product and Service Offering We offer 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, approximately 80% of our assortment has been comprised of essential and non-discretionary products that are needed by residential and professional consumers to care for pools and spas.
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We plan to expand our offering by introducing new and innovative products and services in our existing categories and by expanding into adjacent categories. Specifically, we believe there is an opportunity with products targeted to spa owners, who have historically been underserved. Grow additional share in the professional market.
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However, we have not traditionally invested significant dollars in new consumer acquisition. Historically, the vast majority of this spend has been directed toward retention rather than new consumer acquisition. We are now profitably growing our investment in new consumer acquisition.
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This drives an annuity-like stream of demand for the chemicals and products necessary to properly maintain a pool or spa.
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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.
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The residential pool market consists of 8.8 million pools representing a total aftermarket sales opportunity of $8.4 billion. Within this market, the DIY aftermarket spend represents roughly 70% of total spend while DIFM services represent approximately 30% of total spend.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

90 edited+22 added−16 removed145 unchanged
Biggest changeRisks Related to Ownership of Our Common Stock • Our stock price may be volatile, resulting in substantial losses for investors. • An active trading market for our common stock may not be sustained. • Future sales of common stock by existing stockholders could cause our stock price to decline. • Stockholders’ ability to influence corporate matters may be limited because a small number of stockholders beneficially own a substantial amount of our common stock and continue to have substantial control over us. • Transactions engaged in by our principal stockholders, our officers or directors involving our common stock may have an adverse effect on the price of our stock. • Certain of our stockholders have the right to engage or invest in the same or similar businesses as us. • 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 stockholder actions. • Certain provisions of our fifth amended and restated certificate of incorporation may have the effect of discouraging lawsuits against our directors and officers. • We will continue to incur increased costs as a result of being a public company. • We have identified a material weakness in our internal control over financial reporting related to ineffective information technology general controls (ITGCs) in the area of user access over certain information technology (IT) systems that support the Company’s financial reporting processes.
Biggest changeRisks Related to Ownership of Our Common Stock • Our stock price may be volatile, resulting in substantial losses for investors. • An active trading market for our common stock may not be sustained. 10 Table of Contents • Future sales of common stock by existing stockholders could cause our stock price to decline. • Transactions engaged in by our principal stockholders, our officers or directors involving our common stock may have an adverse effect on the price of our stock. • 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 stockholder actions. • Certain provisions of our sixth amended and restated certificate of incorporation may have the effect of discouraging lawsuits against our directors and officers. • We will continue to incur increased costs as a result of being a public company. • We have identified material weaknesses in our internal control over financial reporting.
If growth significantly decreases, it will negatively impact our cash reserves, and it may be necessary to obtain additional financing, which may increase indebtedness or result in dilution to shareholders. Further, we may not be able to obtain additional financing on acceptable terms, if at all.
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 acceptable terms, if at all.
The foregoing provision will not apply to claims arising under the Exchange Act or the Securities Exchange Act of 1933, as amended (the “Securities Act”).
The foregoing provision will not apply to claims arising under the Exchange Act or the Securities Act of 1933, as amended (the “Securities Act”).
Any failure on our part to provide an attractive, effective, reliable, and user-friendly digital platform that offers a wide assortment of merchandise with rapid delivery options and that continually 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.
Any failure on our part to provide an attractive, effective, reliable, and user-friendly digital platform that offers a wide assortment of merchandise with rapid delivery 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.
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 ongoing COVID-19 pandemic, including wrongful death actions brought on behalf of employees who contracted COVID-19 while performing their employment-related duties.
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 wrongful death actions brought on behalf of employees who contracted COVID-19 while performing their employment-related duties.
Our fifth amended and restated certificate of incorporation requires, to the fullest extent permitted by law, that (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, 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 officers arising pursuant to any provision of the Delaware General Corporation Law (“DGCL”) or our fifth amended and restated certificate of incorporation or our amended and restated bylaws or as to which the DGCL confers jurisdiction on the Court of Chancery of the State of Delaware, (iv) any action to interpret, apply, enforce or determine the validity of our fifth amended and restated certificate of incorporation or amended and restated bylaws, (v) any action asserting a claim against us or our directors or officers governed by the internal affairs 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 Chancery of the State of Delaware (or if the Court of Chancery of the State of Delaware lacks subject matter jurisdiction, any other state court of the State of Delaware, or if no state court of the State of Delaware has subject matter jurisdiction, the federal district court for the District of Delaware), unless we consent in writing to the selection of an alternative forum.
Our sixth amended and restated certificate of incorporation requires, to the fullest extent permitted by law, that (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, 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 officers arising pursuant to any provision of the Delaware General Corporation Law (“DGCL”) or our sixth amended and restated certificate of incorporation or our amended and restated bylaws or as to which the DGCL confers jurisdiction on the Court of Chancery 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 officers governed by the internal affairs 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 Chancery of the State of Delaware (or if the Court of Chancery of the State of Delaware lacks subject matter jurisdiction, any other state court of the State of Delaware, or if no state court of the State of Delaware has subject matter jurisdiction, the federal district court for the District of Delaware), unless we consent in writing to the selection of an alternative forum.
As a merchant that accepts debit and credit cards for payment, we are subject to the Payment Card Industry Data Security Standard (“PCI DSS”) issued by the PCI Council and to the American National Standards Institute (“ANSI”) data encryption standards and payment network security operating guidelines, as well as the Fair and Accurate Credit Transactions Act (“FACTA”).
As a merchant that accepts debit and credit cards for payment, we are subject to the Payment Card Industry Data Security Standard (“PCI DSS”) issued by the Payment Card Industry Council and to the American National Standards Institute (“ANSI”) data encryption standards and payment network security operating guidelines, as well as the Fair and Accurate Credit Transactions Act (“FACTA”).
Tightening consumer credit could prevent consumers from obtaining financing for pool and spa projects, which could negatively impact our sales of products and services. The ongoing COVID-19 pandemic and associated responses could adversely impact our business and results of operations. The ongoing COVID-19 pandemic has significantly impacted economic activity and markets throughout the world.
Tightening consumer credit could prevent consumers from obtaining financing for pool and spa projects, which could negatively impact our sales of products and services. The COVID-19 pandemic and associated responses could adversely impact our business and results of operations. The COVID-19 pandemic has significantly impacted economic activity and markets throughout the world.
The risks described below are not the only ones we face. The occurrence of any of the following risks or additional risks and uncertainties not presently known to us, or that we currently believe to be immaterial, could materially and adversely affect our business, financial condition, prospects, or results of operations.
The risks described below are not the only risks or uncertainties we face. The occurrence of any of the following risks or additional risks and uncertainties not presently known to us, or that we currently believe to be immaterial, could materially and adversely affect our business, financial condition, prospects, or results of operations.
As a result, we may not be successful in making the improvements necessary to remediate the material weakness identified by management, be able to do so in a timely manner, or be able to identify and remediate additional control deficiencies, including material weaknesses, in the future.
As a result, we may not be successful in making the improvements necessary to remediate the material weaknesses identified 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.
Our inability to successfully 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 affect our business and investor confidence in us, and reduce our stock price. 27 Table of Contents Item 1B.
Our inability to successfully 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 affect our business and investor confidence in us, and reduce our stock price. 26 Table of Contents Item 1B.
Technology and Privacy Related Risks • If our online systems do not function effectively, our operating results could be adversely affected. • Any limitation or restriction to sell on online platforms could harm our profitability. 10 Table of Contents • A significant disturbance or breach of our technological infrastructure could adversely affect our financial condition and results of operations. • Improper activities by third parties and other events or developments may result in future intrusions into or compromise of our networks, payment card terminals, or other payment systems .
Technology and Privacy Related Risks • If our online systems do not function effectively, our operating results could be adversely affected. • Any limitation or restriction to sell on online platforms could harm our profitability. 9 Table of Contents • A significant disturbance or breach of our technological infrastructure could adversely affect our financial condition and results of operations. • Improper activities by third parties and other events or developments may result in future intrusions into or compromise of our networks, payment card terminals, or other payment systems .
In addition, our processes and controls may not comply with evolving standards for identifying, measuring, and reporting ESG metrics, including ESG-related disclosures that may be required of public companies by the SEC, 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.
In addition, our processes and controls may not comply with evolving standards for identifying, 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.
Notwithstanding our internal training curriculum and compliance programs, we cannot guarantee that our employees will follow the applicable operating procedures and regulations, or that no accidents or incidents will arise that could expose us to liability and have a negative impact on our operations and results. 18 Table of Contents Product supply disruptions may have an adverse effect on our profitability and operating results.
Notwithstanding our internal training curriculum and compliance programs, we cannot guarantee that our employees will follow the applicable operating procedures and regulations, or that no accidents or incidents will arise that could expose us to liability and have a negative impact on our operations and results. 17 Table of Contents Product supply disruptions may have an adverse effect on our profitability and operating results.
These suppliers (and those they depend upon for materials and services) are subject to risks, including from natural or man-made disasters or extreme weather (including as a result of climate change), public safety issues, geopolitical events and security issues (including terrorist attacks and armed hostilities), power outages, labor or trade disputes, union organizing activities, financial liquidity problems, and similar events, as well as supply constraints and general economic, social, and political conditions that can limit their ability to provide us (or our suppliers) with quality products and services in a timely manner.
These suppliers (and those they depend upon for materials and services) are subject 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 conflicts (including terrorist attacks and armed hostilities), power outages, labor or trade disputes, union organizing activities, financial liquidity problems, and similar events, as well as supply constraints and general economic, social, and political conditions that can limit their ability to provide us (or our suppliers) with quality products and services in a timely manner.
Work stoppage, labor shortages, operations below historical efficiency levels, supply chain disruptions, inclement weather, or other unforeseen 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 affect our sales and profitability.
Work stoppages, labor shortages, operations below historical efficiency levels, supply chain disruptions, inclement weather, or other unforeseen 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 affect our sales and profitability.
Information technology supports 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 effectively on a day-to-day basis and accurately report our results depends on a solid technological infrastructure, which may be susceptible to internal and external threats.
Information technology supports 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 effectively on a day-to-day basis and accurately report our results depends on robust technological infrastructure, which may be susceptible to internal and external threats.
The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including: • actual 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; 23 Table of Contents • 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 ventures, results of operations, or capital commitments; • changes in operating performance and stock market valuations of other retail companies generally, or those in our industry 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 officers or directors; • lawsuits threatened or filed against us; • changes in laws or regulations applicable to our business; • changes in our capital structure, 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; • 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 trading market for our common stock may not be sustained.
The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including: • actual 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 ventures, results of operations, or capital commitments; 22 Table of Contents • changes in operating performance and stock market valuations of other retail companies generally, or those in our industry 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 officers or directors; • lawsuits threatened or filed against us; • changes in laws or regulations applicable to our business; • changes in our capital structure, 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 trading market for our common stock may not be sustained.
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 unfavorable weather conditions that could adversely impact our sales or operations. Drought conditions or water management initiatives may lead to municipal ordinances related to water use restrictions.
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 unfavorable 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.
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 Exchange Act against us or any of our directors or officers.
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 officers.
Our future success depends on the continued efforts of the members of our executive management team. If one or more of our executives or other key personnel are unable or unwilling to continue in their present positions, or if we are unable to attract and retain high-quality executives or key personnel in the future, our business may be adversely affected.
Our future success depends on the continued efforts of the members of our executive leadership team. If one or more of our executives or other key personnel are unable or unwilling to continue in their present positions, or if we are unable to attract and retain high-quality executives or key personnel in the future, our business may be adversely affected.
In addition, if an acquired business fails to meet our expectations, our business, financial condition, and results of operations may be negatively affected. 17 Table of Contents Our operating results will be harmed if we are unable to effectively manage and sustain our future growth or scale our operations.
In addition, if an acquired business fails to meet our expectations, our business, financial condition, and results of operations may be negatively affected. 16 Table of Contents Our operating results will be harmed if we are unable to effectively manage and sustain our future growth or scale our operations.
If we are unable to remediate this material weakness, or if we experience additional material weaknesses or other deficiencies in the future or otherwise fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately or timely report our financial results, in which case our business may be harmed, investors may lose confidence in the accuracy and completeness of our financial reports, and our stock price could be adversely affected.
If we are unable to remediate these material weaknesses, or if we experience additional material weaknesses or other deficiencies in the future or otherwise fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately or timely report our financial results, in which case our business may be harmed, investors may lose confidence in the accuracy and completeness of our financial reports, and our stock price could be adversely affected.
Such agreements limit our ability, among other things, to: • incur additional debt or issue certain preferred shares; • pay dividends on or make distributions in respect of our common stock or make other restricted payments; • make certain investments; 22 Table of Contents • 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 affiliates; and • designate our subsidiaries as unrestricted subsidiaries.
Such agreements limit our ability, among other things, to: • incur additional debt or issue certain preferred 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 affiliates; and • designate our subsidiaries as unrestricted subsidiaries.
From time-to-time, we are a party to legal proceedings, including matters involving personnel and employment issues, personal injury, antitrust claims, intellectual property claims, and other proceedings arising in or outside of the ordinary course of business.
From time-to-time, we are a party to legal proceedings, including matters involving personnel and employment issues, personal injury, antitrust claims, intellectual property claims, securities law claims, and other proceedings arising in or outside of the ordinary course of business.
We may be unable to manage our inventory efficiently, keep inventory within expected budget goals, keep our work-in-process inventory on hand or manage it efficiently, control expired product, or keep sufficient product on hand to meet demand. We may not be able to keep inventory costs within our target levels.
At times, we may be unable to manage our inventory efficiently, keep inventory within expected budget goals, keep our work-in-process inventory on hand or manage it efficiently, control expired product, or keep sufficient product on hand to meet demand. We may not be able to keep inventory costs within our target levels.
If we are unable to locate, attract, or retain qualified personnel, or if costs of labor or other related costs increase significantly, our financial performance could be adversely affected. 13 Table of Contents We are subject to, and may in the future be subject to, legal or other proceedings that could have a material adverse effect on us.
If we are unable to locate, attract, or retain qualified personnel, or if costs of labor or other related costs increase significantly, our financial performance could be adversely affected. We are subject to, and may in the future be subject to, legal or other proceedings that could have a material adverse effect on us.
These states encompass our largest markets and entry of significant new competitors into them could have a substantial impact on our total sales. 14 Table of Contents The demand for our swimming pool and spa related products and services may be adversely affected by unfavorable economic conditions.
These states encompass our largest markets and entry of significant new competitors into them could have a substantial impact on our total sales. The demand for our swimming pool and spa related products and services may be adversely affected by unfavorable economic conditions.
Failure to comply with these guidelines or standard 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.
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.
Exposure to various types of cyberattacks such as malware, computer viruses, worms, or other malicious acts, as well as human error and technological malfunction, could also potentially disrupt our operations or result in a significant interruption in the delivery of our goods and services. 16 Table of Contents We also may experience occasional system interruptions and delays, as a result of routine maintenance, periodic updates, or other factors, that make our information systems unavailable or slow to respond, including the interaction of our information systems with those of third parties.
Exposure to various types of cyberattacks such as malware, computer viruses, worms, social engineering attacks, or other malicious acts, as well as human error and technological malfunction, could also potentially disrupt our operations or result in a significant interruption in the delivery of our goods and services. 15 Table of Contents We also may experience occasional system interruptions and delays, as a result of routine maintenance, periodic updates, or other factors, that make our information systems unavailable or slow to respond, including the interaction of our information systems with those of third parties.
Our inability to remediate this material weakness, our identification of any additional weaknesses, or our inability to achieve and maintain effective disclosure controls and procedures and internal control over financial reporting in a timely manner could adversely affect our results of operations, our stock price and investor confidence in us.
Our inability to remediate these material weaknesses, our identification of any additional weaknesses, or our inability to achieve and maintain effective disclosure controls and procedures and internal control over financial reporting in a timely manner could adversely affect our results of operations, our stock price and investor confidence in us.
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. 20 Table of Contents In addition, if our products are defectively designed, manufactured, or labeled, contain defective components or are misused, we may become subject to costly litigation initiated by consumers.
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. In addition, if our products are defectively designed, manufactured, or labeled, contain defective components or are misused, we may become subject to costly litigation initiated by consumers.
We must also include a report issued by our independent registered public accounting firm based on their audit of our internal controls 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.
Disruptions from natural or man-made disasters or extreme weather, public safety issues, geopolitical events and security issues, labor or trade disputes, and similar events could have a material adverse effect on our business.
Disruptions from natural or man-made disasters or extreme weather, public health and safety issues, geopolitical events and security issues, labor or trade disputes, macroeconomic crises, and similar events could have a material adverse effect on our business.
Our ability to comply with the annual internal control report requirements will depend on the effectiveness of our financial reporting and data systems and controls across our Company. We expect these systems and controls to involve significant expenditures and to become increasingly complex as our business grows.
Our ability to comply with the annual internal control report requirements will depend on the effectiveness 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.
For example, due to the ongoing COVID-19 pandemic and the resulting disruption of workplaces and the economy, the ability of certain vendors to supply required products has been impaired as a result of labor shortages, government mandated shutdown orders, impaired financial conditions, or for other reasons.
For example, due to the COVID-19 pandemic and the resulting disruption of workplaces and the economy, the ability of certain vendors to supply required products was impaired as a result of labor shortages, government mandated shutdown orders, impaired financial conditions, or for other reasons.
Failure to do so may harm our long-term growth prospects. 19 Table of Contents Any significant interruption to the operations of our distribution centers could affect our ability to distribute our products in a timely manner, which could adversely impact our business and financial condition.
Failure to do so can harm our profitability and long-term growth prospects. 18 Table of Contents Any significant interruption to the operations of our distribution centers could affect our ability to distribute our products in a timely manner, which could adversely impact our business and financial condition.
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 rapidly evolving consumer expectations through our proprietary mobile app and e-commerce websites; • generate sufficient cash flows or obtain sufficient financing to support expansion plans and general operating activities; • identify suitable acquisition candidates and successfully integrate acquired businesses; • maintain favorable supplier arrangements and relationships; and • identify and divest assets that do not continue to create value consistent with our objectives.
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 rapidly evolving consumer expectations through our proprietary mobile app and e-commerce websites; • generate sufficient cash flows or obtain sufficient financing to support expansion plans and general operating activities; • identify suitable acquisition candidates and successfully integrate acquired businesses; • maintain favorable supplier arrangements and relationships; and • identify and divest assets that do not continue to create value consistent with our objectives. 11 Table of Contents If we do not manage these factors successfully, our operating results could be adversely affected.
These online marketplaces 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 temporary or otherwise) on our ability to sell our products through these online platforms could harm our profitability and results of operations.
These online marketplaces 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 temporary or otherwise) on our ability to sell our products or a material change in transaction fees charged through these online platforms could harm our profitability and results of operations.
The cost of complying with stricter laws and standards, including PCI DSS, ANSI, and FACTA data encryption standards and the California Consumer Privacy Act, which took effect in January 2020, and the California Privacy Rights Act, which is expected to take effect on January 1, 2023, and other state data privacy regulations that we may be subject to in the future, could be significant.
The cost of our continued compliance with stricter laws and standards, including, among other regulations, PCI DSS, ANSI, and FACTA data encryption standards and the California Consumer Privacy Act, which took effect in January 2020, and the California Privacy Rights Act, which took effect on January 1, 2023, and the cost of complying with other state data privacy regulations that we may be subject to in the future, could be significant.
Our amended and restated certificate of incorporation and amended and restated bylaws include provisions that: • permit the board of directors to establish the number of directors and fill any vacancies and newly created directorships; • provide that, from and after the date on which our private equity sponsors cease to beneficially own at least a majority of the outstanding shares of our common stock (the “Trigger Event”), a director may be removed only for cause and only by the affirmative 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, from and after the Trigger Event, the affirmative 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 fifth amended and restated certificate of incorporation regarding the amendment of our fifth amended and restated certificate of incorporation, the composition and authority of our board of directors, the election and removal of directors, limitations of director liability, stockholder meetings, corporate opportunities, choice of forum and the interpretation of our fifth amended and restated certificate of incorporation; 25 Table of Contents • authorize the board of directors to amend our bylaws without the assent or vote of shareholders, provided that, from and after the Trigger Event, stockholders may amend the bylaws with the affirmative 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; • from and after the Trigger Event and with the exception of actions required or permitted to be taken by the holders of preferred stock, prohibit stockholder action by written consent, instead requiring stockholder actions to be taken at a meeting of our stockholders; • permit our board of directors, without further action by our stockholders, to fix the rights, preferences, privileges, and restrictions of preferred stock, the rights of which may be greater than the rights of our common stock; • restrict the forum for certain litigation against us to Delaware; • establish 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; and • provide for a staggered board.
Our amended and restated certificate of incorporation and amended and restated bylaws include provisions that: • permit the board of directors to establish 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 affirmative 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 affirmative 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 certificate 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 liability, 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 affirmative 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 preferred stock, prohibit stockholder action by written consent, instead requiring stockholder actions to be taken at a meeting of our stockholders; • permit our board of directors, without further action by our stockholders, to fix the rights, preferences, privileges, and restrictions of preferred stock, the rights of which may be greater than the rights of our common stock; • restrict the forum for certain litigation against us to Delaware; and • establish 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.
Risks Related to Commercialization of Our Products • The commercial success of our planned or future products is not guaranteed. • We may implement a product recall or voluntary market withdrawal, which could significantly increase our costs, damage our reputation, and disrupt our business. • If we do not manage product inventory effectively and efficiently, it could adversely affect profitability. • If we do not effectively manage our distribution centers, it could adversely affect our business and financial condition. • If we do not continue to obtain favorable purchase terms with manufacturers, it could adversely affect our operating results.
Risks Related to Commercialization of Our Products • The commercial success of our planned or future products is not guaranteed. • We may implement a product recall or voluntary market withdrawal, which could significantly increase our costs, damage our reputation, and disrupt our business. • If we do not manage product inventory effectively and efficiently, it could adversely affect profitability. • If we do not effectively manage our distribution centers, it could adversely affect our business and financial condition. • If we do not continue to obtain favorable purchase terms with manufacturers, it could adversely affect our operating results. • Product quality, warranty claims, or safety concerns could impact our sales and expose us to litigation.
In addition, because our revenues are 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. 15 Table of Contents We are susceptible to adverse weather conditions.
In addition, because our revenues are 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.
If we do not manage these factors successfully, our operating results could be adversely affected. We may not be able to successfully manage our inventory to match consumer demand, which could have a material adverse effect on our business, financial condition, and results of operations. We base our inventory purchases, in part, on our sales forecasts.
We may not be able to successfully manage our inventory to match consumer demand, which could have a material adverse effect on our business, financial condition, and results of operations. We base our inventory purchases, in part, on our sales forecasts.
Among other factors, significant disruption to our supply chain for products we sell, as a result of COVID-19, geopolitical conflict or otherwise, could have a material impact on our sales and earnings. Summary of Risk Factors The following summarizes the risks facing our business, all of which are more fully described below.
Among other factors, a significant disruption to our supply chain for products we sell, as a result of macroeconomic and geopolitical developments, including public health crises or otherwise, could have a material impact on our sales and earnings. Summary of Risk Factors The following summarizes the risks facing our business, all of which are more fully described below.
Additionally, macroeconomic and geopolitical developments, including the ongoing COVID-19 pandemic, escalating global conflicts, supply chain disruptions, labor market constraints, rising rates of inflation and rising interest rates may amplify many of the risks discussed below to which we are subject.
Additionally, macroeconomic and geopolitical developments, including public health crises, escalating global conflicts, supply chain disruptions, labor market constraints, rising rates of inflation and rising interest rates may amplify many of the risks discussed below to which we are subject.
From time-to-time, our directors and executive officers 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 officers may sell a significant number of shares for a variety of reasons unrelated to the performance of our business.
These sales will be publicly disclosed in filings made with the SEC. In the future, our directors and executive officers may sell a significant number of shares for a variety of reasons unrelated to the performance of our business.
Management has processes in place to facilitate and support 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 injunctive relief. Moreover, compliance with such laws and regulations in the future could prove to be costly.
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 injunctive relief. Moreover, compliance with such laws and regulations in the future could prove to be costly.
We have a substantial amount of indebtedness. As of November 23, 2022, 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 subsidiary borrowers, Leslie’s, Inc., each lender party thereto, Bank of America, N.A., as Administrative Agent, and U.S.
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 subsidiary borrowers, Leslie’s, Inc., each lender party thereto, Bank of America, N.A., as Administrative Agent, and U.S.
Successful growth of our sales and marketing efforts will depend on the strength of our marketing infrastructure and the effectiveness of our sales and marketing strategies. Our ability to satisfy product demand driven by our sales and marketing efforts will be largely dependent on the ability to maintain a commercially viable manufacturing process that is compliant with regulatory standards.
Our ability to satisfy product demand driven by our sales and marketing efforts will be largely dependent on the ability to maintain a commercially viable manufacturing process that is compliant with regulatory standards.
Risks Related to Our Indebtedness • Our substantial indebtedness could materially adversely affect our financial condition and our ability to operate our business. • Our ability to generate sufficient cash depends on numerous factors beyond our control, and we may be unable to generate sufficient cash flow to service our debt obligations. • Restrictive covenants in the agreements governing our Credit Facilities may restrict our ability to pursue our business strategies, and failure to comply with these restrictions could result in acceleration of our debt. 11 Table of Contents • Incurrence of substantially more debt could further exacerbate the risks associated with our substantial leverage. • The phase-out of the London Interbank Offered Rate (LIBOR), or the replacement of LIBOR with a different reference rate, may adversely affect interest rate.
Risks Related to Our Indebtedness • Our substantial indebtedness could materially adversely affect our financial condition and our ability to operate our business. • Our ability to generate sufficient cash depends on numerous factors beyond our control, and we may be unable to generate sufficient cash flow to service our debt obligations. • Restrictive covenants in the agreements governing our Credit Facilities may restrict our ability to pursue our business strategies, and failure to comply with these restrictions could result in acceleration of our debt. • Incurrence of substantially more debt could further exacerbate the risks associated with our substantial leverage.
Future sales of common stock by existing stockholders could cause our stock price to decline. If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market the trading price of our common stock could be adversely impacted. As of November 23, 2022, we had 183,545,344 shares of common stock outstanding.
Future sales of common stock by existing stockholders could cause our stock price to decline. If our existing stockholders sell, or indicate an intention to sell, substantial 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.
Bank National Association, as Co-Collateral Agent (the “Revolving Credit Facility”), and together, the “Credit Facilities” was $797.9 million. Subject to restrictions in the agreements governing our debt, we may incur additional debt.
Bank National Association, as Co-Collateral Agent (the “Revolving Credit Facility,” together, the “Credit Facilities”) was $789.8 million. Subject to restrictions in the agreements governing our debt, we may incur additional debt.
These payment terms typically include favorable pricing and are available to us for pre-season or early season purchases. If we do not continue to maintain such favorable purchase terms with manufacturers, it could adversely affect our operating results.
These payment terms typically include favorable pricing and are available to us for pre-season or early season purchases. If we do not continue to maintain such favorable purchase terms with manufacturers, it could adversely affect our operating results. We depend on a network of suppliers to source our products, including our own branded products.
The ultimate impact will depend on the severity and duration of the current ongoing COVID-19 pandemic and future resurgences and actions taken by governmental authorities and other third parties in response, each of which is uncertain, rapidly changing, and difficult to predict.
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, rapidly changing, and difficult to predict. Our growth rates during the COVID-19 pandemic may not be sustainable and may not be indicative of future growth.
Natural or man-made disasters or extreme weather (including as a result of climate change), public safety issues, geopolitical events and security issues (including terrorist attacks and armed hostilities), labor or trade disputes, and similar events can lead to uncertainty and have a negative impact on demand for our products, in addition to causing disruptions to our supply chain.
Natural or man-made disasters or extreme weather (including as a result of climate change), public health and safety issues, geopolitical events and conflicts (including terrorist attacks and armed hostilities), labor or trade disputes, macroeconomic crises (including any stemming from recent adverse developments in the financial services industry), and similar events can lead to uncertainty and have a negative impact on demand for our products, in addition to causing disruptions to our supply chain.
Our attempts to anticipate future regulatory 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 effective as we anticipate. We depend on a network of suppliers to source our products, including our own branded products.
Our attempts to anticipate future regulatory 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 effective as we anticipate.
In addition, actual or anticipated downward pressure on our stock price due to actual or anticipated sales of stock by our directors or officers 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.
In addition, actual or anticipated downward pressure on our stock price due to actual or anticipated sales of stock by our directors or officers 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 Table of Contents From time-to-time, our directors and executive officers may sell shares of our common stock on the open market.
Our growth rates during the ongoing COVID-19 pandemic may not be sustainable and may not be indicative of future growth. The demand for pool chemicals may be affected by consumer attitudes towards products for environmental or safety reasons. We could be adversely affected if consumers lose confidence in the safety and quality of our products.
The demand for pool chemicals may be affected by consumer attitudes towards products for environmental or safety reasons. We could be adversely affected if consumers lose confidence in the safety and quality of our products.
Such weakness led to a determination that our internal control over financial reporting and disclosure controls and procedures were not effective as of October 1, 2022.
Such weaknesses led to a determination that our internal control over financial reporting and disclosure controls and procedures were not effective as of September 30, 2023.
A significant portion of our digital sales take place through online marketplaces and online retailers and are subject to their terms of service and their various other policies.
A significant portion of our digital sales take place through online marketplaces and online retailers and are subject to their terms of service and their various other policies including fees charged for transacting on the corresponding platforms.
Such restrictions could result in decreased pool installations, which could negatively impact our sales. 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, or cause damage to our facilities.
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.
We identified a material weakness in our internal control over financial reporting.
We have identified material weaknesses in our internal control over financial reporting.
Restrictive covenants in the agreements governing our Credit Facilities may restrict our ability to pursue our business strategies, and failure to comply with any of these restrictions could result in acceleration of our debt.
In addition, the terms of our existing or future debt agreements may restrict us from pursuing any of these alternatives. 21 Table of Contents Restrictive covenants in the agreements governing our Credit Facilities may restrict our ability to pursue our business strategies, and failure to comply with any of these restrictions could result in acceleration of our debt.
We may not be able to effect any of these actions on a timely basis, on commercially reasonable terms or at all, and these actions may not be sufficient to meet our capital requirements. In addition, the terms of our existing or future debt agreements may restrict us from pursuing any of these alternatives.
We may not be able to effect any of these actions on a timely basis, on commercially reasonable terms or at all, and these actions may not be sufficient to meet our capital requirements.
Risks Related to Our Industry and the Broader Economy • We face competition by manufacturers, retailers, distributors, and service providers in the residential and professional pool and spa care market. • The demand for our swimming pool and spa related products and services may be adversely affected by unfavorable economic conditions. • The ongoing COVID-19 pandemic could adversely impact our business and results of operations. • The demand for pool chemicals may be affected by consumer attitudes towards products for environmental or safety reasons. • Our results of operations may fluctuate from quarter to quarter for many reasons, including seasonality. • We are susceptible to adverse weather conditions.
Risks Related to Our Industry and the Broader Economy • We face competition by manufacturers, retailers, distributors, and service providers in the residential and professional pool and spa care market. • The demand for our swimming pool and spa related products and services may be adversely affected by unfavorable economic conditions. • The COVID-19 pandemic could adversely impact our business and results of operations. • The demand for pool chemicals may be affected by consumer attitudes towards products for environmental or safety reasons. • Our results of operations may fluctuate from quarter to quarter for many reasons, including seasonality. • Adverse developments affecting the financial services industry, such as actual events or concerns involving liquidity, defaults, or non-performance by financial institutions or transactional counterparties, could adversely affect our current and projected business operations and our financial condition and results of operations. • We maintain our cash at financial institutions in balances that may exceed federally insured limits. • We are susceptible to adverse weather conditions.
Risks Related to Government Regulation • The nature of our business subjects us to compliance with employment, environmental, health, transportation, safety, and other governmental regulations. • Product quality, warranty claims, or safety concerns could impact our sales and expose us to litigation.
Risks Related to Government Regulation The nature of our business subjects us to compliance with employment, environmental, health, transportation, safety, and other governmental regulations.
Further, in the event a court finds either exclusive forum provision contained in our fifth amended and restated certificate of incorporation to be unenforceable 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. 26 Table of Contents We will continue to incur increased costs as a result of being a public company, and our management will continue to be required to devote substantial time to compliance with our public company responsibilities and corporate governance practices.
Further, in the event a court finds either exclusive forum provision contained in our sixth amended and restated certificate of incorporation to be unenforceable 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.
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, substantial amounts of our common stock in the public market. 24 Table of Contents Transactions engaged in by our principal stockholders, our officers, or directors involving our common stock may have an adverse effect on the price of our stock.
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, substantial amounts of our common stock in the public market.
The extent of the impact of COVID-19 on our financial and operating performance depends significantly on the duration and severity of the pandemic, the actions taken to contain or mitigate its impact and any changes in consumer behaviors.
The extent of the impact of macroeconomic and geopolitical developments, including public health crises, on our financial and operating performance depends significantly on the duration and severity of such macroeconomic and geopolitical developments, including public health crises, the actions taken to contain or mitigate its impact and any changes in consumer behaviors as a result thereof.
Sales of our shares by our officers, directors, and principal stockholders could have the effect of lowering our stock price.
Transactions engaged in by our principal stockholders, our officers, or directors involving our common stock may have an adverse effect on the price of our stock. Sales of our shares by our officers, directors, and principal stockholders could have the effect of lowering our stock price.
If we are not successful in our defense of or are not successful in obtaining dismissals of any such lawsuit, legal fees or settlement costs could have a material adverse effect on our results of operations and financial position. 21 Table of Contents Risks Related to Our Indebtedness Our substantial indebtedness could materially adversely affect our financial condition and our ability to operate our business, react to changes in the economy or industry or pay our debts and meet our obligations under our debt agreements, and could divert our cash flow from operations to debt payments.
Risks Related to Our Indebtedness Our substantial indebtedness could materially adversely affect our financial condition and our ability to operate our business, react to changes in the economy or industry or pay our debts and meet our obligations under our debt agreements, and could divert our cash flow from operations to debt payments. We have a substantial amount of indebtedness.
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.
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 unstable supply of granular chlorine compounds we believe some customers stockpile chemicals, resulting in unexpected changes in demand.
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. Certain of our stockholders have the right to engage or invest in the same or similar businesses as us.
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 dividends for the foreseeable future.
Timing of consumer purchases will vary each year and sales can be expected to shift from one quarter to another. As a result, management believes that period-to-period comparisons of results of operations are not necessarily meaningful and should not be relied upon as any indication of future performance or results expected for the fiscal year.
As a result, management believes that period-to-period comparisons of results of operations are not necessarily meaningful and should not be relied upon as any indication of future performance or results.
Our results of operations may fluctuate from quarter to quarter for many reasons, including seasonality. Our sales are highly seasonal and we experience fluctuations in quarterly results as a result of many factors. We have historically generated a greater percentage of our revenues during the warm weather months of April through September.
Our results of operations may fluctuate from quarter to quarter for many reasons, including seasonality. 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 difficult to predict.
The potential for natural or man-made disasters or extreme weather, geopolitical events and security issues, labor or trade disputes, 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.
The potential for natural or man-made disasters or extreme weather, geopolitical events and conflicts, labor 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. 12 Table of Contents Risks Related to Our Industry and the Broader Economy We face competition by manufacturers, retailers, distributors, and service providers in the residential and professional pool and spa care market.
Further, remediation efforts place a significant burden on management and add increased pressure to our financial and IT resources and processes.
We intend to remediate these material weaknesses, but we cannot be certain as to when remediation will be complete. Further, remediation efforts may place a significant burden on management and add increased pressure to our financial and IT resources and processes.
We do not intend to pay dividends for the foreseeable future. We currently intend to retain any future earnings to finance the operation and expansion of our business and we do not expect to declare or pay any dividends in the foreseeable future.
We currently intend to retain any future earnings to finance the operation and expansion of our business and we do not expect to declare or pay any dividends in the foreseeable future. As a result, stockholders must rely on sales of their common stock after price appreciation as the only way to realize any future gains on their investment.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for evaluating and reporting on the effectiveness of our system of internal control.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for evaluating and reporting on the effectiveness 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 effectiveness of our internal control over financial reporting.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeOur current physical network is summarized in the chart below: State Number of Locations Alabama 8 Arizona 97 Arkansas 3 California 169 Colorado 4 Connecticut 16 Delaware 4 Florida 88 Georgia 35 Illinois 10 Indiana 12 Iowa 1 Kansas 6 Kentucky 6 Louisiana 14 Maryland 11 Massachusetts 11 Michigan 6 Mississippi 4 Missouri 13 Nebraska 2 Nevada 25 New Hampshire 3 New Jersey 34 New Mexico 3 New York 34 North Carolina 13 Ohio 17 Oklahoma 21 Oregon 7 Pennsylvania 46 Rhode Island 2 South Carolina 9 Tennessee 13 Texas 209 Utah 3 Virginia 17 Washington 12 Wisconsin 2 Total Locations 990 28 Table of Contents Our corporate offices are located in Phoenix, Arizona.
Biggest changeOur current physical network of locations is summarized in the chart below: State Number of Locations Alabama 8 Arizona 98 Arkansas 3 California 169 Colorado 4 Connecticut 16 Delaware 4 Florida 93 Georgia 34 Illinois 10 Indiana 11 Iowa 1 Kansas 6 Kentucky 6 Louisiana 17 Maryland 11 Massachusetts 11 Michigan 6 Mississippi 4 Missouri 13 Nebraska 2 Nevada 26 New Hampshire 3 New Jersey 34 New Mexico 3 New York 34 North Carolina 14 Ohio 17 Oklahoma 22 Oregon 8 Pennsylvania 46 Rhode Island 2 South Carolina 9 Tennessee 13 Texas 215 Utah 3 Virginia 18 Washington 12 Wisconsin 2 Total Locations 1,008 27 Table of Contents Our corporate offices are located in Phoenix, Arizona.
Item 2. Pr operties. Properties As of October 1, 2022, we had 990 locations in 39 states, three manufacturing facilities, and six distribution centers supporting our residential locations. In addition, we contract with third-party logistic providers under short-term agreements for additional capacity as needed.
Item 2. Pr operties. Properties As of September 30, 2023, we had over 1,000 locations in 39 states, two manufacturing facilities, and six distribution centers supporting our residential locations. In addition, we contract with third-party logistic providers under short-term agreements for additional capacity as needed.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeItem 3. Legal Proceedings. We are subject to litigations, 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 October 1, 2022, we had established reserves for claims that are probable and estimable and such reserves were not significant.
Biggest changeWe dispute the allegations of wrongdoing and intend to defend ourselves vigorously in this matter. We are subject 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.
Not applicable. 29 Table of Contents PART II
Not applicable. 28 Table of Contents PART II
Added
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 Officer and our former Chief Financial Officer.
Added
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 reasonably estimate the potential range of loss, if any.
Added
As of September 30, 2023, we had established reserves for claims that are probable and estimable and such reserves were not significant.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

5 edited+0 added−0 removed6 unchanged
Biggest changeDuring the quarter ended October 1, 2022, there were no repurchases under our program and as of October 1, 2022, approximately $148 million remained available for future purchases under our share repurchase program. Item 6. [Reserved]. 31 Table of Contents
Biggest changeDuring the quarter ended September 30, 2023, there were no repurchases under our program and as of September 30, 2023, approximately $147.7 million remained available for future purchases under our share repurchase program. Item 6. [Reserved]. 30 Table of Contents
Any future determination relating to our dividend policy will be made by our board of directors and will depend on a number of factors, including: our actual and projected financial condition, liquidity, and results of operations; our capital levels and needs; tax considerations; any acquisitions or potential acquisitions that we may examine; statutory and regulatory 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.
Any future determination relating to our dividend policy will be made by our board of directors and will depend on a number of factors, including: our actual and projected financial condition, liquidity, and results of operations; our capital levels and needs; tax considerations; any acquisitions or potential acquisitions; statutory and regulatory 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. 30 Table of Contents Recent Sales of Unregistered Securities None.
We are not obligated to pay dividends on our common stock. 29 Table of Contents Recent Sales of Unregistered Securities None.
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 October 1, 2022. Data for the Nasdaq Global Composite Index, S&P 500 Index, and S&P SmallCap 600 Index assume reinvestment of dividends.
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.
As of November 23, 2022, there were 7 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.
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.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

62 edited+18 added−23 removed58 unchanged
Biggest changeYear Ended Statements of Operations data: October 1, 2022 October 2, 2021 October 3, 2020 Sales $ 1,562,120 $ 1,342,917 $ 1,112,229 Cost of merchandise and services sold 888,379 747,757 651,516 Gross profit 673,741 595,160 460,713 Selling, general and administrative expenses 434,987 386,075 314,338 Operating income 238,754 209,085 146,375 Other expense: Interest expense 30,240 34,410 84,098 Loss on debt extinguishment — 9,169 — Other expenses, net 397 2,377 1,089 Total other expense 30,637 45,956 85,187 Income before taxes 208,117 163,129 61,188 Income tax expense 49,088 36,495 2,627 Net income $ 159,029 $ 126,634 $ 58,561 Earnings per share Basic $ 0.86 $ 0.68 $ 0.37 Diluted $ 0.85 $ 0.67 $ 0.37 Weighted average shares outstanding Basic 184,347 185,412 156,500 Diluted 186,148 190,009 156,500 Percentage of Sales (1) (%) (%) (%) Sales 100.0 100.0 100.0 Cost of merchandise and services sold 56.9 55.7 58.6 Gross margin 43.1 44.3 41.4 Selling, general and administrative expenses 27.8 28.7 28.3 Operating income 15.3 15.6 13.2 Other expense: Interest expense 1.9 2.6 7.6 Loss on debt extinguishment — 0.7 — Other expenses, net 0.1 0.2 0.1 Total other expense 2.0 3.4 7.7 Income before taxes 13.3 12.1 5.5 Income tax expense 3.1 2.7 0.2 Net income 10.2 9.4 5.3 Other Financial and Operations data: Number of new and acquired locations, net 38 17 10 Number of locations open at end of period 990 952 936 Comparable sales growth (2) 10.6 % 21.5 % 18.0 % Adjusted EBITDA (3) $ 292,276 $ 270,613 $ 182,770 Adjusted EBITDA as a percentage of sales (3) 18.7 % 20.2 % 16.4 % Adjusted net income (3) $ 176,391 $ 161,478 $ 64,973 Adjusted diluted earnings per share $ 0.95 $ 0.85 $ 0.42 (1) Components may not add to totals due to rounding.
Biggest changeThe following table summarizes key components of our results of operations for the periods indicated, both in dollars and as a percentage of our sales (in thousands, except per share amounts): Year Ended Statements of Operations Data: September 30, 2023 October 1, 2022 October 2, 2021 Sales $ 1,451,209 $ 1,562,120 $ 1,342,917 Cost of merchandise and services sold 902,986 888,379 747,757 Gross profit 548,223 673,741 595,160 Selling, general and administrative expenses 446,044 434,987 386,075 Operating income 102,179 238,754 209,085 Other expense: Interest expense 65,438 30,240 34,410 Loss on debt extinguishment — — 9,169 Other expenses, net — 397 2,377 Total other expense 65,438 30,637 45,956 Income before taxes 36,741 208,117 163,129 Income tax expense 9,499 49,088 36,495 Net income $ 27,242 $ 159,029 $ 126,634 Earnings per share Basic $ 0.15 $ 0.86 $ 0.68 Diluted $ 0.15 $ 0.85 $ 0.67 Weighted average shares outstanding Basic 183,839 184,347 185,412 Diluted 184,716 186,148 190,009 Percentage of Sales (1) (%) (%) (%) Sales 100.0 100.0 100.0 Cost of merchandise and services sold 62.2 56.9 55.7 Gross margin 37.8 43.1 44.3 Selling, general and administrative expenses 30.7 27.8 28.7 Operating income 7.0 15.3 15.6 Other expense: Interest expense 4.5 1.9 2.6 Loss on debt extinguishment — — 0.7 Other expenses, net — 0.1 0.2 Total other expense 4.5 2.0 3.4 Income before taxes 2.5 13.3 12.1 Income tax expense 0.7 3.1 2.7 Net income 1.9 10.2 9.4 Other Financial and Operations Data: Number of new and acquired locations, net 18 38 16 Number of locations open at end of period 1,008 990 952 Comparable sales growth (2) (11.0 )% 10.6 % 21.5 % Adjusted EBITDA (3) $ 168,149 $ 292,276 $ 270,613 Adjusted EBITDA as a percentage of sales (3) 11.6 % 18.7 % 20.2 % Adjusted net income (3) $ 51,113 $ 176,391 $ 161,478 Adjusted diluted earnings per share $ 0.28 $ 0.95 $ 0.85 (1) Components may not add to totals due to rounding.
In addition, unseasonably early or late warming trends can increase or decrease the length of the pool season and impact timing around pool openings and closings and, therefore, our total sales and timing of our sales. We generally open new locations before our peak selling season begins and we close locations after our peak selling season ends.
In addition, unseasonably early or late warming trends can increase or decrease the length of the pool season and impact timing around pool openings and closings and, therefore, our total sales and timing of our sales. We generally open new locations before our peak selling season begins and we generally close locations after our peak selling season ends.
Income Taxes 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 effective tax rate was 23.6% compared to 22.4% for fiscal 2022 and fiscal 2021, respectively, reflecting lower income tax benefits attributable to equity-based compensation awards and research and development credits.
Income Taxes 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 effective 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.
Due to the non-discretionary nature of our products and services, our business has historically delivered strong, uninterrupted growth and profitability in all market environments, including through the Great Recession and the ongoing COVID-19 pandemic. We have a legacy of leadership and disruptive innovation.
Due to the non-discretionary nature of our products and services, our business has historically delivered strong, uninterrupted growth and profitability in all market environments, including through the Great Recession and the COVID-19 pandemic. We have a legacy of leadership and disruptive innovation.
(4) Represents non-cash expense due to the write-off of deferred financing costs related to the Term Loan modification and the repayment of our senior unsecured notes in fiscal 2021, which are reported in loss on debt extinguishment in our consolidated statements of operations.
(4) Represents non-cash expense due to the write-off 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.
These differentiated capabilities allow us to meet the needs of any pool and spa owner, whether they care for their pool or spa themselves or rely on a professional, whenever, wherever, and however they choose to engage with us. 32 Table of Contents 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.
These differentiated capabilities allow us to meet the needs of any pool and spa owner, whether they care for their pool or spa themselves or rely on a professional, whenever, wherever, and however they choose to engage with us. 31 Table of Contents 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.
Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these items. 34 Table of Contents Adjusted Net Income (Loss) and Adjusted Earnings per Share Adjusted net income (loss) and Adjusted earnings per share are additional key measures used by management and our board of directors to assess our financial performance.
Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these items. 33 Table of Contents Adjusted Net Income (Loss) and Adjusted Earnings per Share Adjusted net income (loss) and Adjusted earnings per share are additional key measures used by management and our board of directors to assess our financial performance.
Selling and operating expenses generally vary proportionately with sales and the change in the number of locations. In contrast, general and administrative expenses are generally not directly proportional to sales and the change in the number of locations but are expected to increase over time to support our growth and public company obligations.
Selling and operating expenses generally vary proportionately with sales and the change in the number of locations. In contrast, general and administrative expenses are generally not directly proportional to sales and the change in the number of locations, but may increase over time to support our growth and public company obligations.
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 judgements.
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 negotiate extended payment terms with certain of our primary suppliers as we receive merchandise in December through March, and we pay for merchandise in April through July. The principal external factor affecting our business is weather.
We negotiate extended payment terms with certain of our primary suppliers as we receive merchandise in December through March, and we pay for merchandise in April through July. 38 Table of Contents The principal external factor affecting our business is weather.
Founded in 1963, we are the only direct-to-consumer pool and spa care brand with national scale, operating an integrated marketing and distribution ecosystem powered by a physical network of 990 branded locations and a robust digital platform.
Founded in 1963, we are the only direct-to-consumer pool and spa care brand with national scale, operating an integrated marketing and distribution ecosystem powered by a physical network of over 1,000 branded locations and a robust digital platform.
Actual results or outcomes may differ materially from those anticipated in these forward-looking statements, which are subject to risks, uncertainties, and other factors, including those described in Part I, Item 1A, “Risk Factors” of this Annual Report on Form 10-K for the fiscal year ended October 1, 2022.
Actual results or outcomes may differ materially from those anticipated in these forward-looking statements, which are subject to risks, uncertainties, and other factors, including those described in Part I, Item 1A, “Risk Factors” of this Annual Report on Form 10-K for the fiscal year ended September 30, 2023.
We expect to fund capital expenditures from net cash provided by operating activities. 40 Table of Contents Based on our growth plans, we believe our cash and cash equivalents position, net cash provided by operating activities and borrowing availability under our Revolving Credit Facility will be adequate to finance our working capital requirements, planned capital expenditures, strategic acquisitions, share repurchases, and debt service over the next 12 months.
Based on our growth plans, we believe our cash and cash equivalents position, net cash provided by operating activities and borrowing availability under our Revolving Credit Facility will be adequate to finance our working capital requirements, planned capital expenditures, strategic acquisitions, share repurchases, and debt service over the next 12 months.
Net cash provided by financing activities in fiscal 2021 of $53.8 million was primarily related to net proceeds raised during our IPO in November 2020 of $458.6 million, partially offset by a $396.1 million repayment of long-term debt. Net cash used in financing activities in fiscal 2020 of $10.4 million was related to the net paydown of long-term debt.
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 offset by a $396.1 million repayment of long-term debt.
We estimate the amount recorded, generally as a reduction of the prices of the vendor’s products and therefore a reduction of inventory at the end of each period based on a detailed analysis of inventory and of the facts and circumstances of various contractual agreements with vendors.
We calculate the amount earned based on actual purchases, recorded as a reduction of the prices of the vendor’s products and therefore a reduction of inventory at the end of each period based on a detailed analysis of inventory and of the facts and circumstances of various contractual agreements with vendors.
Cost of merchandise and services sold reflects the direct cost of purchased merchandise, costs to package certain chemical products, including direct materials and labor, costs to provide services, including labor and materials, as well as distribution and occupancy costs. The direct cost of purchased merchandise includes vendor rebates, which are generally treated as a reduction of merchandise costs.
Cost of merchandise and services sold reflects the direct cost of purchased merchandise, costs to package certain chemical products, including direct materials and labor, costs to provide services, including labor and materials, as well as distribution and occupancy costs. The direct cost of purchased merchandise includes vendor rebates.
Sales are substantially lower during our first and second fiscal quarters. We have a long track record of investing in our business throughout the year, including in operating expenses, working capital, and capital expenditures related to new locations and other growth initiatives.
Sales are substantially 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 capital, and capital expenditures related to new locations and other growth initiatives.
Adjusted net income increased to $176.4 million in fiscal 2022 from $161.5 million in fiscal 2021, an increase of $14.9 million. Adjusted diluted earnings per share increased to $0.95 in fiscal 2022 compared to $0.85 in fiscal 2021.
Adjusted net income increased to $176.4 million in fiscal 2022 from $161.5 million in fiscal 2021, an increase of $14.9 million. Adjusted diluted earnings per share increased to $0.95 in fiscal 2022 compared to $0.85 in fiscal 2021. Adjusted EBITDA Adjusted EBITDA increased to $292.3 million in fiscal 2022 from $270.6 million fiscal 2021, an increase of $21.7 million.
The number of new locations reflects the number of locations opened during a particular reporting period. New locations require an initial capital investment in location build-outs, fixtures, and equipment, which we amortize over time as well as cash required for inventory. As of October 1, 2022, we operated 990 retail locations in 39 states across the United States.
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, fixtures, and equipment, which we amortize over time as well as cash required for inventory. As of September 30, 2023, we operated over 1,000 locations in 39 states across the United States.
Adjusted EBITDA Adjusted EBITDA is defined as earnings before interest (including amortization of debt issuance costs), taxes, depreciation and amortization, management fees, equity-based compensation expense, loss on debt extinguishment, costs related to equity offerings, strategic project costs, executive transition costs, loss (gain) on disposition of assets, mark-to-market on interest rate cap and other non-recurring, non-cash or discrete items.
Adjusted EBITDA Adjusted EBITDA is defined as earnings before interest (including amortization of debt issuance costs), taxes, depreciation and amortization, management fees, equity-based compensation expense, loss (gain) on debt extinguishment, loss (gain) on asset and contract dispositions, executive transition costs, severance, costs related to equity offerings, strategic project costs, merger and acquisition costs, and other non-recurring, non-cash or discrete items.
References to fiscal 2022, 2021, and 2020 refer to the fiscal years ended October 1, 2022, October 2, 2021, and October 3, 2020, respectively. Fiscal 2022 and 2021 included 52 weeks of operations. Fiscal 2020 included 53 weeks of operations.
References to fiscal 2023, 2022, and 2021 refer to the fiscal years ended September 30, 2023, October 1, 2022, and October 2, 2021, respectively. Fiscal 2023, 2022, and 2021 included 52 weeks of operations.
We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions used to calculate our inventory reserve. 42 Table of Contents Business Combinations We account for business combinations using the acquisition method of accounting.
When an inventory item is sold or disposed, the associated reserve is released at that time. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions used to calculate our inventory reserve. Business Combinations We account for business combinations using the acquisition method of accounting.
Cash and cash equivalents totaled $112.3 million and $343.5 million as of October 1, 2022 and October 2, 2021, respectively. As of October 1, 2022 and October 2, 2021, we did not have any outstanding borrowings under our Revolving Credit Facility.
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.
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 subjective judgements. Based on this definition, we have identified the critical accounting policies and judgements addressed below.
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 subjective judgments.
(2) See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors and Measures We Use to Evaluate Our Business.” (3) The tables below provide a reconciliation from our net income to Adjusted EBITDA and net income to Adjusted net income for fiscal 2022, 2021, and 2020 (in thousands). 36 Table of Contents Year Ended October 1, 2022 October 2, 2021 October 3, 2020 Net income $ 159,029 $ 126,634 $ 58,561 Interest expense 30,240 34,410 84,098 Income tax expense 49,088 36,495 2,627 Depreciation and amortization expense (1) 30,769 26,553 28,925 Management fees (2) — 382 4,900 Equity-based compensation expense (3) 11,922 25,621 1,785 Loss on debt extinguishment (4) — 9,169 — Costs related to equity offerings (5) 550 10,444 — Strategic project costs (6) 4,960 — — Executive transition costs and other (7) 5,718 905 1,874 Adjusted EBITDA $ 292,276 $ 270,613 $ 182,770 Year Ended October 1, 2022 October 2, 2021 October 3, 2020 Net income $ 159,029 $ 126,634 $ 58,561 Management fees (2) — 382 4,900 Equity-based compensation expense (3) 11,922 25,621 1,785 Loss on debt extinguishment (4) — 9,169 — Costs related to equity offerings (5) 550 10,444 — Strategic project costs (6) 4,960 — — Executive transition costs and other (7) 5,718 905 1,874 Tax effects of these adjustments (8) (5,788 ) (11,677 ) (2,147 ) Adjusted net income $ 176,391 $ 161,478 $ 64,973 (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) See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors and Measures We Use to Evaluate Our Business.” (3) The tables below provide a reconciliation from our net income to Adjusted EBITDA and net income to Adjusted net income for fiscal 2023, 2022, and 2021 (in thousands). 35 Table of Contents Year Ended September 30, 2023 October 1, 2022 October 2, 2021 Net income $ 27,242 $ 159,029 $ 126,634 Interest expense 65,438 30,240 34,410 Income tax expense 9,499 49,088 36,495 Depreciation and amortization expense (1) 34,142 30,769 26,553 Management fees (2) — — 382 Equity-based compensation expense (3) 12,067 11,922 25,621 Loss on debt extinguishment (4) — — 9,169 Loss (gain) on asset and contract dispositions (5) 6,379 426 (1,643 ) Executive transition costs (6) 6,160 883 — Costs related to equity offerings (7) — 550 10,444 Strategic project costs (8) 3,004 4,960 — Other non-recurring costs (9) 4,218 4,409 2,548 Adjusted EBITDA $ 168,149 $ 292,276 $ 270,613 Year Ended September 30, 2023 October 1, 2022 October 2, 2021 Net income $ 27,242 $ 159,029 $ 126,634 Management fees (2) — — 382 Equity-based compensation expense (3) 12,067 11,922 25,621 Loss on debt extinguishment (4) — — 9,169 Loss (gain) on asset and contract dispositions (5) 6,379 426 (1,643 ) Executive transition costs (6) 6,160 883 — Costs related to equity offerings (7) — 550 10,444 Strategic project costs (8) 3,004 4,960 — Other non-recurring costs (9) 4,218 4,409 2,548 Tax effects of these adjustments (10) (7,957 ) (5,788 ) (11,677 ) Adjusted net income $ 51,113 $ 176,391 $ 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.
As of October 1, 2022, outstanding standby letters of credit totaled $10.0 million, and after considering borrowing base restrictions, we had $190.0 million of available borrowing capacity under the terms of the Revolving Credit Facility. As of October 1, 2022, we were in compliance with the covenants under the Revolving Credit Facility and our Term Loan agreements.
As of September 30, 2023, outstanding standby letters of credit totaled $11.4 million, and after considering borrowing base restrictions, we had $238.6 million of available 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.
Adjusted net income (loss) is defined as net income (loss) adjusted to exclude management fees, equity-based compensation expense, loss on debt extinguishment, costs related to equity offerings, strategic project costs, executive transition costs, loss (gain) on disposition of assets, mark-to-market on interest rate cap, and other non-recurring, non-cash or discrete items.
Adjusted net income (loss) is defined as net income (loss) adjusted 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 offerings, strategic project costs, merger and acquisition costs, and other non-recurring, non-cash, or discrete items.
Impact of Macroeconomic Events and Uncertainties Our financial performance and condition may be impacted to varying extents from period to period by macroeconomic and geopolitical developments, including the ongoing COVID-19 pandemic, escalating global conflicts, supply chain disruptions, labor market constraints, rising rates of inflation, and rising interest rates.
Impact of Macroeconomic Events and Uncertainties 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 conflicts, supply chain disruptions, labor market constraints, rising rates of inflation, rising interest rates, general economic slowdown, and potential failures among financial institutions.
(6) Represents non-recurring costs, such as third-party consulting costs, which are not part of our ongoing operations and are incurred to execute differentiated, strategic projects, and are reported in SG&A in our consolidated statements of operations.
(7) Includes costs incurred for follow-on equity offerings, which are reported in other (income) expenses, net in our consolidated statements of operations. (8) Represents non-recurring costs, such as third-party consulting costs, which are not part of our ongoing operations and are incurred to execute differentiated, strategic projects, and are reported in SG&A in our consolidated statements of operations.
Our capital expenditures are primarily related to infrastructure-related investments, including investments related to upgrading and maintaining our information technology systems, ongoing location improvements, expenditures related to our distribution centers, and new location openings.
Our capital expenditures are primarily related to infrastructure-related investments, including investments related to upgrading and maintaining our information technology systems, ongoing location improvements, expenditures related to our distribution centers, and new location openings. We expect to fund capital expenditures from net cash provided by operating activities.
Summary of Cash Flows A summary of our cash flows from operating, investing, and financing activities is presented in the following table (in thousands): Year Ended October 1, 2022 October 2, 2021 October 3, 2020 Net cash provided by operating activities $ 66,644 $ 169,272 $ 102,138 Net cash used in investing activities (138,981 ) (35,355 ) (26,811 ) Net cash (used in) provided by financing activities (158,868 ) 53,780 (10,425 ) Net (decrease) increase in cash and cash equivalents $ (231,205 ) $ 187,697 $ 64,902 Cash Provided by Operating Activities Net cash provided by operating activities decreased to $66.6 million in fiscal 2022 from $169.3 million in fiscal 2021, a decrease of $102.7 million.
Summary of Cash Flows A summary of our cash flows from operating, investing, and financing activities is presented in the following table (in thousands): Year Ended September 30, 2023 October 1, 2022 October 2, 2021 Net cash provided by operating activities $ 6,470 $ 66,644 $ 169,272 Net cash used in investing activities (52,539 ) (138,981 ) (35,355 ) Net cash (used in) provided by financing activities (10,804 ) (158,868 ) 53,780 Net (decrease) increase in cash and cash equivalents $ (56,873 ) $ (231,205 ) $ 187,697 39 Table of Contents Cash Provided by Operating Activities Net cash provided by operating activities was $6.5 million in fiscal 2023 compared to $66.6 million in fiscal 2022.
Gross margin is impacted by merchandise costs, pricing and promotions, product mix and availability, inflation, and service costs, which can vary. Our proprietary brands, custom-formulated products, and vertical integration provide us with cost savings, as well as greater control over product availability and quality as compared to other companies in the industry.
Our proprietary brands, custom-formulated products, and vertical integration provide us with cost savings, as well as greater control over product availability and quality as compared to other companies in the industry. Gross margin is also impacted by the costs of distribution and occupancy costs, which can vary. Our gross profit is variable in nature and generally follows changes in sales.
Cash (Used in) Provided by Financing Activities Net cash used in financing activities in fiscal 2022 of $158.9 million was primarily related to the repurchase and retirement of common stock of $152.1 million and net repayment of debt of $8.1 million, partially offset by proceeds from option exercises of $1.4 million.
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.
While these investments drive performance during the primary selling season in our third and fourth fiscal quarters, they have a negative impact during our first and second fiscal quarters. We typically experience a build-up of inventory and accounts payable during the first and second fiscal quarters in anticipation of the peak swimming pool supply selling season.
We typically experience a build-up of inventory and accounts payable during the first and second fiscal quarters in anticipation of the peak swimming pool supply selling season.
Amounts are reported in income tax expense in our consolidated statements of operations. 37 Table of Contents 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%.
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%.
Selling and operating expenses at retail locations include payroll, bonus and benefit costs for personnel, supplies, and credit and debit card processing costs.
Selling, General and Administrative Expenses 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, supplies, and credit and debit card processing costs.
Critical Accounting Estimates The preparation of our consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of sales and expenses during the reported periods.
Certain leases are renewable at our option typically for periods of five or more years and some require payments upon early termination. 40 Table of Contents Critical Accounting Estimates The preparation of our consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of sales and expenses during the reported periods.
Selling, General and Administrative Expenses SG&A increased to $386.1 million in fiscal 2021 from $314.3 million in fiscal 2020, an increase of $71.8 million or 22.8%.
Selling, General and Administrative Expenses 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%.
The increase was primarily driven by comparable sales growth of $143.1 million, or 10.6%, in the current fiscal year as well as non-comparable sales of $76.1 million, driven by acquisitions and new locations open for less than 52 weeks.
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 Table of Contents Gross Profit and Gross Margin Gross profit increased to $673.7 million in fiscal 2022 from $595.2 million in fiscal 2021, an increase of $78.5 million or 13.2%.
Consumers receive the benefit of extended vendor warranties on purchased products from our locations and on installations or repairs from our certified in-field technicians. We offer complimentary, commercial-grade in-store water testing and analysis via our proprietary AccuBlue ® system, which increases consumer engagement, conversion, basket size, and loyalty, resulting in higher lifetime value.
We offer complimentary, commercial-grade in-store water testing and analysis via our proprietary AccuBlue ® system, which increases consumer engagement, conversion, basket size, and loyalty, resulting in higher lifetime value.
Gross margin increased to 44.3% compared to 41.4% in fiscal 2020, an increase of 290 basis points. The increase in gross profit was primarily due to increased sales and gross margin improvements. The increase in gross margin was primarily due to product margin improvements and occupancy leverage, partially offset by business mix.
Gross margin decreased to 43.1% compared to 44.3% in fiscal 2021, a decrease of 120 basis points. The increase in gross profit was primarily due to increased sales. The decrease in gross margin was primarily due to shifts in business mix, decreased product margin related to promotions and higher product cost, partially offset by distribution and occupancy leverage.
(7) Includes executive transition costs, losses (gains) on disposition of fixed assets, merger and acquisition costs and other non-recurring, non-cash or discrete items as determined by management. Amounts are reported in SG&A and other (income) expenses, net in our consolidated statements of operations. (8) Represents the tax effect of the total adjustments based on our actual statutory tax rate.
(9) 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 effect of the total adjustments based on our combined U.S. federal and state statutory tax rates.
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 renewable at our option typically for periods of five to more years and are cancelable on short notice and others require payments upon early termination.
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.
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. Net cash provided by operating activities increased to $169.3 million in fiscal 2021 from $102.1 million in fiscal 2020, an increase of $67.2 million.
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 Investing Activities Net cash used in investing activities was $52.5 million in fiscal 2023 compared to $139.0 million in fiscal 2022.
Approximately 80% of our assortment is comprised of non-discretionary products essential to the care of residential and commercial pools and spas. Our assortment includes chemicals, equipment and parts, cleaning and maintenance equipment, and safety, recreational, and fitness-related products. We also offer important essential services, such as equipment installation and repair for residential consumers and professional pool operators.
Our assortment includes chemicals, equipment and parts, cleaning and maintenance equipment, and safety, recreational, and fitness-related products. We also offer important essential services, such as equipment installation and repair for residential consumers and professional pool operators. Consumers receive the benefit of extended vendor warranties on purchased products from our locations and on installations or repairs from our certified in-field technicians.
We do not believe there is a reasonable 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.
We do not believe there is a reasonable 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 Table of Contents 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.
Gross margin is also impacted by the costs of distribution and occupancy costs, which can vary. Our gross profit is variable in nature and generally follows changes in sales. The components of our cost of merchandise and services sold may not be comparable to the components of cost of sales or similar measures of other companies.
The components of our cost of merchandise and services sold may not be comparable to the components of cost of sales or similar measures of other companies. As a result, our gross profit and gross margin may not be comparable to similar data made available by other companies.
While it is not possible to predict the likelihood, timing, or severity of future direct and indirect impacts of COVID-19 on our business, due to the non-discretionary nature of our products and services, our business has delivered strong growth and profitability thus far throughout the pandemic, despite restrictions on the operation of our locations and distribution facilities.
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 profitability throughout the pandemic, despite restrictions on the operation of our locations and distribution facilities.
Inventories Inventories are stated at the lower of cost or market or net realizable value. We value inventory using the weighted-average cost method. We evaluate inventory 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.
We evaluate inventory 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 actual demand or market conditions are different than those projected by management, future margins may be unfavorably or favorably affected by adjustments to these estimates.
Sales and earnings are highest during the third and fourth fiscal quarters, which include April through September, and represent the peak months of swimming pool use. In fiscal 2022, we generated approximately 75% of our sales and 95% of our Adjusted EBITDA in the third and fourth quarters of our fiscal year.
This increase was due primarily to the increase in comparable sales and gross profit. 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.
Once we sell the product we recognize such consideration as a reduction of cost of merchandise and services sold in our consolidated statements of operations. We do not believe there is a reasonable likelihood there will be a material change in the future estimates or assumptions we use to calculate our reduction of inventory.
We do not believe there is a reasonable likelihood there will be a material change in the future estimates or assumptions we use to calculate our reduction of inventory. Inventories Inventories are stated at the lower of cost or market or net realizable value. We value inventory using the weighted-average cost method.
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. 43 Table of Contents
Business 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 Table of Contents Results of Operations We derived our consolidated statements of operations for fiscal 2023, 2022, and 2021 from our consolidated financial statements.
Net cash used in investing activities increased to $35.4 million in fiscal 2021 from $26.8 million in fiscal 2020, an increase of $8.6 million. This increase was primarily driven by an increase in investments in information technology initiatives.
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.
We operate primarily in the pool and spa aftermarket industry, which is one of the most fundamentally attractive consumer categories given its scale, predictability, and growth outlook. We have a highly predictable, recurring revenue model, as evidenced by our 59 consecutive years of sales growth.
We operate primarily in the pool and spa aftermarket industry, which is one of the most fundamentally attractive consumer categories given its scale, predictability, and growth outlook. More than 80% of our assortment is comprised of non-discretionary products essential to the care of residential and commercial pools and spas.
Significant disruption to our supply chain for products we sell, as a result of COVID-19, geopolitical conflict or otherwise, could have a material impact on our sales and earnings. Business 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.
Significant disruption to our supply chain for products we sell, as a result of COVID-19, geopolitical conflict or otherwise, can also have a material impact on our sales and earnings and cause unpredictable changes in results. An additional uncertainty that can impact our results of operation is consumer purchasing patterns.
Occupancy costs include the rent, common area maintenance, real estate taxes, and depreciation and amortization costs of all retail locations. These costs are significant and are expected to continue to increase proportionate to our growth. 33 Table of Contents Gross margin is gross profit as a percentage of our sales.
These costs are significant and are expected to continue to increase proportionate to our growth. 32 Table of Contents Gross margin is gross profit as a percentage of our sales. Gross margin is impacted by merchandise costs, pricing and promotions, product mix and availability, inflation, and service costs, which can vary.
Gross Profit and Gross Margin Gross profit 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 profit was primarily due to increased sales.
Adjusted EBITDA Adjusted 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 profit.
We recognize such vendor rebates at the time the obligations to purchase products or perform services have been completed, and the related inventory has been sold. Distribution costs include warehousing and transportation expenses, including costs associated with third-party fulfillment centers used to ship merchandise to our e-commerce consumers.
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 fulfillment centers used to ship merchandise to our e-commerce consumers. Occupancy costs include the rent, common area maintenance, real estate taxes, and depreciation and amortization costs of all retail locations.
These costs will generally be included in SG&A in our consolidated statements of operations. 35 Table of Contents Results of Operations We derived our consolidated statements of operations for fiscal 2022, 2021, and 2020 from our consolidated financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future.
Our historical results are not necessarily indicative of the results that may be expected in the future.
As of October 1, 2022, approximately $148 million remained available for future purchases under our share repurchase program (see Note 16—Share Repurchase Program). 41 Table of Contents Contractual Obligations and Other Commitments The following table summarizes our contractual cash obligations as of October 1, 2022 (in thousands): Payments Due By Period Total 2023 2024 2025 2026 2027 Thereafter Revolving Credit Facility (1) $ — $ — $ — $ — $ — $ — $ — Term Loan 797,850 8,100 6,075 10,125 8,100 8,100 757,350 Letters of credit 9,983 9,983 — — — — — Purchase commitments (2) 16,650 4,143 4,422 3,366 3,120 1,339 260 Operating lease obligations (3) 272,291 71,851 67,558 51,216 40,959 22,844 17,863 Total $ 1,096,774 $ 94,077 $ 78,055 $ 64,707 $ 52,179 $ 32,283 $ 775,473 (1) We are required to pay a commitment fee of 0.25% based on the unused portion of the Revolving Credit Facility.
Contractual Obligations and Other Commitments The following table summarizes our contractual cash obligations as of September 30, 2023 (in thousands): Payments Due By Period Total 2024 2025 2026 2027 2028 Thereafter Long-term debt, net (1) $ 789,750 $ 6,075 $ 10,125 $ 8,100 $ 8,100 $ 757,350 $ — Purchase commitments (2) 174,018 79,941 78,327 7,838 5,705 2,207 — Operating lease obligations (3) 306,281 76,361 70,356 61,616 41,139 22,036 34,773 Total $ 1,270,049 $ 162,377 $ 158,808 $ 77,554 $ 54,944 $ 781,593 $ 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 included in the table above due to the unknown nature of future borrowings.
Income Taxes Income tax expense increased to $36.5 million in fiscal 2021 from $2.6 million in fiscal 2020, an increase of $33.9 million. This increase was primarily attributable to higher income before taxes.
Income Taxes 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 effective tax rate was 25.9% for fiscal 2023 compared to 23.6% for fiscal 2022.
Adjusted EBITDA Adjusted EBITDA increased to $292.3 million in fiscal 2022 from $270.6 million fiscal 2021, an increase of $21.7 million or 8.0%.
Total Other Expense 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.
Removed
As a result, our gross profit and gross margin may not be comparable to similar data made available by other companies. Selling, General and Administrative Expenses Our SG&A includes selling and operating expenses across our retail locations and digital platform, and our corporate-level general and administrative expenses.
Added
Due to the highly unstable supply 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 the periods of stockpiling and lower than normal during period after stockpiling has occurred.
Removed
The extent of the impact of COVID-19 on our financial and operating performance depends significantly on the duration and severity of the pandemic, the actions taken to contain or mitigate its impact, and any changes in consumer behaviors.
Added
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.
Removed
Incremental Public Company Expenses As a newly public company we will incur significant expenses on an ongoing basis that we did not incur as a private company.
Added
(5) Includes losses (gains) on asset and contract dispositions, which are reported in SG&A in our consolidated statements of operations. (6) Includes executive transition costs and severance associated with corporate restructuring, which are reported in SG&A in our consolidated statements of operations.
Removed
Those costs include additional director compensation and director and officer liability insurance expenses, as well as third-party and internal resources related to accounting, auditing, Sarbanes-Oxley Act compliance, legal, and investor and public relations expenses.
Added
Amounts are reported in income tax expense in our consolidated statements of operations. 36 Table of Contents 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%.
Removed
The following table summarizes key components of our results of operations for the periods indicated, both in dollars and as a percentage of our sales (in thousands, except per share amounts).
Added
Comparable sales decreased $170.5 million, or 11.0%, compared to fiscal 2022, primarily driven by traffic declines. Non-comparable sales including acquisitions and new stores were $59.6 million compared to the prior year period. Gross Profit and Gross Margin Gross profit 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%.
Removed
(5) Includes one-time payments of contractual amounts incurred in connection with our IPO that was completed in November 2020, which are reported in SG&A, and costs incurred for follow on equity offerings, which are reported in other (income) expenses, net in our consolidated statements of operations.
Added
Gross margin decreased to 37.8% compared to 43.1% in fiscal 2022, a decrease of 530 basis points.
Removed
The decrease in gross margin was primarily due to shifts in business mix, decreased product margin related to promotions and higher product cost, partially offset by distribution and occupancy leverage. Selling, General and Administrative Expenses 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%.
Added
The decrease in gross margin was primarily driven by a decrease in retail chemical pricing retail in June 2023, adjustments associated with year-end physical inventory results, adjustments to product rebates based on reduced equipment purchases, and occupancy deleverage associated with the decrease in comparable sales.
Removed
This increase was due primarily to the increase in comparable sales and gross profit. 38 Table of Contents Comparison of Fiscal 2021 and 2020 Impact of 53 rd week Fiscal 2020 included a 53 rd week, which added approximately $18.0 million in sales, $1.5 million in net income, and $3.0 million in Adjusted EBITDA.
Added
Selling, General and Administrative Expenses 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%.
Removed
Sales Sales increased to $1,342.9 million in fiscal 2021 from $1,112.2 million in fiscal 2020, an increase of $230.7 million or 20.7%.
Added
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 subscriptions.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeItem 7A. Quantitative and Qualitati ve Disclosures About Market Risk. Interest Rate Risk Our operating results are subject to risk from interest rate fluctuations on our borrowings, which carry variable interest rates. Our borrowings include our Revolving Credit Facility and Term Loan.
Biggest changeItem 7A. Quantitative and Qualitati ve Disclosures About Market Risk. Interest Rate Risk 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.
Although we may experience periodic effects on sales, gross profit, gross margins, and cash flows as a result of changing prices, including most recently from inflationary pressures due primarily to supply chain disruptions complicated by the ongoing COVID-19 pandemic, we do not expect the effect of inflation or deflation to have a material impact on our ability to execute our long-term business strategy.
Although we may experience periodic effects on sales, gross profit, gross margins, and cash flows as a result of changing prices, we do not expect the effect 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. 42 Table of Contents
Removed
Our Revolving Credit Facility provides for revolving loans of up to $200.0 million, with a sub-commitment for issuance of letters of credit of $25.0 million. Because our borrowings bear interest at a variable rate, we are exposed to market risks relating to changes in interest rates.
Added
See Note 10—Long-Term Debt, Net to our consolidated financial statements for additional information. Accordingly, we are subject 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.
Removed
As of October 1, 2022, we had variable rate debt outstanding of $797.9 million under our Term Loan. No amounts were outstanding under our Revolving Credit Facility as of October 1, 2022.
Added
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 contractual amortization would total approximately $7.9 million over the next 12 months. Impact of Inflation and Deflation We experience inflation and deflation related to our purchase of certain products.
Removed
Based on the outstanding variable rate loan balance for the Term Loan, an increase or decrease of 1% in the effective interest rate would cause an increase or decrease in interest cost of approximately $8.0 million over the next 12 months. From time-to-time, we may enter into interest rate hedges or cap agreements to manage interest rate risk.
Removed
The United Kingdom’s Financial Conduct Authority announced the phased cessation of the publication of LIBOR beginning after 2021 and continuing through 2023.
Removed
When LIBOR is discontinued, we may need to change the terms of certain of our floating rate notes, interest rate cap agreements, and credit instruments which utilize LIBOR as a benchmark in determining the interest rate, to replace LIBOR with the new standard that is established.
Removed
As a result, we may incur incremental costs in the transition to a new standard, and interest rates on our current or future indebtedness may be adversely affected by the new standard. A decision has not been finalized regarding the replacement rates.
Removed
As such, the potential effect of any such event on our cost of capital cannot yet be determined, but we do not expect it to have a material impact to our consolidated financial condition, results of operations, or cash flows. Impact of Inflation We experience inflation and deflation related to our purchase of certain products.
Removed
We currently do not use derivative instruments to manage these risks. 44 Table of Contents

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