There have been some high-flying IPOs this year including the usual mix of hot technology names. One of the more underground, but interesting 2020 market debuts have been Phoenix-based Leslie's (NASDAQ:LESL).
After an initial burst, shares of the swimming pool and spa care retailer took a dip before rallying to a new high. With the stock now up nearly 50% over the past month, the question is, should investors hop in while the water's warm?
What is Driving Performance at Leslie's?
This week Leslie's reported its first quarterly results since its October 29th IPO at $17 per share. Fourth-quarter sales were up 28% to $381 million. Adjusted EPS of $0.28 trounced the prior year result of $0.04 and beat the analyst consensus by $0.08, or 29%. Full year sales rose 20% while full-year adjusted EPS climbed from $0.08 to $0.42.
Higher COVID-19-related volumes have been behind the solid performance. The pandemic has forced Americans to spend more time at home—and may continue to do so for a while. This has turned people on to home improvement projects. What better way to make a residence more relaxing than to install a swimming pool?
Leslie's is more than just physical stores with inflatable dolphins floating around sample pools. It also has an emerging online channel. Digital sales have been a major contributor to the recent growth thanks to free shipping on all orders—and will likely continue to be going forward as consumers seem to be embracing online shopping in all areas of retail.
Bottom line, Leslie's turned in a refreshing report that should give investors' confidence about the company's leadership in the pool industry. And based on rising pool ownership and company guidance, expect Leslie's to continue to make waves. Management's outlook for fiscal 2021 includes sales of $1.16 billion to $1.18 billion and adjusted net income of $96 million to $106 million.
What are Leslie's Growth Prospects?
Taking a step back, Leslie's has been around for 57 years and has grown into the nation's biggest direct-to-consumer pool and spa care brand. Sales growth has been achieved in all 57 of its years and the company just topped the $1 billion sales mark for the first time in its history. Its products are sold to residential, professional, and commercial customers through its 900-plus retail locations across the U.S.
Leslie's sells a range of above ground pools of many shapes, sizes, and prices. Its affordable line of 'Staycation' pools starts at $800 while its Salt Water and premium Embassy pools get into the $2,000 to $4,000-plus price range. It also sells hot tubs and a wide variety of pool after-market products like covers, chemicals, and other equipment. The competitive advantage lies in the company's size, product breadth, and longstanding relationships with the top pool and spa brands.
The U.S. swimming pool and spa industry is very fragmented marked by a bevy of one-off mom-and-pop retailers and small regional chains. This points to the idea that Leslie's has opportunities to grow inorganically by consolidating the space and gaining market share.
What's most appealing about an investment like Leslie's is that it has a leadership position in a pool retail space that is rather steady when it comes to growth expectations. Demand for pools and pool supplies has been rather consistent over the years so investors roughly know what to expect.
There is good visibility into Leslie's earnings and low double-digit EPS growth is a reasonable forecast for the next couple of years. Pool installments are expected to continue to increase next year and Leslie's should stay a beneficiary of this trend.
Is Leslie's Stock a Post-Earnings Buy?
Leslie's shares are trading at a high multiple of forward earnings (roughly 50x) with the bar having been raised after this week's report. Although the company needs time to grow into its lofty valuation, investors would be better off lounging poolside for now.
Overall, sell-side analysts have a favorable opinion on the stock. The last four firms to offer an opinion on the stock all gave it a 'buy' rating. Most recently, Jeffries reiterated its positive opinion after the Q4 report and gave Leslie's a Street-high $29 price target. The firm said it sees full-year results coming in at the higher end of management's guidance.
After the post-earnings run-up in the stock, Leslie's is trading less than a buck from the $29 target. Price targets could get bumped higher in the days ahead as analysts return from Christmas vacations and digest the company's latest performance. So, as the Street potentially plays catch up, investors should sit tight and let Leslie's stock cool down a bit. Any downturn in the stock, however, should be viewed as an entry point for those that were late to this pool party.
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