Q2 2024 Leslie's Inc Earnings Call

Participants

Matthew Skelly; Vice President, Investor Relations; Leslie's Inc

Michael Egeck; Chief Executive Officer, Director; Leslie's Inc

Scott Bowman; Chief Financial Officer, Treasurer; Leslie's Inc

Justin Kleber; Analyst; Baird

Jonathan Matuszewski; Analyst; Jefferies

Shaun Kelley; Analyst; Bank of America

Kate McShane; Analyst; Goldman Sachs

David Bannister; Analyst; Mount Sinai

Steven Forbes; Analyst; Guggenheim Securities LLC

Ryan Merkel; Analyst; William Blair

Simeon Gutman; Analyst; Morgan Stanley

Garik Shmois; Analyst; Loop Capital Markets

Andrew Carter; Analyst; Stifel

Presentation

Operator

Good afternoon and welcome to the Second Quarter of Fiscal 2024 Conference Call for Leslie's. (Operator Instructions) I will now turn the call over to Matt Skelly, Vice President of Investor Relations.

Matthew Skelly

So thank you and good afternoon. I would like to remind everyone that comments made today may include forward-looking statements, which are subject to significant risks and uncertainties that could cause the Company's actual results to differ materially from management's current expectations. These statements speak as of today and will not be updated in the future. If circumstances change, please review the cautionary statements and risk factors contained in the Company's earnings press release and recent filings with the SEC.
During the call today, management will refer to certain non-GAAP financial measures. A reconciliation between the GAAP and non-GAAP financial measures can be found in the company's earnings press release, which was furnished to the SEC today and posted to the Investor Relations section of Leslie's website at ir dot Leslie's Poole.com.
We have also posted our Q2 2024 earnings presentation to our IR website, and we'll be making references to it in our prepared remarks on the call today is Mike Egeck, Chief Executive Officer, and Scott Bowman, Chief Financial Officer. With that, I'll turn the call over to Mike.

Michael Egeck

Thanks, Matt, and thank you all for joining us this afternoon. Our bottom line financial performance in the second quarter was largely in line with our expectations. Top line sales were impacted by cool and wet weather in our seasonal and nonseasonal markets as well as a pool and spa consumer that continues to normalize their post-pandemic spending patterns
I am pleased with the team's performance in the quarter as we executed well against the factors within our control, we saw improved conversion from healthy in-stock levels and competitive price positioning across our channels.
And we delivered on our inventory goals while providing superior customer service and disciplined expense management since it's been nearly six months since we provided our planning assumptions for the year, I want to remind everyone how we are thinking about our annual guidance at the midpoint.
We plan the following for the year, discretionary product sales down 10%, equipment sales down 10%, nondiscretionary product sales up 1.5%. AOV down 4% driven by mix and the cycling of our June 2023 chemical price adjustments and transactions up 3%, driven by normal weather. You will hear from us today that the majority of these factors are performing in line with expectations, with the exception of weather and the associated impact on traffic and transactions during the quarter, the weather was much cooler across key nonseasonal markets, including Texas, Southern California, Arizona and Florida.
This resulted in significantly fewer consecutive days above the critical 70 degree threshold versus the same period in the prior year and are the 10-year averages for these markets. Weather was also a factor in our seasonal markets with pool openings down 19% year-over-year, driven by a cool and wet spring.
Turning to our financial results for the quarter, total second-quarter sales were $189 million, down 11% year over year. This includes an approximately 440 basis point impact from our June 2023 chemical price actions and the Q2 calendar shift that Scott will detail later in the call. Residential Pool was down 12%. Pro fuel was down 9% and residential hot tub was down 14%.
Comp sales were down 12%. Given the weather I just discussed, traffic was down 10% in the quarter. Total transactions were down 6% year over year. Our focus on customer service, product availability, competitive pricing, compelling assortments and value messaging drove increases in customer conversion that offset a significant portion of the traffic decline. Average order value was down 5% year-over-year.
Average order value continues to be affected by sales of high ticket discretionary products, including hot tubs, above-ground pools and heaters, as well as our June 2023 chemical price changes. Non-discretionary product sales were down 11% versus a year ago. Total chemical sales decreased 11%, inclusive of a negative 575 basis point impact from our June 2023 price adjustments.
However, volume of cow, hypo and Tricor was down only 1%, and we were encouraged by the sequential improvement in key chemical volumes each month during the quarter. Sales of equipment were down 10%, an improvement of 800 basis points from Q1 and consistent with our expectations at the midpoint of our full year guide.
Discretionary product sales were down 13%, an improvement of 600 basis points from Q1 and contributed about 24% of the quarter's total sales decline of note rain and our snow across many of our seasonal markets prevented installation crews from delivering and installing hot tubs and swim spas. Cancellation rates remain very low and our order book at the end of the quarter is supportive of the midpoint of our full year guide.
As you can see on page 11 of our earnings presentation, our regular analysis of select credit card data indicates that our sales underperformed the industry by approximately 850 basis points in the quarter, of which approximately 380 basis points is attributable to our June 2023 chemical price changes and the calendar shift.
However, our vendor discussions district and store manager discussions, customer exit interviews and data from SimilarWeb for our digital businesses all indicate our Q2 performance is broadly in line with the industry ex the chemical price change looking across a longer time horizon. The credit card data indicates that specialty pool sales were down in eight of the last 10 quarters. Over those 10 quarters, we have grown sales faster than the industry by an average of approximately 380 basis points.
With respect to profitability, gross margin decreased 464 basis points, driven primarily by the impact of the chemical price reductions we implemented in June 2023 and occupancy deleverage. Gross margin was largely in line with our expectations, with the exception of the incremental occupancy deleverage associated with lower than expected sales.
Adjusted EBITDA for the quarter was negative $19 million and adjusted diluted earnings per share was negative $0.17. As a reminder, our fiscal second quarter like our first fiscal quarter is historically a relatively small sales quarter during which we make investments and incur costs to position the company for the peak pool season in our fiscal second half.
As such, we expect no profit contribution in these quarters, and our performance this year was consistent with these expectations. With regard to the industry backdrop, certain categories and channels have seen some instances of deflation year to date. But overall, industry retail pricing is largely stable and we remain competitively priced across our omnichannel platform, industry promotional activity continues to be consistent with historic seasonality, and we are using advanced analytics to be more surgical on when and where to promote most effectively.
Supply chains are operating normally and inventory levels are seasonally appropriate the slow start to this year's pool season. Notwithstanding, we believe that the long-term pool industry fundamentals and secular tailwinds that drive industry demand remain intact, and we expect both of these factors to continue to underpin our long-term growth opportunity.
Leslie's remains the leading direct to consumer pool and SPAR retailer with unmatched scale capabilities and brand awareness. As we have positioned ourselves to win during full season. We also remain focused on executing our strategic growth initiatives, which we expect to drive long-term sustainable top line growth and profitability share gains and operational efficiency.
Turning to those initiatives. First, our customer file improved from down 8% in fiscal Q1 to down 3% in fiscal Q2. We believe that our customer file continues to normalize from the pandemic spike, and we expect to return to growth in the second half of the year.
Second, average revenue per customer was down 8% in the quarter, driven primarily by decreases in big ticket items such as hot tubs, swim spas, above-ground pools and automatic pool cleaners. Average revenue per customer for our loyalty customers outperformed it down 4% in the quarter.
Third, with regard to our Pro initiatives, we ended the quarter with 4,088 pro contracts in place and 102 pro locations. This compares to 3,300 Pro contracts and 98 pro locations at the end of the second quarter of last year. Pro sales were down 9% for the quarter, pro partner sales were down 7%, offset by non-partner Pro sales, which declined 26%, highlighting the importance and effectiveness of our partner program. Fourth, M&A and new store growth continue to be important initiatives for Leslie's, and we are confident in our long-term store expansion opportunities.
For fiscal 2024. We remain on track to open 15 new stores. Finally, our active blue homes, smart tech, water testing device and membership program continues to gain momentum and is resonating strongly with customers. Our manufacturing partners delivering product on time and we are on track to meet our inventory targets for pool season.
Our members continue to give us feedback that our proprietary software is a game changer and continue to respond with very positive online reviews. As you will recall, our active blue home membership consists of a free device and a $50 per month membership subscription, which is offset by $50 per month or purchased credits that can be used online or in-store. Our members have been spending at a rate of more than $1,000 per year.
We remain focused on executing our strategic initiatives to capture the long-term opportunities and extend our industry leadership. In addition, we continue to take actions to improve the trajectory of the balance of the year number one, we are using our analytical tools and insights to drive efficiency in pricing and promotions with a focus on growing gross margin dollars.
Number two, we achieved our goal of reducing our peak inventory by more than $100 million and remain on track to reduce year-end inventory by more than $50 million, while maintaining strong in-stock levels and service metrics and high NPS scores, we will keep a laser focus on SG&A efficiency. Scott will address this later in the call, but SG&A in the second quarter was down 12% versus the same period a year ago.
Number four, we continue investing in our people fostering and promoting top talent within the organization while adding outside talent with deep experience in fresh eyes to continuously improve how we operate five. We are leveraging our omnichannel platform to connect with consumers more frequently, including through surveys, exit interviews, research and other feedback to give us a detailed view into the specialty pool and spot consumers.
And six, we continue to invest in marketing to drive long-term brand awareness, customer file growth, pool Perks members and sales. I will now hand it over to Scott to discuss our results and outlook in more detail. Scott?

Scott Bowman

Good afternoon, everyone, and thank you, Mike. Our results for the quarter were largely in line with our expectations, while unfavorable weather contributed to lower traffic in a late start to the pool season in our main markets.
For the second quarter, we reported total sales of $189 million, a decrease of 11% compared to the second quarter of fiscal 2023. The second quarter this year ended on March 30 versus April first, last year. Due to this calendar shift, we lost to early spring higher volume selling days and gain to lower volume winter selling days.
The negative impact of this shift was approximately $4 million or 180 basis points in the quarter. Comparable sales decreased 12%, driven primarily by transaction count and spending on larger ticket items. Comparable sales decreased 26% on a two year stack basis. Non-comparable sales contributed $1.5 million in the quarter, driven by acquisitions and new store growth.
With respect to trends by consumer group comparable sales for residential pool declined 12%. Pro pool declined 9%, and residential hot tub declined 14% compared to the prior year period. Sales declines are driven by unfavorable weather, softer sales and discretionary items in the June 2023 price actions. In the shoulder seasons, weather and the timing of pool openings can cause significant sales variances due to the smaller sales base.
Gross profit was $54 million compared to $71 million the second quarter of fiscal 2023 and gross margin rate declined 464 basis points to 28.8%, which was slightly below expectations, mainly due to incremental occupancy deleverage from lower than expected sales.
We continue to expect meaningful back half margin expansion versus the first half of the fiscal year, most notably in the fourth quarter as we cycle the June 2023 chemical price decreases and higher inventory adjustments and distribution costs that pressured second half 2023 profitability.
Page 9 of our earnings presentation illustrates our Q2 gross margin rate bridge in more detail during the quarter gross margin was affected mainly by lower selling prices and deleverage in occupancy costs due to lower sales. SG&A was $85 million, a reduction of 12% or 11.5 million compared to the second quarter of fiscal 2023.
The reduction was primarily due to declines in merchant fees, lower payroll and executive transition costs and lower store expenses. Adjusted EBITDA was negative $19 million compared to negative $8 million in the second quarter of fiscal 2023. And adjusted net loss was $32 million compared to a loss of $26 million in the second quarter of fiscal 2023.
Interest expense increased to $18 million during the quarter from $17 million in the same period last year. Due primarily to higher interest rates. And our effective tax rate increased to 29% compared to 25.7% in the second quarter of fiscal 2023 adjusted diluted earnings per share was negative $0.17 compared to negative $0.14 in the second quarter of fiscal 2023. Diluted weighted average shares outstanding were $185 million.
Moving to the balance sheet, we ended the quarter with $786 million outstanding on our secured term loan facility and $97 million on our revolving credit facility. This compares to $794 million and $172 million, respectively in the prior year quarter. Our debt levels were lower by $83 million versus a year ago, and our leverage ratio was 6.0 times.
Availability on the revolver was $142 million at the end of the quarter. As a reminder, this is our peak debt quarter before we generate all of our profitability and free cash flow in the seasonally important second half of our fiscal year. The applicable rate on our term loan was silver plus 275 basis points in the second quarter, and our effective interest rate was 8.2% compared to 7.3% in the prior year quarter.
Our total cost of debt for the quarter was 8.1% compared to 7.2% in the second quarter of last year. And additionally, last month, we successfully extended the maturity date of our revolving credit facility to April 2029.
Cash and cash equivalents were $8 million at the end of the quarter compared to $9 million for the same period last year. Inventory ended the quarter at $379 million, a decrease of $113 million or 23% compared to the prior year quarter. While our in-stock position, service metrics and net promoter scores remain very strong, our stores are well-stocked with the full assortment for the pool owner and Pro as we gear up for the peak pool season.
And now turning to our fiscal 2024 outlook. After a first quarter that was consistent with expectations. Our second quarter was below our top-line expectations, mainly due to unfavorable weather that resulted in a slower start to the pool season. We are now five weeks into our third quarter. During the first three weeks, weather continued to be a challenge.
However, over the last two weeks, we've seen improved trends with improved weather. Ultimately, our biggest volume weeks lie ahead there. And with our consistent seasonable weather, we believe we are on track to deliver a year within our outlook ranges.
Moving to capital allocation. Our first priority continues to be the paydown of debt with the goal of achieving a leverage ratio of 3.5 times to 3.7 times in fiscal 2024 and a longer-term goal of reaching a leverage ratio of 3 times or less.
Regarding our footprint, we are planning 15 new store openings in fiscal 2024 with the majority of these stores expected to open prior to Memorial Day ahead of the peak pool season. We also plan to convert six residential stores to our Pro format this year. At this time, we are not including any sales or EBITDA contribution from M&A activity in our full year guidance.
And with that, I'll hand it back over to Mike for closing remarks.

Michael Egeck

Thank you, Scott. To conclude results. This quarter continued the recent trend of softer sales for Leslie's and the industry from persistent unfavorable weather and normalizing cool and spot consumer behavior from a period of significant growth. In light of that, we continue to aggressively manage SG&A and inventory while focusing on customer service. We believe we are set up to win in pool season. Our employees are excited and engaged.
Our stores and DCs are well stocked and ready to go. Our omnichannel presence has us positioned to service residential and Pro customers in the way that they choose and our Pro partner and pool Perks loyalty program are leaders in the industry.
We have an unmatched set of capabilities to serve our customers and with active blue home, a clean, safe and beautiful pool has never been easier to achieve with the majority of our sales and all of our profitability still to be achieved in the back half of the year. We are focused on superior execution, and we remain confident in our long-term prospects for growth and profitability.
With that, I will hand it back to the operator for Q&A.

Question and Answer Session

Operator

Thank you. We will now be conducting a question and answer session. (Operator Instructions)
Justin Kleber, Baird.

Justin Kleber

Yes, good afternoon, everyone. Thanks for taking the questions. Just a follow-up on on near term trends, and I mean can you give us a sense just how you're tracking out five weeks into the quarter relative to the comp that you put up within fiscal 2Q? That's just my first question?

Michael Egeck

Yes, Justin, I think the best way to characterize the last couple of weeks of the quarter is a material improvement in the trend.

Justin Kleber

Okay. Got it. And that's just that's just as weather has normalized?

Michael Egeck

Yes, exactly. We finally are seeing some consistently warm weather in our in our major markets in that sense, making a material difference.

Justin Kleber

Got it. Good to hear. Secondly, maybe on the SG&A front, Scott, you were previously talking about a slight decline in dollars year on year. It seems like you're tracking well ahead of that target at least through the first full fiscal first half. So just wondering if your guidance implicitly implying a lower SG&A dollar figure, maybe relative to when you gave the initial outlook?

Scott Bowman

Yes. Justin, I think the whole team is doing a really good job. And I would say that we're probably ahead of kind of the progress that we thought we'd be making at this point in time as a back half goes on, we'll see and everything changed, and we expect no major changes in the back half. But what I do see is that we've improved a little bit faster than I thought, and that's on many different fronts.
So naturally, merch merchant fees and things like that come down with sales, but just really good control on labor, but still, you know, having a high level of service and a lot of that is store labor. And what we're doing is we're just taking advantage of the strong shoulder season where the traffic is very low. And so we just dumb adjusted, you know, our hours according to kind of the customer traffic. Now as we get into busy season will be more fully staffed.
Okay. And so you may not see as big of a decline there because we fully intend to be fully staffed. But just other store expenses everybody in the stores incorporate you and just watching expenses and controlling those very well. And then we just have less add-backs, executive transition costs and strategic projects, things like that, that we had last year. Some of those are more favorable this year.

Justin Kleber

All right. That's good here. And if I could just sneak one more in just as we enter the fall season. Do you guys have a sense as to, I guess, the magnitude of chemical carryover that still needs to be worked through? Or is that not really part of the story of this year as we enter pool season? Thank you so much

Michael Egeck

Yes, Justin, good question. We put out a another pool pool owner survey in February. So pretty recent information and based off the results from that survey. We don't think there's any challenges around consumer stockpiling this season.

Operator

Jonathan Matuszewski, Jefferies.
Great.

Jonathan Matuszewski

Good afternoon, and thanks for taking my questions. The first one was on equipment. I wanted to kind of dig in on that category a little bit, so down 10% this quarter. But can you provide any color on some of the moving pieces there?
I think historically or at least last quarter, heaters and automatic pool cleaners were underperforming, I think variable speed pumps were relatively more healthy. Has there been any change there that would lead you to believe that maybe the higher end or the lower end of that, you know, midpoint you shared for the year could be realized? Thanks.

Michael Egeck

Yes, thanks for the question, Jonathan. Look, first thing I'll do is point out like a like I did in the in the prepared remarks, we're really pleased to see the 800 basis improvement from down [18 to down 10], and we saw improvement across most all the categories, I would say heaters has actually improved materially and we think that's a really good sign and more in line with what I would call pre-pandemic seasonality.
And as the pool season starts to approach, people start thinking about it hitting your pools, they turn on their pool heater for the first time that doesn't work either replace it or or fixed it. So we consider that a good sign. Apcs are still a little challenged, though robotics have been performing better and salt systems are a little challenged for us. So a little bit of change in the mix here is a little better our robotics, a little better variable speed pumps continue to be up a nice stable business.

Jonathan Matuszewski

That's helpful. And then my second question is on pricing. I think heading into this year, the plan was for chemical pricing to be down low single digits year over year on equipment pricing I think was planned to be in maybe that 3% to 5% range that some of the vendors were talking about.
I'm recognizing the first six months, our light in terms of contribution for the year are the midpoint of those ranges still relevant and it be as we're tracking pricing going into pool season, is there anything we should be aware of in terms of the pricing strategy and any volatility or the prices we're seeing from a consumer perspective generally where we would expect the pool season to play out? Thanks so much.

Michael Egeck

Yes, Jonathan. I think I mean, we're pleased to see retail, particularly specialty retail pricing for chemicals to be quite stable. And when I say stable from when we made our price action adjustments in June of '23, since that time has been been quite stable and even with a slow start to the season, what I'm going to call very unfavorable weather.
We haven't seen people breaking price in the residential market, but I will say there's been a little bit more pressure on the pro side of the business, but we're still within that low single digit range for chemicals overall. So we think we're well within our guide on chemical pricing to be at our midpoint and similar with equipment.
I think you quoted three to five. I think we quoted maybe two to five, but yes, midpoint of that is out well within within range. The softness we're seeing and in chemicals and equipment is really based on volume. And right now we're tying that volume very much to traffic.
And we're trying to time traffic very much to whether we just in the second quarter hadn't really seen and seen acute season kickoff. And I tell you, we're being very gratifying to see the last couple of weeks with some consistent warm weather start to move up, start to move like we would expect it to very helpful. Best of luck.

Jonathan Matuszewski

Thank you.

Operator

Shaun Kelley, Bank of America.

Shaun Kelley

Thank you for taking my question on this first following up on the chemical pricing. So last quarter, you were able to offset the pressure in gross margin and then this quarter was a headwind of about 130 basis points. So are you seeing higher promotional activity. Is this what you're just talking about on the pro side, kind of what's driving the downside year-over-year in the second quarter first quarter?

Michael Egeck

Yes, I'll take that one. Briefly what we're seeing is we did have some of the chemical price impact in the first quarter, and the difference was we were able to offset that with pricing actions in other categories, okay. And so and so for Q2, we didn't have those additional price actions that we were able to offset. I think the other thing to think about is that our mix has changed as well. And so with equipment getting better and chemicals off a little bit more than Q1, there's a mix effect there. That's a bit unfavorable.

Shaun Kelley

Okay. Got it. And then the second one, just on the order book comments you made last quarter, I believe you guys said the orders were flat year over year on hot tubs and then the hot tub sales came down 14% year-over-year. But can you just talk about how the orders flow through over time?

Michael Egeck

Yes, Shaun, it's a the average price of the hot tubs, we sell about $10,000 and they are predominantly custom ordered. So customer places an order, the tub is built and then it is scheduled for delivery and the challenge we ran into in second quarter and first quarter as well as particularly wet weather in our hot tub markets was just keeping people from keeping us from being able to pour pads installed, a hot tub took up electricity.
We had people pushing out their appointments for reasons plain and even snow. So what we consider good news is very low cancellation rates people still want their tubs. And now that we've seen the weather break and particularly like we own Valley pool and spas, Pittsburgh area, and we are in Pittsburgh last month, the group of executives, and it was hail storms, tornado warning, 52 degrees rain.
And I was pretty clear why we weren't delivering tubs now that we've seen the weather break there and we've been in the rather consistently in the 70s or low 80s. We're starting to see that that the order book come to fruition with deliveries. So we consider that a positive sign. And I would say that our order book, it is very supportive of the discretionary business being down no more than 10%.
Okay.

Shaun Kelley

Got it. So would you say that there's potential for and our total sales to be up year over year in the second half?

Michael Egeck

Yes, I think we have a very good trend. We have a order book that is in better shape than our midyear guidance, but there's still a lot of volume to be done. So it's too early term, speak to upside.

Shaun Kelley

Okay. Thank you.

Operator

Kate McShane, Goldman Sachs.

Kate McShane

Hi, good afternoon. Thanks for taking our question. I wanted to ask about market share. It still seems that you're underperforming the industry based on what you put in the slides for today and it might be widening. Can you speak to that at all in terms of what happened during the second quarter?

Michael Egeck

Yes, Katy, thanks for the question. We said in the first quarter, we were surprised by what the credit card information was saying. I'm going to say we're a little surprised that this time as well. And we think that's good and important data, and we certainly we certainly pay attention to it last time on the last call, we had talked about some of the changes in our assortment and value messaging that we had done in the stores to drive greater conversion.
And we're really pleased this quarter to see that conversion increase materially. But the traffic was really the challenge this quarter and traffic we really saw we really connect to weather, and it's it's surprising to us that our performance would be under that of the industry given given the weather impact.
And then the second thing, as I said in the prepared remarks, we've talked to our vendors about regularly. We talk to our store managers we talked our district managers this last quarter, we did comprehensive exit interviews for non purchasers to see if we were missing something and of all of that data in addition to similar web data, which tracks our proprietary online businesses.
That data actually showed that our market share increased to 200 basis points online in the quarter. So seems to be a disconnect between the two. We're taking it seriously. If we have if we have given back some share, we'll be focused on winning it back in in policies and proper.

Kate McShane

Okay. Thank you.

Operator

David Bannister, Mount Sinai

David Bannister

Thanks for the question. Another one on this material improvement in trend over the last couple of weeks, sorry, has that been broad-based across geographies, just recognizing this is an incredibly short period of time just two weeks, if that trend were to continue through the balance of the quarter, could you potentially see a positive overall comp within the Q3 period?

Michael Egeck

Yes. Look, we're not going to we're not going to give Q3 guidance like that. I will say this. It was it mostly broad-based benefits recovery for one of the things we find positive is we've got material improvement despite what is it, 50 million people in the U.S. being under severe weather alerts right now. And the flooding in Houston and Houston is our single single largest metro market. So despite those two very adverse weather conditions, we saw really nice improvement. And we saw the business respond as we would expect it to with appropriate weather. And that's a that's as much as we're going to say about Sunquest.

David Bannister

Fair enough. And this my second one on that inventory being down more than 20% year over year. Maybe just help us unpack that a little bit. Could you talk about units versus price? And are there certain categories that are down more than others in terms of units?

Scott Bowman

Yes, I can take one. I can take that one. Yes, there is always a bit of a mix effect, but per unit units are actually down a little bit more than and I think it's just the effort that the the planning team has put forth using our Blue Yonder tool to really start off on the right foot in on the front end with a much better plan and executing that plan very well and also from our suppliers as well. I mean, the lead times are fairly short on most of our items. And so that, that helps as well.
And so you kind of look across the categories. I mean, there's showing some fairly large decreases in some of our chemical categories and, you know, equipment, cleaning and maintenance categories and so on, which if you look at the turns in our profile, there is definitely room to do that. And so we continue to find more efficiencies, but also we're really concerned also with in-stocks and service level. And fortunately for us, we've executed to the point where the service levels and in-stocks are much better than they were last year. So we're really pleased with the performance overall.

David Bannister

Very good. Thank you both

Operator

Steven Forbes, Guggenheim Securities

Steven Forbes

Good afternoon, Mike, Scott and I it I was curious, maybe if you could take a step back and maybe just talk about the customer file, if there's any green shoots that you're seeing, whether it's your most loyal customers, I think you mentioned loyalty members trends, right better than that, the file as a whole. But like what are you seeing within the file that that gives you confidence to reiterate the guide for the back half today that are the are there any green shoots?
And can you can you better help us better understand what your what you're referencing in terms of file growth expectations for the back half and what your sort of implying in terms of improvement in spending trends within the file as well?

Michael Egeck

Yes. A few questions in there. I think what was going on, I think what's going on with the file as we added a lot of I'm going to call them one-and-done customers during the height of the pandemic '21, particularly also into '22. And we identified this cohort of customers that came in and basically bought TAP, and that was it.
And we threw a lot of retention and reactivation tactics at those customers, but not nearly the results we would we would typically see and the file degradation that we've seen kind of since mid point of '22 is just those customers kind of working their way out of a file and with a file down 3% quarter over quarter. Again, Q2, we feel we are around we're basically through that cleansing, if you will, of a one-and-done customers, which outside of that, the reason the green shoot that we see is outside of those customers peeling off and adjusted then, yes, we're seeing the files stabilize and starting to show some some growth.
And we're not going to go into what kind of growth we expect in the second half, but we expect the we expect the business to be positive in the second half, and we expect positive customer file to support that.

Steven Forbes

Thanks, Mike. And then maybe just a follow-up on. I think Shaun'scomment or question from before on on sort of the chemical pricing, right, net net of the offsets that occurred in the first quarter because it does. It does seem like there was a more challenging second quarter dynamic here and any help on framing like what you sort of expect the product margin be in the back half.
Right. I think in the reiterated gross margin guidance, are we still looking at stability to expansion in product margin or is there something within the bridge that's changing?

Michael Egeck

Yes. Scott can take that.

Scott Bowman

Yes, I can. I can take that one. I think there's potential for our margin expansion in the back half and the main reason for that is when the June pricing action, once we overlap that in June, then that basically eliminate the biggest headwind that we have on our product margins and so I think that'll be a big benefit for us and also rebates should help us more in the back half. We are kind of getting past some timing differences that we had in the first half, but the back half specifically that the fourth quarter should give us better margin lift from rebates and retention.

Michael Egeck

Thank you, Steve. And I'll add one point to that on the on the earnings deck on Page 9, we've got the gross margin bridge that I will give a little color on. There's 91 basis points in our other product rate. More than half of that is some promotional dollars that we invested in the quarter trying to drive increased traffic, right? We just didn't sit there sit here and let lead the weak traffic numbers impact the business without trying some different tactics. But I think what we discovered there was very clearly you can't promote your way through tough weather, you can promote your way through a pool that's not not opened yet. So we learned a lot. We're going to implement those learnings in the second half, but that's a that's more than half of what you see there on the other product rate line.

Steven Forbes

Helpful.Thank you.

Operator

Ryan Merkel, William Blair.

Ryan Merkel

Hey, everyone.
Thanks, Mike I wanted to ask on the non or the nondiscretionary sales down 11% in the quarter. Is that all weather and chemical price deflation? I just ask because the consumer there's some weakness there. Is that showing up up at all?

Michael Egeck

Yes, I don't think it's consumer weakness per se, Ryan. The chemicals volume overall in Chemicals was down 4% TriCor and Cal hypo were down one. We had some softness in other chemicals, so pricing was down seven and of that down seven 575 basis points that most of it is tied to the June '23 price actions. The balance I would characterize as a combination of mix and a little bit more price pressure on the pro side in chemicals.

Ryan Merkel

Got it. Okay. That's helpful.

Michael Egeck

When I'm when I had both weak consumer per se, we're not seeing a consumer with the weather. We thought it was. It was a matter of footsteps through the doors and eyeballs on the sites.

Ryan Merkel

Got it. Okay.
Yes, that makes sense. And then I had a question on gross margin to you sort of answered it with the last one, but should we be expecting gross margins to be higher in the fourth quarter than in the third quarter? That's what I had in my notes. Just wanted to clarify that.

Michael Egeck

Yes, Scott can take it.

Scott Bowman

Yes, I have that one. So yes, it's a good question and the answer is yes. And the main reason for that is we'll have kind of a full quarter's worth of being beyond the June pricing actions that will help rebates will help a little bit as well as those normalize. But also of note is the inventory adjustments in DC costs that were really heavy last year because of all the outside warehouses and all the movement of goods, we should show significant favorability against those two lines as well.

Ryan Merkel

Got it. Thanks for that.

Michael Egeck

Thanks Ryan.

Operator

Simeon Gutman with Morgan Stanley. Please go ahead.

Simeon Gutman

Hi, guys. Mike, I wanted to ask about pent-up demand and the history of this business. When we have tough weather in the beginnings, you know, other parts of the season, we don't catch and this goes back to the order book that you mentioned, because I would think you'd be well ahead of where you should be tracking now given pent-up demand and all the companies in our space that have had weather impacts are recovering normally.
So I think it's very valid, but you do sell a higher-priced item or a lot of higher priced items, maintenance and repair and even some of the discretionary. So how do you think about that pent-up demand? How do you think about in the context of where the consumer is? And then I'm trying to get at. Was there any way this is a head fake in your industry, how you're contemplating that? Just trying to look at both sides?

Michael Egeck

Yes. And in terms of pent-up demand for hot tub specifically where we've got a forward order book. Yes, I would say definitively, we have pent-up demand there and we've been we feel good about the reflection of that part of the business, the home in terms of equipment and well, let me answer it this way. It because it differs between seasonal and non-seasonal markets in the seasonal markets I mentioned that pool openings were down 19%. Pool openings themselves generate volume.
But what they really are is an indicator of the start to the season. And, you know, by our by our estimation, we're several weeks behind the started the season now historically. And as we've looked at weather this year, I think we're closer maybe to 2018. And originally, we had thought we were closer to 2022.
But as we look at whether Yes, when when the pools open in the Northeast, Long Island, in particular, where it's a really significant ramp. However, you potentially have fewer pool days. It's all going to depend now on how the pool season ends in the shoulder season.
If it ends on its normal cadence and we started late, yes, we'll lose some days in the seasonal markets, just from the pools not being opened up in the nonseasonal markets. I think it is more about pent-up demand people want to use their pools when they when the weather is correct and they'll tend to use the pool more when the weather, when then weather encourages them to do so.

Simeon Gutman

Okay. And then can I ask the follow up back on the share, which you have a market share and you know, you provide a lot of data here, which is not a lot of information. So you're going to get a lot of questions. When you have lower price chemical prices a year ago, remind us it was the industry had lowered it before you, meaning Why shouldn't that lower price leading to the lead lead to more share gain at this point? And are you seeing that share gain come back and chemicals?

Michael Egeck

Yes, good question. We would there was two things that spurred us on the chemical price adjustments in June. One was we have gotten outside of our historical price positioning, which is above mass and at or below specialty, we have gotten ourselves up and over specialty.
Second thing and just important to us was in our regular consumer insight work. We were starting to get feedback that we weren't representing a good value and it was showing up in our NPS scores. So just our prices down to where we thought they should be. We in the third quarter last year and in the fourth quarter of last year, we feel we did we did pull back some some share, some versus leaving the prices where they are at and the last two quarters, it's like we said, we were surprised by the by the credit card data, but we take it seriously and we're working to make sure we make the most of the traffic that we're getting.
I don't know what to make of the credit card data. Actually, it's a little concerning for sure, more importantly to it's not really aligning with all of our other channel checks. So not something we're ignoring, but it doesn't change how we operate. And we think we're very competitively priced right now. And this idea of value. And you know, our consumers seeing the value not only in our product, but our capabilities like Jackie Bluewater testing in the stores. We think all that's showing up through what was a really nice conversion. That's one of the things we feel most positive about the business. When the traffic's there, we're converting at higher levels than we had in the past, and that's that's a good sign for the full season.

Simeon Gutman

Thank you.

Michael Egeck

Thanks.

Operator

Garik Shmois, Loop Capital Markets.

Garik Shmois

Oh, hi, thanks. And just a follow up on that point. Just go on to see if you could provide a little more context on how traffic was in the quarter and non-weather hit markets and if there was anything to read into trends in places where weather it hasn't been an issue?

Michael Egeck

Yes. I mean that's one of the challenges with the with this quarter. Typically, we have some regions where we've got normal weather that we can point to as a control group, if you would. And we just we didn't have that. We don't have the name with the seasonal markets, as I talked about, and as evidenced by the pool openings, just very combination of cooler and wet.
And when the weather got a little warmer, it was still very wet and the number of consecutive days over 70 degrees, which we've found is highly correlated with traffic in our business in our major markets, Texas, Florida, Arizona, that was down anywhere from 18% to 64%. And in California, which was our best performing market, there was zero consecutive days over 70%, but there was also 69% more rainy days than a 10-year average. So we actually couldn't point to any of our major markets and say we had based on data on a normal quarter.

Garik Shmois

Okay. No, that's that's helpful. And just my final question is on gross margins. Just to put a bit of a finer point on the guide. I think coming into the year, you're expecting about 100 basis points in gross margin improvement this year, correct me if I'm wrong on that. And if that was the case, do you think that's still reasonable given we're heading into the peak season now, do you think there's there's enough opportunities in front of you to reach that prior guide?

Michael Egeck

I think there is just because as we gain volume, you get a direct impact on leverage with occupancy and in our margin miss in oh four. This past quarter was and that was the biggest contributor was just the deleverage on occupancy. So as we add volume as we get past the chemical price actions and with some of the promos that we've run, you know, we I've learned some things of what's working really well, and some things that are not working so well.
So I think we'll be a little bit more efficient one, the use of promos and discounting both on the types of promos we run the magnitude at the discount. And so I think we've gotten a little sharper there, which should help us out, you know, as we get into peak pool season.

Garik Shmois

Okay. Sounds good.

Operator

Andrew Carter, Stifel.

Andrew Carter

Thank you very much. First question I wanted to ask and just to put a fine tune on pricing. First one just kind of a housekeeping, how much of a headwind is it in the comp because it's you don't anniversary it till June first. And then the second point about your ability to potentially take further pricing?
How fast can you can you see it last year was a little bit of a waiting game, waiting people for people to take pricing this year. You'd actually be looking for direct action. And then I'd also ask that question and I'll finish this one off. How much autonomy do kind of local managers have to do their own pricing and move or do they have to follow kind of kind of the national? Thanks.

Michael Egeck

So Andrew. So couple of questions in there, I'll start, and I may need you to remind me on a couple of them. But Doug, first of all, on on the impact of the price actions on total sales is 260 basis points and there's only 1.5 of non-comp in the quarter. So it's basically a 260 basis point for comp headwind as well.
The I think the second question was on when when we decide to do price actions, we look at our competitive pricing report every week is a combination of third party services and regular checking of local competitors by our district managers and we also do web scraping.
So we're going to we will react quickly if we see ourselves getting out of our historical and what is also our current price position. And in terms of price actions from individual stores, you know, we have national pricing.
We also have and have had for a number of years of price match guarantee and the price match guarantee you go to our website, you can see kind of what the guidelines are around it. But our store managers and store associates and the authority to price match. If a consumer can show us a payout a competitive price, it's lower for a comparable product.

Andrew Carter

Thank you for that. Second question, just kind of bigger picture, Home Depot. Obviously, made the as well. It's signed an agreement to acquire SRS., which is owns heritage, the number two pull distributor in the category. Could you give any perspective on whether you kind of see that as a threat, particularly Home Depot's ability for kind of a deeper integration between the two to go after DIY. or cash carry pro business as well as just kind of what that can mean putting those together with online and remind us how much the home centers really kind of compete in the category category as it stands today against you specifically?

Michael Egeck

Thanks for this question. In our view, we think Home Depot has made it pretty clear that the acquisition of SRS. heritage No, it's really about growing their pro builder business as opposed to a new focus on pool. They said those businesses were run as separate businesses. Current management heritage is only about 15% of the SRS business so that that seems clear to us.
And we haven't seen any evidence to suggest that Home Depot would increase aisle space to pull SKUs at the expense of existing SKUs that turn So pretty high opportunity cost. So given those two dynamics, we don't really think it changes the competitive landscape for Leslie's.
We've competed against in the home centers they do, Andrew, about 15% or 16% of the pool business I have for a number of years. I think that shares held on a pretty steady. So current competitors. We definitely keep an eye on them, but we don't think this particular acquisition really changes the competitive landscape for us.

Andrew Carter

Thanks. I'll pass it on.

Operator

Thank you. I would like to turn the floor over to Mike Egeck for closing remarks.

Michael Egeck

Thanks, Stacy, and thank you all for joining us this afternoon and for your continued interest in Leslie's.

Operator

With this concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.