Why does John Rogers keep buying Leslies Inc.?

Leslies Inc. is not a high quality company. It has a huge amount of debt and negative equity. Its Altman Z-score is 1.1 and is at the "distress" level. I got interested in the stock because I noticed in Gurufocus real time picks that value guru John Rogers (Trades, Portfolio) of Ariel Investment adding to his position in Leslies at all-time lows. The stock which debuted during the pandemic has crashed ~98% from its high set in 2021.

Rogers already has 31% of the outstanding stock of the company. While Rogers is deeply underwater in his position he has been adding to his position as the stock dropped showing great conviction. I am thinking, the man is obviously no fool who is throwing good money after bad and he must be on to something. So what is the deal here?

In addition to John Rogers (Trades, Portfolio) buying activity, insiders have also purchased the stock recently.

Leslie's, Inc. is the largest pool and spa supply retailer in the United States, founded in 1963 by Phil Leslie Jr. and Raymond Cesmat in North Hollywood, Los Angeles. Starting as a single store, the company expanded steadily over the decades, overcoming early ownership disputes and leadership changes to fuel aggressive growth. After going public in 1991 and undergoing several changes in ownership among private equity firms.

Leslie's, Inc. was first taken public in 1991, raising $28 million through an initial public offering on NASDAQ. In 1997, the company was taken private in a $140 million deal led by Hancock Park Associates and Leonard Green & Partners. After several years under private equity ownership and additional changes in ownership, Leslie's returned to the public markets in October 2020, when it filed for an IPO.

Leslie's, Inc. went public on the stock market on October 29, 2020. Its common stock began trading on the Nasdaq Global Select Market under the ticker symbol "LESL" at an initial offering price of $17.00 per share. While the IPO was well received initially but as the pandemic passed the stock price fell as Leslies revenue and profits began to decline from peak "stay at home."

Leslie's continued to expand its footprint nationwide. By 2023, it operated over 1,000 stores across 37 states, solidifying its position as the leading direct-to-consumer brand in pool and spa care. The company is known for its wide product selection, expert services, and commitment to customer satisfaction, with Jason McDonell appointed as CEO in September 2024.

As part of the IPO process the former private equity owners made the company take on a large amount of debt. So you can say it was a "leveraged sell-out". Leslie's Inc. took on a significant amount of debt at the time of its IPO mainly to refinance existing high-interest borrowings and to pay a special dividend to its private equity owners. Before going public, Leslie's was owned by private equity firms that had financed their acquisition through leveraged buyouts, leaving the company with substantial debt. The IPO and new debt issuance allowed Leslie's to replace older debt with potentially more favorable terms and enabled the private equity sponsors to extract value through a dividend recapitalization. This approach is common among private equity-backed companies going public, as it maximizes returns for the owners while transferring the debt burden to the newly public company shareholders.

Leslie's, Inc. holds a significant position in the U.S. pool and spa supply market, with estimates of its market share ranging from 15% to 20% of the overall pool care aftermarket segment. This makes Leslie's the largest direct-to-consumer brand in the industry, far outpacing its competitors in both physical retail presence and sales volume. The company's dominance is supported by its network of over 1,000 stores nationwide and a strong e-commerce platform, allowing it to serve both residential and professional customers across the country.

As mentioned above the company has negative equity i.e. Total liabilities exceed total assets.

However the company is free cash flow positive even though GAAP net earnings are in the red. Note the large changes in working capital (yellow bars) caused by rapid demand changes during and after the pandemic.

Overall the company's capital structure in built almost entirely on Debt

As of March 29, 2025, Leslies Inc. has a total long-term debt of about $858 million, mainly made up of a $757 million Term Loan due in 2028 and $101.5 million borrowed under a Revolving Credit Facility that matures in 2029. The Term Loan carries an interest rate of around 7.3%, based on a benchmark rate plus a margin, and is secured by most of the company's assets. Leslies has been actively managing this debt, making regular payments and a $25 million prepayment recently to reduce future obligations. The Revolving Credit Facility has an interest rate of about 5.9% and currently has $101.5 million outstanding, with some borrowing capacity reduced by letters of credit. The company is in good standing with its lenders, meeting all debt requirements and facing no defaults. Leslie's debt is well-structured with manageable upcoming payments, giving the company financial flexibility till 2028 when the term loan matures.

The Pool Market in the US

Putting in a swimming pool in one's backyard is a significant investment. In 2025, the cost to install a backyard inground swimming pool in the U.S. generally ranges from about $40,000 to $100,000, depending on the pool size, materials, and location. On average, homeowners spend around $65,000 to $66,000 for a standard pool installation. Once a pool is put in, the homeowner has to maintain it which is a significant non-discretionary expense.

The average cost to maintain a backyard pool in the U.S. typically ranges from $80 to $150 per month, amounting to about $960 to $1,800 annually for routine cleaning, water testing, and chemical balancing. However, when considering all ownership expensesincluding electricity, water usage, repairs, and seasonal opening and closingthe total yearly cost usually falls between $3,000 and $6,000. Maintenance costs can vary based on the pool's size, type, and material, with concrete pools generally being more expensive to maintain than fiberglass or vinyl options.

There are approximately 10.7 million swimming pools in the U.S., with about 10.4 million of those being residential pools. Around 8% of U.S. households have a swimming pool. Given there are roughly 130 million households in the country, this means about 10.4 million homes have pools. The prevalence of pools is highest in warm-climate metropolitan areas like Miami, Phoenix, Orlando, Austin, and Tampa, where pools are often considered a standard home amenity. There has been a large migration of population from the North of the US to the Southern sunbelt.

Since 2019, the market for homes with swimming pools in the U.S. has seen notable changes. The average listing price for homes with pools increased from $415,000 in 2019 to $599,000 in April 2025, a 44.3% rise that slightly outpaces the 42% growth for homes without pools. During the COVID-19 pandemic, demand for pools surged, pushing the price premium for homes with pools to a record 61% in early 2022. Although this premium has since moderated to 54% by 2025, it remains significantly higher than pre-pandemic levels. Additionally, the share of homes for sale with pools reached an all-time high of 24.4% in 2025, reflecting both increased construction and sustained buyer interest. While homes with pools tend to be larger, the size difference compared to homes without pools has narrowed as new homes overall have become smaller. Overall, despite a cooling from the pandemic peak, homes with pools continue to command a strong price advantage and remain highly desirable in the housing market. In addition household with pools are signficantly richer than households without pools.

Conclusion

Given the size of the stake, continuing accumulation and the amount of debt Leslie Inc. carries John Rogers (Trades, Portfolio) must have a plan in mind. I would think a recapitalization of the company will take place over the next couple of years with debt being swapped for equity if the debt cannot be rolled. There might even be a re-privatization. The swimming pool market in the US is attractive and climate change (global warming) is making it more attractive even in Northern Climate. More and more people are putting in pools instead of buying a vacation home.

A rebound in same-store sales growth is expected next year as the lingering impacts of the post pandemic bust continue to diminish.

According to Gurufocus, the average price John Rogers (Trades, Portfolio) has paid for Leslie in $6.28 a share. I would think that he want at least that to break even. If Rogers is right the current stock price may be a high risk- high reward setup for someone taking a position in the company stock at the present time. The risk of course is that if the debt cannot be rolled or recapitalized the equity will be wiped out in a restructuring. On the other hand if it can, this could be a multi-bagger from the current distressed price. Clearly, John Rogers (Trades, Portfolio) is walking on high wire.