Shareholders of Leslie's would probably like to forget the past six months even happened. The stock dropped 72.3% and now trades at $1.25. This was partly driven by its softer quarterly results and might have investors contemplating their next move.

Is now the time to buy Leslie's, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Do We Think Leslie's Will Underperform?

Despite the more favorable entry price, we're sitting this one out for now. Here are three reasons you should be careful with LESL and a stock we'd rather own.

1. Shrinking Same-Store Sales Indicate Waning Demand

Same-store sales is a key performance indicator used to measure organic growth at brick-and-mortar shops for at least a year.

Leslie’s demand has been shrinking over the last two years as its same-store sales have averaged 7.9% annual declines.

2. EPS Trending Down

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Sadly for Leslie's, its EPS declined by 32.9% annually over the last three years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.

3. High Debt Levels Increase Risk

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Leslie’s $1.02 billion of debt exceeds the $3.62 million of cash on its balance sheet. Furthermore, its 20× net-debt-to-EBITDA ratio (based on its EBITDA of $50.39 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Leslie's could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Leslie's can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Final Judgment

We see the value of companies helping consumers, but in the case of Leslie's, we’re out. After the recent drawdown, the stock trades at 18.8× forward EV-to-EBITDA (or $1.25 per share). This multiple tells us a lot of good news is priced in - you can find more timely opportunities elsewhere. We’d recommend looking at the Amazon and PayPal of Latin America.

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