Leslie’s Poolmart, Inc.

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Leslie’s Poolmart, Inc.

20222 Plummer Street
Chatsworth, California 91311
U.S.A.
(818) 993-4212
Fax: (818) 349-1059

Public Company
Incorporated: 1963 as Leslie’s Poolmart, Inc.
Employees: 780
Sales: $162.4 million (1995)
Stock Exchanges: NASDAQ
SICs: 5999 Miscellaneous Retail Stores, Not Elsewhere Classified; 5961 Catalog & Mail-Order Houses; 3086 Plastic Foam Products; 7389 Business Services, Not Elsewhere Classified

The world’s largest specialty retailer of swimming pool supplies, Leslie’s Poolmart, Inc. operates a chain of full-service retail outlets and markets its products through a nationwide mail-order catalog business. During the mid-1990s, Leslie’s Poolmart operated more than 250 stores in 27 states. Each of the company’s stores were staffed by employees trained in water chemistry and pool equipment maintenance.

Origins

In 1963, Philip Leslie and his partner, Raymond Cesmat, opened a chain of swimming pool supply stores in the Los Angeles area. The two colleagues spent the ensuing quarter century building Leslie’s Poolmart into a thriving chain, establishing 65 stores during their first two decades together and creating an enterprise that generated nearly $60 million in yearly sales. By all accounts, the chain of Leslie’s Poolmart stores stood as a healthy, vibrant, and profitable business by the late 1980s, its development representing the exemplary story of two entrepreneurs who had carved a lasting niche in their industry and succeeded where others had failed. Together, Leslie and Cesmat had achieved much.

But in terms of Leslie’s Poolmart’s corporate history the bulk of the company’s financial and physical growth, and all of the drama surrounding such growth, occurred after Leslie and Cesmat went their separate ways. Their separation marked the beginning of Leslie’s Poolmart’s prolific development into the nation’s dominant pool-supply retailer, an era in the company’s history that began in 1987 when Cesmat decided he wanted to leave the business. His decision touched off a feud and, unwittingly, sparked the remarkable rise of Leslie’s Poolmart.

When Cesmat informed Leslie in 1987 that he wanted to sell his stake in the privately-owned company, trouble started brewing. Leslie offered to buy Cesmat’s stock, but at a price Cesmat felt was grossly inadequate. Cesmat wanted more—a lot more—and a rift developed quickly between the two founders, a rift that would prove to be Leslie’s undoing. Cesmat filed to have the corporation dissolved, a move that put the fate of the company into the hands of the courts and paved the way for new ownership. In the spring of 1988, a California Superior Court judge resolved the issue, ordering that ownership of the company would go to the highest bidder. The winning bid, a $23-million offer, was submitted by an investor group led by Hancock Park Associates, a Los Angeles-based venture capital firm that represented neither Leslie nor Cesmat. After 25 years spent building the business into a $57-million-a-year company, Phil Leslie was decidedly angry about the ruling and later expressed as much when he told a Forbes reporter, “They sold it out from under me.”

1987: A New Beginning

Leslie pocketed $10 million from the deal, but lost stewardship of the company he had co-founded. Hancock Park Associates, the new owners of Leslie’s Poolmart, took over after Leslie’s departure and replaced the company’s co-founder with someone with far less experienced in the business world, 31-year-old Brian McDermott. At the time, McDermott knew little about the business world and even less about assuming the duties of a top executive, but he had spent his life around swimming pools. A competitive swimmer since age six, McDermott spent his early adulthood starring on Williams College’s varsity swim team and paying his way through college by managing pools during the summers. Whether or not this life-long yet tangential association with the swimming pool business would prove sufficient to successfully guide McDermott in his new role as Leslie’s Poolmart’s chief operating officer was questionable at the time, but after a rocky beginning the self-described “chlorine head” proved himself entirely capable.

For McDermott, the first few months at his new job were particularly rough. In May 1988, just as he was adjusting to his new executive position and just as the pool season got underway, 61 of the chain’s 66 store managers refused to open their shops, deciding collectively to express their loyalty to Phil Leslie by ignoring the company’s new management. McDermott immediately found himself in a precarious position, but responded with prompt action. He reopened the shops with new managers and was granted a restraining order against anyone who conspired to sabotage the future course of Leslie’s Poolmart, whether such activity was lead by Phil Leslie or any of his supporters.

Surviving the May revolt was only one of the problems facing McDermott and Leslie’s Poolmart’s new management. Hobbled by nearly $20 million in acquisition debt, Leslie’s Poolmart lost money until 1990, but by the following year the chain began to turn its fortunes around. The burdensome debt, which had precluded significant expansion since 1988, was removed in April 1991 when Montgomery Securities sold 47 percent of the company to the public. The company’s initial public offering raised $28 million, which McDermott used to pay off debt and to implement his strategy for the company’s future. McDermott’s strategy was simple yet ambitious: expansion from California to New York, with the ultimate goal of creating what retailers referred to as a “category killer,” or a company whose market dominance precludes the development of any serious competition.

As McDermott set his sights on expansion, there was much to be gained in the swimming pool-supply industry by a retailer intent on blanketing the country with new stores. Although Leslie’s Poolmart already ranked as the world’s largest swimming pool-supply retailer at the time of the 1991 initial public offering, it controlled less than three percent of the U.S. market, which generated more than $3 billion in sales each year. Highly fragmented, the industry offered tremendous room for growth for a nationwide chain, and as the 1990s began no company occupied a better position to seize the opportunity and put a stranglehold on the U.S. market than Leslie’s Poolmart. Aside from the myriad small, independent retailers, Leslie’s Poolmart’s only serious competition came from large, discount chains such as Home Depot. But chains like Home Depot could hardly be considered an equal match for Leslie’s Poolmart. Home Depot, whose merchandise mix embraced a variety of retail categories, stocked 75 swimming pool-supply products. Leslie’s Poolmart, by contrast, stocked 2,800 products, offering a wide variety of merchandise that ranged from chemicals such as chlorine, algicide, and soda ash, to leaf skimmers and pool-cleaning machines. Equally important as the company’s superior product selection was the superior service offered at Leslie’s Poolmart’s stores. Each store was staffed by employees trained in water chemistry and pool equipment maintenance. Each store offered free water analysis, giving customers the opportunity to bring in a water sample and have a Leslie’s Poolmart employee prescribe a solution for whatever the problem might be. Although McDermott was determined to build on Leslie’s Poolmart’s stalwart market position to create an enterprise without rival, the company already was without rival as it entered the 1990s. One industry analyst succinctly described the company’s enviable position to queries from a Los Angeles Business Journal reporter, “There’s nobody else doing what they’re doing.”

The analysts’ words characterized a retail “category killer,” but despite Leslie’s Poolmart’s advantages over competitors the company’s future growth and profitability were not guaranteed as expansion began in earnest following the 1991 initial public offering. The company was subject to the vagaries of weather and the cyclical nature of its business year, and could not ignore the competition mounted by large, discount chains. Historically, Leslie’s Poolmart posted all of its profits during the second and third fiscal quarters, which were contemporaneous with the duration of the swimming pool season, April through September. During the first and fourth fiscal quarters, the primary objective was to minimize losses. To offset the company’s vulnerability to the seasonality of its business, Leslie’s Poolmart had entered the commercial swimming pool market in 1989, when the company began serving year-round swimming pool customers such as health clubs, hotels, and municipalities. Further penetration of the commercial market would occur during the early 1990s, as the company looked to build upon its 1989 foray and develop a diversified clientele capable of generating year-round sales and profits.

Company Perspectives:

As the world’s largest specialty retailer of swimming pool supplies and related items, Leslie’s Poolmart enjoys the considerable benefits of leadership in a highly recession-resistant, solidly growing business. Approximately 75 percent of the company’s sales pertain to the on-going maintenance and care of pools, making a vast majority of Leslie’s products non-discretionary and regularly purchased in nature. These products range from consumables such as chlorine, brushes, skimmers, and other cleaning accessories to high ticket, less frequently purchased items such as pumps, filters, and automatic pool cleaners. We also provide a wide selection of recreational products, resulting in a store that can provide virtually everything pool owners need to maintain and enjoy their pools.

1990s Expansion

Moving forward from 1991, McDermott’s primary objective was the expansion of the chain, with further development of the commercial business ranking as a subsidiary yet important goal. As aggressive expansion began, pursuit of the company’s primary objective was made easier by a flourishing side business that served as a valuable marketing tool. In addition to the scores of full-service stores composing Leslie’s Poolmart’s operations, the company also distributed a nationwide mail-order catalogue of swimming pool products to more than two million households, or 65 percent the country’s residential, in-ground swimming pool owners. With the support provided by its catalogue sales, the company began expanding vigorously in 1991, opening 19 stores during the year to lift its store count to 102. The store openings extended the company’s presence into Maryland and Michigan, two new markets for the chain, and represented one of several key achievements during the year. Aside from the spate of store openings and the April public offering, Leslie’s Poolmart posted record mail-order catalogue sales and opened a second distribution center during the year, making for a highly successful beginning to the company’s ascendancy to the ranks of retail category killers.

Although the summer of 1992 was the coolest in the United States in 77 years, the weather did not keep Leslie’s Poolmart from recording a very active year. In February, the company announced its strategic entry into warehouse-style discount merchandising by articulating plans to open discount facilities in Texas and Southern California. Five stores were subsequently opened, featuring the same breadth of merchandise as the company’s full-service outlets but at discount prices. The warehouse-style stores, which operated as Pool Club-USA, did not offer the services, repairs, and level of customer service that the company’s full-service stores did and quickly proved to be a great disappointment. Before the year was through, four of the five Pool Club-USA stores were converted to the full-service format and the fifth was closed.

Despite the failure of Leslie’s Poolmart’s discount concept, great strides were gained on several fronts during 1992. The company opened 26 stores during the year, recorded its 29th consecutive year of record sales, and completed a pivotal acquisition that strengthened its presence in the commercial market, During a year in which the company would register a 75 percent increase in commercial sales, Leslie’s Poolmart acquired North Hollywood-based Sandy’s Pool Supply, Inc., a 22-store chain and national mail-order operation recording burgeoning growth in the commercial segment of the swimming pool business. With the addition of the Sandy’s Pool Supply units and the outlets opened through internal means, the number of stores composing the chain grew to 143 by year’s end, or more than two-and-a-half times the number of stores in operation when McDermott first joined Leslie’s Poolmart.

The substantial gain in stores registered during 1992 helped lift sales to $96.3 million, up from the $82.6 million generated the year before, but the severity of the climate in 1992 could not be brushed aside and profits fell during the year from $5.1 million to $4.1 million. To stimulate earnings growth, McDermott slated only 15 store openings for 1993, deciding to devote more of the company’s resources to increasing per store sales and integrating the outlets gained from the Sandy’s Pool Supply acquisition. Additionally, McDermott increased the company’s direct-mail advertising and adopted a low-everyday-price policy instead of routinely putting specific items on sale to better compete with large discount chains like Home Depot.

By the end of 1993, when the number of stores had risen to 158 and sales had climbed nearly 25 percent to $120 million, Leslie’s Poolmart had captured four percent of the U.S. swimming pool market, which by this point eclipsed $3.5 billion in annual revenue volume. To increase the company’s share of the market, McDermott engineered the most prodigious expansion in Leslie’s Poolmart’s history in 1994. During the company’s first fiscal quarter alone, 25 new stores were opened. In response, annual sales and net income marched upward, helping make Leslie’s Poolmart one of the “best small companies in America” according to Forbes’ annual rankings.

As Leslie’s Poolmart entered the mid-1990s and formulated plans for the remainder of the decade, ambitious expansion continued be the mantra repeated at company headquarters in Chatsworth, California. Forty-four new stores were opened during 1995, giving the company a total of 224 stores by the end of the year. In the years ahead, further expansion was anticipated, as the company pursued its objective of operating 500 stores and generating $500 million in annual sales by 2000. By the end of 1995, Leslie’s Poolmart was nearly half-way toward its objective in terms of physical size, but the potential for its financial growth offered considerably more room for progress during the remainder of the 1990s.