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Leslie's, Inc. (LESL -5.12%)
Q4 2021 Earnings Call
Dec 09, 2021, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good afternoon, and welcome to the fourth quarter and fiscal year 2021 conference call for Leslie's, Inc. [Operator instructions] As a reminder, this conference call is being recorded and will be available for replay later today on the company's website. I will now turn the call over to Caitlin Churchill, investor relations.

Caitlin Churchill -- Investor Relations

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 on the Investor Relations section of Leslie's website at ir.lesliespool.com. On the call today from Leslie's, Inc. is Mike Egeck, chief executive officer; and Steve Weddell, chief financial officer.

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With that, I will turn the call over to Mike. Mike?

Mike Egeck -- Chief Executive Officer

Thanks, Caitlin, and good afternoon, everyone. Thank you all for joining us. The format and cadence for this call will be a little different than our previous calls. The first thing to note is we have posted a brief deck on the Leslie's IR side to supplement our scripted comments, and we'll be referring you to specific pages as we present.

I'm going to start by highlighting our key results and performance drivers for Q4 and the full year. Steve will then walk through our fourth quarter and full-year financial results in detail, present our share repurchase program, and introduce our initial guidance for fiscal 2022. Then I'm going to walk through how we bridge our 2021 results to our 2022 guidance and explain why we believe we are uniquely set up to compete and win, given the industry dynamics we see for the year. With that, we'll get started.

I'm pleased to report that our Q4 performance resulted in another record quarter and continued the strong results we have delivered throughout the year. Sales for the quarter were a record $409 million. Comp sales increased 16% for the quarter on a shifted calendar basis and the two-year stack comp for the quarter was 40%. Gross profit for the quarter was a record $188 million and margin rate expanded 190 basis points.

Adjusted EBITDA for the quarter was a record $82 million. Moving to results for the full year. Fiscal 2021 represented our 58th consecutive year of growth and produced all-time record sales, margin, and EBITDA. Sales for the year grew 21% to a record $1.343 billion.

Gross profit for the year grew 29% to a record $595 million and gross margin rate improved 290 basis points. Adjusted EBITDA for the year grew 51% to a record $271 million and EBITDA rate increased 380 basis points to 20%. In fiscal 2021, we generated $170 million in operating cash flow, up 64% from fiscal 2020, and ended the year with less than two turns of leverage. All this after increasing our investment in capex by 40% to support growth.

Our commitment to disciplined capital allocation that drives total shareholder return combined with our strong financial position and free cash flow generation and our confidence in our long-term growth prospects are the drivers of the $300 million share buyback authorization we are pleased to announce today. Our Q4 and full-year results reflect the outstanding performance of our associates and vendor partners in managing constrained supply chains to meet strong consumer demand. This is also a testament to the organization's ability to manage the margin in the face of significant cost pressure and to continue to execute our growth initiatives at a high level while operating a direct-to-consumer business in the grip of the global pandemic. Our frontline associates have now been operating under COVID-19 protocols for more than 18 months.

Their discipline, diligence, and dedication are a driving force in our performance. Now a few words on the industry. In 2021, the Leslie's business and the pool industry benefited from strong consumer demand. This demand was driven by the macro trends that accelerated with the onset of the pandemic, were further elevated by work from home, and which are showing no signs of slowing.

The numbers for pool construction and remodeling are a particularly good sign for us. Because when a pool is completed, our business of essential maintenance starts and that annuity-like demand continues for the life of the pool. Against this background of robust demand, the competitive advantages derived from our integrated system of physical and digital assets, working together with our strategic growth initiatives, continue to win share. Our consumer file is showing strong, sustained growth.

Total target file growth was 15% in the quarter and 18% for the full year. Q4 was our eighth straight quarter of double-digit file growth driven by our digital marketing capabilities. We continue to achieve high ROI on our marketing spend and have increased our budget for 2022 by 30% to continue to drive this initiative. Consumers are also responding well to our Leslie's Connect omnichannel capabilities, BOPIS, ship from store, ship to store, and BORIS.

These capabilities allow us to utilize the inventory in our location network to effectively fulfill consumer orders in whatever manner they choose and to increase consumer retention. Leslie's Connect has enabled more than 30% of Leslie's digital orders since launching in February 2021. Our loyalty program, Leslie's Pool Perks drove loyalty file growth of 14% in the quarter and 18% for the full year as consumers continue to be drawn to the program's key benefits: a 5% rewards earn rate and free shipping. Our PRO initiatives are delivering solid results.

The 10 converted and three new PRO locations we launched in 2021 continue to outperform, and we plan to convert 25 and build five new locations in 2022. Our PRO affiliate program is scaling rapidly. In November, we passed 1,000-plus PRO affiliate agreements, and we continue to sign up new affiliates daily. For the year, our PRO affiliate partner sales increased 86%.

The new and converted PRO locations, our expanding PRO affiliate program, and our dedicated PRO site helped grow our total PRO business, which we now define as all of our nonresidential B2B business, 42% in the quarter and 44% for the full year. Our PRO business now accounts for about 15% of our total sales but remains a small percentage of the approximately $2.4 billion PRO market. Moving to M&A. For the year, we completed three acquisitions that added eight locations and expanded our operations into a 38th state.

In October, the first month of our fiscal 2022, we closed on the acquisition of B&L Pools, which operates seven locations in the Greater Phoenix area. As we execute our integration playbook, the B&L locations are being rebranded as Leslie's and their assortments are transitioning to the Leslie's model, and we are installing our proprietary AccuBlue water testing system. We continue to see a wealth of acquisition opportunities in the pool and spa industry. And we have staffed up to accelerate our ability to acquire and integrate businesses in 2022.

With regard to residential white space, we added 16 new locations in 2021, including residential, PRO, and acquired. We ended the year with 952 total locations. With regard to AccuBlue Home, we are encouraged that the initial production of Version 1.0 and sold out quickly in Q4 and that Version 2.0 has completed the prototyping stage. However, we are experiencing delivery delays in key components, specifically microchips, which are impacting manufacturing.

The number of devices we will be able to produce for this pool season is uncertain. Therefore, at this time, we are not planning any significant sales for this initiative in 2022. With regard to corporate governance, we published our inaugural ESG report in the quarter and have started work on our 2021 report. I'm pleased to say that as part of our ESG efforts, and in recognition of the contributions of our frontline associates, we have raised our minimum starting wage for Leslie's full-time associates to $15 an hour effective December 26, 2021, and we have instituted a stock grant program for our store managers.

Also of note, our assortment of Eco products now numbers more than 1,800 and sales for these products grew more than 40% in 2021. Now I'd like you to refer to the deck that we posted to the Leslie's IR site. On Page 6, we bridge our 2021 sales growth in two different ways and also isolate the impact of some specific sales drivers. In the first bridge, we estimate the impact of total industry growth from new pool builds to be 2%.

The math we use is 110,000 new in-ground pools across a base of $5.5 million. We estimate that retail price inflation for the year was approximately 8%. The balance of the bridge, 11% is the sales growth impact driven by our strategic growth initiatives. The second bridge illustrates the sales growth impact from our residential pool, PRO pool, and residential hot tech consumer groups.

As you can see, we had good growth across all three groups, including our core residential pool consumer. We have fielded a number of questions in previous calls and meetings with regard to the impact of Trichlor, aboveground pools, and hot tubs on our total sales growth. On Page 6, we have broken out the impact for each by both price and volume. I will also add that all 3 categories experienced acute supply chain disruptions that resulted in unmet demand for 2021.

We could have sold more. Moving to Page 7. We isolate the sales growth impact from each of our six strategic growth initiatives. As you will recall from our earlier presentations, we guided that, over time, each of these initiatives should contribute 100 to 300 basis points of growth per year.

Clearly, our marketing capabilities resulted in an outsized impact from growing our consumer file. Our PRO initiative also outperformed, while deeper relationships, M&A, and residential white space performed within the range we had projected. AccuBlue Home [Technical difficulty]

Questions & Answers:


Operator

Please hang on as we reconnect Mike Egeck's line.

Mike Egeck -- Chief Executive Officer

Thank you. Sorry about that, everyone. I'm not sure why the line dropped. I'm not exactly clear where I stopped.

But I'm going to pick up with Page 7 and my comments on each of the strategic growth initiatives. Clearly, our marketing capabilities resulted in an outsized impact from growing our consumer file. Our PRO initiative also outperformed, while deepened relationships, M&A, and residential white space performed within the range we had projected. AccuBlue Home had a successful launch but has not yet contributed meaningfully to sales.

We are very pleased with how the initiative and the teams leading them performed in 2021. Now I'll turn it over to Steve to share more detail on our financial results, our $300 million share repurchase program, and our 2022 guidance. Steve?

Steve Weddell -- Chief Financial Officer

Thank you, Mike, and good afternoon, everyone. As you can see from our earnings release, we reported record results for both the fourth quarter and full year of fiscal 2021. We're grateful for the contributions of our entire team as they continue to execute at a high level in the current environment. Before I get started, I'd like to share a few highlights.

Momentum continued throughout the fourth quarter as we generated a calendar comp on a two-year stack basis of 40%, compared to our prior guidance of the low 30s. We again beat guidance across the board and finished the year with sales growth of 21%, gross margin improvement of 290 basis points, and adjusted EBITDA growth of 50%, and we ended cash with -- ended the year with cash of $345 million. We also initiated guidance for fiscal 2022, which reflects double-digit sales and adjusted EBITDA growth, gross margin expansion, and earnings growth in the mid- to high teens. This is consistent with or better than our long-term growth algorithm.

And finally, we announced today that we are introducing our first share repurchase program, which includes an authorization for up to $300 million. Our business generates robust cash flows and even after considering an increase in investment in talent, capital expenditures, and M&A for fiscal 2022, we have excess cash to deploy toward share repurchases. I'll discuss our capital allocation priorities in more detail, but the takeaway from this action is that it reflects our confidence in our long-term growth prospects. Today, I'll review our fourth quarter of fiscal 2021 performance, our performance for the full year of fiscal 2021, our guidance for fiscal 2022, and our capital allocation priorities.

And before I turn to financial results for the fourth quarter, following as a quick reminder on the calendar shifts, which is consistent with prior quarter disclosures, in fiscal 2020, the 53rd week added approximately $18 million in sales and $3 million in adjusted EBITDA. Also as a result of fiscal 2020 having 53 weeks, there were calendar shifts that impact our quarterly comparisons on a year-over-year basis in fiscal '21. In the fourth quarter of fiscal 2021, we replaced a higher volume week at the end of June with a lower volume week at the end of September. The combination of the 53rd week and the calendar shift negatively impacted fourth quarter comparisons to the prior year by approximately $38 million for sales by approximately $11 million for adjusted EBITDA.

I'll discuss the impact of these items on our fourth quarter and full-year results as I review comparisons to prior-year performance. Fourth quarter results. Our fourth quarter this year included 13 weeks and ended October 2, 2021. Total reported sales for the 13-week period increased 6.8% from the fourth quarter of fiscal 2020, which included 14 weeks.

Our comparable sales growth on a reported or unshifted basis increased 10%. Using a realigned period for 2020 for comparability, our comparable sales growth on a shifted basis for the fourth quarter of 2021 increased 16.3%. This increase is on top of comparable sales growth of 23.3% in the fourth quarter of fiscal 2020 and represents comparable sales growth on a two-year stack basis of 39.6%. We generated strong results across consumer types and continue to see strong performance in the core sanitizer and equipment product categories during the quarter.

Retail price inflation remained elevated and primarily related to chemical products channel management by major equipment manufacturers, higher input costs, and promotion management. Gross profit increased 11.3% and gross margin rate increased by 190 basis points from 46% from 44.1% in the prior year, primarily due to product margin improvements across our businesses and occupancy leverage and partially offset by business mix. SG&A increased 21.6%, driven primarily by our sales increase and investments to support our growth. Drivers of the increase over the prior year included higher equity-based compensation, executive transition costs, compensation accruals, and other one-time or non-comparable costs, which include public company costs.

These increases were partially offset by lower sponsor management fees. Adjusted EBITDA increased by 2.4% or $1.9 million to $82.0 million, compared to $80.1 million in the fourth quarter of fiscal 2020. After factoring in the 53rd week and the calendar shift, adjusted EBITDA increased by 18.3% or $12.7 million when compared to fiscal 2020. Adjusted EBITDA on a reported basis as a percentage of sales was 20%, compared to 20.9% in the prior-year period.

And adjusted net income increased by 14% or $6.2 million to $50.5 million, compared to $44.3 million in the prior-year period. Now I'll turn to full-year results. Total sales for the 52-week period increased 20.7% to $1.3 billion, compared to $1.1 billion in the prior year. Our comparable sales growth on a reported or unshifted basis increased 21.5%.

Using a realigned period in 2020 for comparability, our comparable sales growth on a shifted basis for fiscal 2021 increased 21.2%. This increase is on top of comparable sales growth of 18% in the prior year and represents comparable sales growth on a two-year stack basis of 39.1%. Gross profit increased 29.2% to $595.2 million, compared to $460.7 million in the prior year, and gross margin rate increased by 290 basis points to 44.3%, primarily due to product margin improvements and occupancy leverage and partially offset by business mix. SG&A increased 22.8% to $386.1 million, compared to $314.3 million in fiscal 2020.

As we disclosed in our earnings release, the net impact of changes in equity-based compensation, cost-related equity offerings, executive transition, and other costs and the change in management fees increased SG&A by approximately $29 million in fiscal 2021 when compared to the prior year. Excluding these items that are not indicative of our core operating performance, SG&A increased by $43 million or 14%. And as a percentage of sales, SG&A decreased to 26% in fiscal 2021, compared to 27.5% in the prior year, a decrease of 150 basis points. Adjusted EBITDA increased by 48% to $270.6 million, and adjusted EBITDA as a percentage of sales increased 380 basis points to 20.2%.

After factoring in the 53rd week, adjusted EBITDA increased by 50.6% or $90.9 million when compared to fiscal 2020. Adjusted diluted net income per share doubled to $0.85 per share, compared to $0.42 per share in the prior year. And before I move on, I'll comment on the impact of Trichlor, our primary chlorine-based sanitizer. As shown on Slide 6 of the presentation materials, Trichlor sales grew by $70 million in fiscal 2021, with approximately 60% driven by price and 40% driven by volume.

We had a more consistent supplier product than others in the industry, and we leveraged our inventory position to better serve new and existing customers. Also, it's important to note that as a result of our efforts to procure and convert more pounds of Trichlor during the year, we did experience an increase in costs related to Trichlor. These cost increases were a key driver of the price component of our Trichlor sales growth in fiscal 2021. Moving to the balance sheet.

We finished fiscal 2021 with cash and cash equivalents of $345.1 million, compared to $157.1 million at the end of fiscal 2020, an increase of $188.0 million. We ended the year with inventory of $198.8 million, up 33%, compared to $149.0 million at the end of the prior year. We expect inventory conditions in the industry to remain tight throughout fiscal 2022, particularly for chemicals and equipment. We have an always-on procurement strategy at Leslie's, and our team continues to proactively work with our vendor partners to manage the flow of inventory as we continue to identify opportunities to strategically invest in inventory to meet heightened consumer demand.

As a result, we anticipate our inventory balances to be higher throughout the coming year. With regard to debt, at the end of fiscal 2021, total funded debt was $806.0 million, compared to $1.2 billion at the end of fiscal 2020. The $395 million reduction was due to the repayment of our senior unsecured notes in connection with our IPO and quarterly amortization payments on our outstanding term loan. As of fiscal 2021, funded debt divided by adjusted EBITDA totaled 3.0x and net debt divided by adjusted EBITDA totaled 1.7 times.

During the fourth quarter, our debt rating was upgraded by S&P to BB- from B+ and by Moody's to Ba3 from B1. Now let me turn to guidance for fiscal 2022. Before I get to the guidance figures, I want to remind everyone of the natural seasonality within our business. Our primary selling season occurs during our fiscal third and fourth quarters, which span April through September.

In 2021, the first half of the fiscal year accounted for approximately 25% of our annual sales, while the third quarter represented approximately 45% and the fourth quarter represented approximately 30%. We will continue to invest in our business throughout the year, including in operating expenses, working capital, and capital expenditures related to our growth initiatives. While these investments drive performance during our primary selling season, they reduce our earnings and cash flow during the first half of our fiscal year. Fiscal 2022 ends on October 1, 2022, and includes 52 weeks.

For fiscal 2022, we're providing the following annual guidance. We expect sales of $1.475 billion to $1.500 billion, representing an increase of 10% to 12% compared to fiscal 2021. This growth rate compares to our long-term growth algorithm of mid- to high single digits. Strong industry fundamentals, expected inflation, and momentum behind our growth initiatives support our sales guidance.

Today, we also provided guidance for gross profit. We expect gross profit of $655 million to $665 million, which implies a small improvement to gross margins when compared to fiscal 2021. This compares to our long-term growth algorithm of flat to positive 25 basis points per year and follows a 290-basis-point improvement in gross margins in fiscal 2021. We continue to see opportunities to improve margins in each of our businesses as a result of our structural advantages, our relationships with leading industry suppliers, our proprietary brand strategies, and our vertical integration in both manufacturing and distribution.

We continue to expect some headwind on margins from business mix related to higher growth in our PRO pool business. And we also expect inflation in mid-single digits and we will continue to pass those cost increases through to consumers. We expect adjusted EBITDA of $295 million to $305 million, representing an increase of 9% to 13% compared to fiscal 2021. This growth rate compares to our long-term growth algorithm of low double digits, and it's important to note that we will continue to execute against opportunities to leverage our operating costs and reinvest to drive growth in each of our businesses.

We expect net income of $170 million to $180 million and adjusted net income of $180 million to $190 million. We expect diluted adjusted earnings per share of $0.94 to $1, representing an increase of 11% to 18% compared to fiscal 2021. This compares to our long-term growth algorithm of mid- to high-teens earnings growth. We estimate a diluted share count of 190 million to 192 million shares.

And this range incorporates a reduction of approximately $3 million related to share repurchases. And finally, I'd like to provide an update on capital allocation. Our capital allocation priorities are as follows: our first priority is capital structure, and we finished the year in a solid position. We had net debt divided by adjusted EBITDA of 1.7 times.

We had $345 million of cash on hand and a $200 million revolving credit facility. Also, our first debt maturity is our revolver in 2025. Our second priority is to invest in growth, and this has two parts. The first is capital expenditures.

In fiscal 2022, we expect to increase our level of investment by approximately 50% over fiscal 2021 levels. Our investments will focus on new residential and PRO locations, distribution infrastructure, and merchandising and information technology projects. The second part is related to M&A. We plan to continue to focus on acquiring high-quality, market-leading businesses to better serve new and existing consumer types.

We have a robust pipeline of opportunities, and our sales guidance has approximately $30 million in sales attributed to M&A. And our final priority is return of excess cash to shareholders. We're in a unique position: a high-growth company with strong cash flow generation and modest maintenance capital requirements. Today, we announced our first share repurchase program as our board of directors approved a $300 million share repurchase authorization.

This action is consistent with our balanced and disciplined approach to capital allocation, our commitment to driving shareholder value, and demonstrates our confidence in our long-term growth prospects. We expect to opportunistically repurchase shares when we believe they are trading at a discount to intrinsic value. In summary, the full year and fourth quarter of fiscal 2021 were record periods, and we drove strong financial results throughout our P&L. Our entire organization continues to execute against our key growth initiatives.

With a great partnership of our long-term vendors, we're successfully navigating the tight supply chain in this environment of heightened consumer demand. We will continue our relentless focus on enhancing our consumers' experience and executing our initiatives to continue to drive growth and market share gains. And with that, I'll hand it back over to Mike. Thank you. 

Mike Egeck -- Chief Executive Officer

Thanks, Steve. Let's go to Page 12 of the deck. As we think about our 2022 performance, the first point I want to make is that every piece of data that we have tells us that the macro trends driving consumer demand in the pool industry should continue into 2022 and for the next several years. Pool build and hot tub backlogs was driven by ongoing investment in the home and backyard; migration to the Sun Belt; the desire for a healthy outdoor lifestyle; a heightened sense of safety incentivization and hybrid and full-time work from home schedules.

All these macro trends support a forecast for healthy ongoing consumer demand. Against this favorable industry backdrop, we are confident that we can grow the Leslie's business faster than the industry, across our consumer types, and across our growth initiatives. On Page 13 is the bridge to our 2022 guidance. We are expecting new pool builds to contribute 2% to our 2022 growth.

We are forecasting inflation at 5%, and we are expecting our strategic growth initiatives to drive an additional 5% of sales growth. We also expect strong growth to continue across all three of our consumer types: residential pool, PRO pool and residential hot tub. Moving to Page 14. We are forecasting that each of our strategic growth initiatives with the exception of AccuBlue Home, will drive 100 to 300 basis points of total sales growth, which is in line with our long-term view.

Page 15 of the deck lays out the primary challenges facing the industry for the 2022 pool season. And importantly, how Leslie's is positioned to mitigate and/or benefit from each of them. Your takeaway should be that we feel confident that we are well-positioned to compete and win in this environment. And then on Page 16, we would be remiss in not taking this opportunity to reinforce the Leslie's value proposition.

There are three key pillars that make Leslie's unique and that highlight our compelling competitive position and growth prospects: Number one, we operate in one of the most advantaged consumer products industries. It's large, over $11 billion. It has annuity-like demand because once the pool is built, it has to be maintained. It has predictable growth.

The installed pool base has now grown every year for 51 years. Number two, we have built a consumer-centric integrated ecosystem of physical and digital assets that is unmatched in scale and reach, and that allows us to provide total pool and spa care solutions to all consumers, whatever their needs and wherever, whenever, and however they want to engage with us. None of our competitors have that capability. Number three, despite being the largest direct-to-consumer brand in the industry, we have significant white space opportunities across all the consumer types we serve and all the channels in which we operate.

We have new capabilities and talent to address these opportunities and multiple early stage strategic growth initiatives. And finally, we have a pipeline of disruptive information that only Leslie's can bring to the pool and spa consumers. To wrap up, we are pleased with our record results for the quarter and year, and we're encouraged by the durable demand we are seeing from our consumers the strength of the macro industry trends supporting that demand and the momentum we have across our strategic growth initiatives. In a unique and advantaged industry, Leslie's is uniquely positioned in advantage to win.

We hope that the presentation and expanded data sets for this call help make that point. Finally, our confidence in 2022 is expressed in our guidance at the high end of our long-term growth algorithm and then our share repurchase program. We look forward to sharing our results throughout the year. With that, I will hand it back to the operator for Q&A.

Operator

Thank you. [Operator instructions] The first question comes from Ryan Merkel with William Blair. Please go ahead. 

Ryan Merkel -- William Blair -- Analyst

Hey, guys. Thanks for taking the questions and all the details in the deck, very helpful. So I guess, Mike, first off, last quarter, you mentioned select stock-outs of chlorine tabs and equipment. I guess a two-part question.

Did that impact the current quarter? And then how are you feeling about inventory of key items as you head into next season, and I think we're all pretty interested in chlorine tabs sort of the price and volume commitment. How are you feeling about that?

Mike Egeck -- Chief Executive Officer

Yeah. If you'll remember, Ryan, we quoted a comp for tabs in Q3 of 100%. And everyone said that we wouldn't be able to maintain that in Q4, given the scarcity of supply. We did see a deceleration in that comp.

The compound chlorine tabs for Q4 was 38%. So a deceleration based completely on supply. Despite that, we're very pleased with the 16% comp given the lower rate of sales in chlorine tabs. With regard to next year, we are -- as Steve mentioned, we have an always-on procurement strategy for key items.

And we have definitively procured more Trichlor for next year. It is rolling from our manufacturers and our tolling operations, and we should be at above last year's levels in the next week or so. And with regard to equipment, I'm going to say that our equipment partners, they're doing a great job in getting their supply chains back to speed. And we feel very good with regard to our position in key equipment, SKUs and also in Trichlor tabs.

Now all that being said, demand also remains very strong. So there's not a lot of slack in supply chains yet, but we are in better shape and we'll be in better shape for the pool season than we were in Q4. 

Ryan Merkel -- William Blair -- Analyst

Got it. That's great to hear. And then my second question on the '22 outlook, your sales guide is a little bit above your long-term average, but EBITDA growth is more in line. Is there anything to call out there why you wouldn't see a little bit more fall-through on the higher sales?

Mike Egeck -- Chief Executive Officer

Yeah. It has to do with our growth investments. And Steve might expand on this a little bit more. But we're in a position where we're generating a lot of cash.

We have the ability to invest in the business. Those investments are paying off. And as we look into 2022, we want to make sure that we're taking the opportunities available to us to set us up not only for growth and profitability in 2022 but also on a go-forward basis.

Steve Weddell -- Chief Financial Officer

That's exactly right. I mean we manage our expenses very carefully, Ryan, and we have to balance the leverage opportunities against our investment opportunities to drive growth. And so that's what you're seeing in 2022. Recognition of momentum against the growth initiatives we have and an opportunity to lean in.

So we're going to do just that in '22.

Ryan Merkel -- William Blair -- Analyst

All right. Makes sense. Thanks. I'll pass it on.

Steve Weddell -- Chief Financial Officer

Thanks, Ryan.

Mike Egeck -- Chief Executive Officer

Thanks, Ryan.

Operator

The next question comes from Simeon Gutman with Morgan Stanley. Please go ahead.

Hannah Pittock -- Morgan Stanley -- Analyst

Hey, guys. Thanks for the time. This is actually Hannah Pittock on for Simeon. First, a general question on the competitive landscape.

It feels like the industry is consolidating at a somewhat accelerated pace. Is that what you're seeing? And can you comment at all on the M&A pipeline?

Mike Egeck -- Chief Executive Officer

Yeah. There's -- there's a fair amount of activity in M&A, I would say. I'm not sure if it's accelerating. We're certainly looking to accelerate our action in the space because it remains still really highly fragmented.

As we've quoted before, 8,000 independent specialty retailers out there are actually the market leaders when combined in the space with just over, I would say, 50% to 55% share. So lots of opportunity, some acceleration. And for us, we'll be looking to accelerate more.

Hannah Pittock -- Morgan Stanley -- Analyst

Makes sense. And maybe a quick follow-up. Could you walk through the drivers that got you to the 2% sales growth from PRO pools next year, given how much growth you saw this year and where it's kind of currently sitting with sales penetration, could that be conservative potentially?

Mike Egeck -- Chief Executive Officer

Well, look, every time we quote an initial guide, it's going to be a range. And one thing we're committed to is making sure that we deliver on our guidance. So that's a long way of saying that we believe there's some conservatism in there, but we also believe it's prudent given we're still operating in a global pandemic and there are still isolated challenges with the supply chains.

Hannah Pittock -- Morgan Stanley -- Analyst

Makes sense. Thank you.

Operator

[Operator instructions] The next question comes from Steven Forbes with Guggenheim Securities. Please go ahead.

Steven Forbes -- Guggenheim Securities -- Analyst

Good evening. I wanted to focus on the outlook for unit growth. If I add up the number of locations, M&A PRO residential targets, I think it's per Slide 14 here. I think you're guiding to 50 net new locations next year or mid-single-digit unit growth.

So I guess, is that correct? And then any color on the cadence of openings? And then also how the pipeline for each one of those sort of opportunities is expected to sort of evolve as we look out here, maybe over a multiyear time period?

Mike Egeck -- Chief Executive Officer

Yeah, Steven. I'll start with that and Steve may add on. We've said before, we believe there is an opportunity for stores in 200 underserved PRO markets and in the residential space, 700. So the numbers you're adding up for total new locations is right in the range that we are thinking.

There's a lot of opportunity out there. And in terms of pacing, what's important for us is to get new locations that we plan in a year open for the pool season. So we really target to get those new locations up and running in the March, April time frame. That being said, the best time to get the retail space is when it's available.

So also an always-on strategy in terms of looking for good locations, but in general, we really look to get set up for the season in the March, April time frame.

Steve Weddell -- Chief Financial Officer

The only thing I would add, as you think about for PRO store conversions, obviously, the best time to do that is off-season. So right now, it's a great time to be completing those. And from an M&A perspective, it's opportunistic, right? So as we get opportunities to close on, we'll do so and not necessarily have a point in time at which we will try to close them by. But as Mike talked about for new stores typically do open those in March or April of each year to hit the season.

And obviously, we're looking at long-term locations across the company to serve consumers.

Steven Forbes -- Guggenheim Securities -- Analyst

Thank you.

Operator

The next question comes from Garik Shmois with Loop Capital. Please go ahead.

Garik Shmois -- Loop Capital -- Analyst

OK, thanks. Thanks for taking my question and thanks for the detail. The 5% retail inflation outlook, just curious if that assumes new pricing in fiscal '22? Or is it really a function of carrying overpricing that you secured last year?

Mike Egeck -- Chief Executive Officer

Yeah, Garik. It's -- I'm going to say it's a combination of both. And clearly, it's a forecast. And I'll note that it's not a cost forecast, it's a retail price forecast.

And like anything we're going to forecast, we're trying to be as accurate as we can but also certainly a certain amount of conservatism in how we think about pricing going forward. I mean, there's a lot of inflation currently in the market. We did see a slight slowdown in retail price inflation from Q3 into Q4 and 5% is how we're thinking about next year.

Garik Shmois -- Loop Capital -- Analyst

Great. Thank you.

Operator

The next question comes from Liz Suzuki with Bank of America. Please go ahead. 

Liz Suzuki -- Bank of America Merrill Lynch -- Analyst

Great. Thank you. I was hoping you could actually expand on the competitive environment a little bit in residential pool. There's been some recent M&A of one of your larger commercial competitors acquiring a residential pool chain.

I mean, do their markets overlap like yours? And does this present any potential margin pressure? And then are some of those 35 locations you expect to add from bolt-on acquisitions likely to be more on the residential side or the PRO side?

Mike Egeck -- Chief Executive Officer

Yeah, Liz, good question. We're aware of the acquisition that you're talking about. We're quite familiar with both companies. The acquired company, really good guys, strong operators.

It's a regional business in Florida, and it has a heavy distribution component, which I think makes sense for the acquirer. So competition is all good. Our business in that region is quite strong. I'm going to assume there is as well.

We have not seen any additional franchising activity or any unusual pricing activity since the announcement of the deal. And in terms of new locations, we're going to focus on about five PRO locations and at least 10 residential locations for 2022.

Steve Weddell -- Chief Financial Officer

Yeah. And that's for new store openings. From an M&A perspective, I think the focus is across the board, right? So we'll look at residential pool stores. We'll look at hot tubs.

We'll look at PRO opportunities as well. But as Mike talked about, the biggest opportunity out there is the 8,000 single-store operators, if you will, or mom and pop. So certainly a lot of opportunities in the pipeline in that area.

Liz Suzuki -- Bank of America Merrill Lynch -- Analyst

Great. Thank you.

Operator

The next question comes from Jonathan Matuszewski with Jefferies. Please go ahead.

Jonathan Matuszewski -- Jefferies -- Analyst

Great. Hey, Mike. Hey, Steve. Great quarter and helpful supplemental presentation.

My question is a two-parter. Is there a specific assumption embedded in your 2022 sales guidance regarding pool utilization, whether it's flat or up or down relative to 2021? And another factor that's going to drive chemical sales is this growing awareness regarding cleanliness and recognition that our goals have been historically under-sanitized tied. So is there a way, any data you're seeing that can frame what percentage of pools are still under-sanitized even after the last two years? Thanks.

Mike Egeck -- Chief Executive Officer

Yeah. Thanks, Jonathan. I'll take a crack at the first part of that question, and then we can talk about data on under-sanitized pools. The assumption in our sales guidance is that utilization of pools in 2022 by PRO customers, meaning the commercial side and also residential, is that it should be similar to 2021.

Now we do that because there's a lot of unknowns around the pandemic, but we do feel that people use their pools more in both '20 and '21. We are really glad to see that in '21. I think it speaks to the stickiness of the new behavior as people invest in their homes and their backyards and in hot tubs and pools. So we're modeling flat.

We think that might be a little conservative, but we definitely don't see it reducing. Steve, we had some data on under-sanitization. I cannot recall it off the top of my head. I'm not sure if you do.

Steve Weddell -- Chief Financial Officer

Yeah. It was more along the commercial lines and a significant level of under-sanitization. So one of the opportunities we talk to is getting water tested more frequently, right, doing a consistent 10-point test. So the AccuBlue in our stores the opportunity with AccuBlue Home is getting that water tested more frequently because we do believe that many bodies are under-sanitized and it's an education process that our store associates go through with consumers on a regular basis.

So it's the opportunity to kind of sell that in that total solution. But no specific metrics on kind of a quarterly or annual basis that I'm aware of.

Jonathan Matuszewski -- Jefferies -- Analyst

Got you. Thanks very much. Helpful.

Operator

The next question comes from Andrew Carter with Stifel. Please go ahead.

Andrew Carter -- Stifel Financial Corp. -- Analyst

Hey, thanks. Good evening. I want to just come back to the gross margin guidance because it seems relatively muted in terms of where you stand? I mean you're going to have pricing essentially matching what your inflation is, which should be a benefit. And I would assume the private label program would gain additional penetration next year? And if you don't mind, also, could you update us where the private label penetration is overall, as well as for chemicals? Thanks.

Mike Egeck -- Chief Executive Officer

I'll start with the second part of that in terms of private label penetration. We went into -- we ended '20 at about 55%. We were looking for a growth of 150, 200 basis points a year, maybe as much as 300 based on our historical planning. I would tell you we did not get there in terms of that kind of lift for the year.

And that was really driven by a very strong equipment business where our actual private label penetration is lower. So still definitely on track for our long-term goal there, which is to get up over 70% by, say, 2025. I feel good about that. But this year was a little skewed by equipment sales and particularly by the situation in Texas.

Steve, do you want to talk about margins?

Steve Weddell -- Chief Financial Officer

Yeah. So it's a great question on margins. And again, the equation that we talked about from a long-term algorithm has a few components, right? So structurally, we have unique advantages in our industry. The size of the POs that we write, the relationships that we have with our vendor partners, number one.

Our ability to grow, as Mike just talked about, from a proprietary brand strategy then vertical integration for manufacturing and distribution. When you think about what we saw in 2021, we see some continuation of that into '22, which is we will find opportunities to increase rate kind of across our product categories and across our businesses. There may be some margin headwind from a Trichlor perspective as we procure more pounds. Some of those pounds come at higher prices.

Those higher-priced pounds are still profitable from a dollar perspective, it may have a rate impact, so that will be a headwind. Overall, we believe rate across the business will be up again. we'll have occupancy leverage, which should be to our benefit. And then the final component is growth in businesses like our PRO pool business that will be a business mix headwind.

So overall, pleased to be in a position to have guided for gross margin positive and inside our long-term growth algorithm despite the fact that we were up 290 basis points last year.

Andrew Carter -- Stifel Financial Corp. -- Analyst

Thanks. I'll pass it on.

Operator

The next question comes from David Bellinger with Wolfe Research. Please go ahead. 

David Bellinger -- Wolfe Research -- Analyst

Hey, guys. Thanks for taking the question. It's in regard to the $300 million buyback program announced tonight. So you're clearly seeing continued momentum in the business, much-improved cash flows, but you were also dealing with all these supply chain is used concerns around inventories.

And also, you've talked about a much greater potential for acquisition into next year. So just walk me now in terms of pulling the trigger on repurchases versus building inventories or growing the customer base further? And do you expect to be active in the market immediately in Q1 just given where shares are trading today?

Mike Egeck -- Chief Executive Officer

Yeah. I think the way to think about what you described as trade-offs is to reiterate Steve's point, Leslie's is a very unique business in that we're both a growth business and we generate really significant and strong cash flow. So we're in a very fortunate position of not having to make trade-offs between investing in growth or potentially returning money to shareholders. So that's the reason for the share authorization from the board.

And when we think about how it will be deployed, as Steve said, we're going to be opportunistic. If the question is, do you think this stock is currently undervalued, I would say, yes, we do. And we'll be opportunistic in how we deploy that, those share repurchase moments by looking at the opportunities over time, and we're not looking to do anything within any specific time frame other than to do it when it has the best return for us. 

David Bellinger -- Wolfe Research -- Analyst

Great. Thanks for that. Appreciate it.

Operator

The next question comes from Rudy Yang with Berenberg Capital Markets. Please go ahead.

Rudy Yang -- Berenberg Capital Markets -- Analyst

Hey, guys. Thanks for taking my question. Just regarding cost inflation for next year and if it possibly grows higher than you anticipated, can you just comment on how much you believe you can continue to pass on costs before when you're seeing a reduction in demand volumes, just especially given that your competitors typically offer competitive prices for similar products?

Mike Egeck -- Chief Executive Officer

Yeah, Rudy. It's a good question. And as we've said before, the pool industry has a long history of passing costs through. That continued in 2021 and you could see it in our margin performance.

We believe that is still going to be the case into 2022. We haven't seen anything that would tell us differently. But yes, there's some pretty strong price increases in the market currently. As you can imagine, we watch it every day.

But currently, we're not seeing any resistance.

Operator

The next question comes from Peter Keith with Piper Sandler. Please go ahead.

Bobby Friedner -- Piper Sandler -- Analyst

Hey, good afternoon. It's Bobby Friedner on for Peter. First just wanted to circle back up on gross margin. I think you said you expect it to be up for the full year.

I was wondering if you could give any color as to the shape of gross margin expansion as you progress through the year, should the year-on-year gains be kind of uniform through the year? Or is there any first half, second half kind of nuance?

Steve Weddell -- Chief Financial Officer

Yeah. It's good question. I think when you think about -- we do have seasonality impacts from a margin perspective. As you think about just the leverage on fixed costs in the first half of the year versus the back half.

Beyond that, I think the guidance is on an annual basis and don't have anything further to define increases on a quarter-to-quarter basis.

Bobby Friedner -- Piper Sandler -- Analyst

OK. That makes sense. And just one other separately. So looking at your digital marketing strategies, the company has placed increased focus on this in the past months here.

I was just wondering if you could give any updates on this front? And are there any related KPIs call out that are trending in the right direction?

Mike Egeck -- Chief Executive Officer

I don't think -- I'm not sure, Peter, we want to say a lot more than we have, obviously, a very competitive situation. But as I did mention in my remarks, we continue to see really favorable ROIs on our digital spend, favorable to the point that we'll want to continue to invest as long as we can maintain those. And we've set ourselves up to do that in 2022 by taking our marketing budget. And specifically, it's the digital marketing budget, which is predominant media we use up 30% for the year.

Bobby Friedner -- Piper Sandler -- Analyst

OK, sounds good. Thanks, Mike.

Mike Egeck -- Chief Executive Officer

Yes.

Operator

The next question comes from Dana Telsey with Telsey Advisory Group. Please go ahead.

Dana Telsey -- Telsey Advisory Group -- Analyst

Thank you. Good afternoon, everyone. As you think about AccuBlue and the home version, I think what's launched in June of this -- of 2021, nearly a third of the active members are new customers. Can you broadly talk about the initial response to that Version 1? Does it increase your enthusiasm when you launch number two, which we understand is delayed by equipment shortages.

What's your expectation there?

Mike Egeck -- Chief Executive Officer

Yeah, Dana. Thanks for this question. We're very encouraged by the response to AccuBlue Home Version 1. As you said, as we put in the deck, about a third of the new -- of the customers for it are new, two-thirds are obviously already Leslie's customers.

And we're just seeing a really nice response. And it's a subscription model, as you know, and it's been very, very sticky to date. So very encouraged by that. At the same time, we're leaning into these first few thousand customers.

We've got focus groups in flight. We have a real nice feedback mechanism from the users, and we're continuing to learn and refine both how consumers use the device and how we might remove any pain points that they have in using it. One of the big updates we've done recently is to get the pool score on the app that wasn't available in the first release, and now we've updated that app for all the current users. So all good there.

And I'm really encouraged by Version 2.0 and equally disappointed in the challenges we're having around securing components. So there's nothing in Version 1 -- nothing in Version 2 that would quell our enthusiasm for the potential. But -- and we said in an earlier call, we didn't think supply chain component delays would impact us, and we were wrong. And yes, that's disappointing.

But our enthusiasm for the long-term potential of AccuBlue Home, very, very high.

Dana Telsey -- Telsey Advisory Group -- Analyst

One more, if I could add. Just -- as you -- any comments on the start of this first quarter, anything to keep in mind in framing fiscal '22? Thank you.

Steve Weddell -- Chief Financial Officer

Yeah. Thanks, Dana. Not going to comment on performance in the current quarter. We've got a few weeks left in the quarter, and we'll report in the coming months.

Dana Telsey -- Telsey Advisory Group -- Analyst

Thank you.

Operator

The next question comes from Peter Benedict with Baird. Please go ahead.

Peter Benedict -- Baird -- Analyst

Hey, guys. Thanks, and good job on that deck, with a lot of good information. Just as we think about '22 and the outlook, obviously positive on the top line and with profits. But as we think about maybe the cadence, I think last year in the second quarter, you did have the Texas storms.

So, Steve, I know you're not going to necessarily get into specific quarters, but how should we be thinking about that it's a low-volume quarter, that was a big event just to level set things, assuming there would be some softer growth rates in that quarter. Just I want to give you an opportunity to address that, if you want.

Steve Weddell -- Chief Financial Officer

Sure. We talked about in Q2 that we thought Texas was approximately a $10 million impact overall when you think about the overall year that $230 million increase in sales, fairly small, right? And again, I'm comparing Q2 to the total year. But again, our first half from an EBITDA perspective, we've talked about historically being roughly kind of flat, breakeven, if you will, and then profits really coming in kind of the second half of the fiscal year. So I don't -- I'm not going to provide any further details than that typical seasonality that we see.

I don't see any reason why there would be material deviation on a quarter-over-quarter basis.

Peter Benedict -- Baird -- Analyst

Got you. OK. Thank you very much.

Operator

This concludes the question-and-answer session. I would like to turn the conference back to Mike Egeck for any closing remarks.

Mike Egeck -- Chief Executive Officer

Thank you, operator, and thank you all for joining us today on our Q4 earnings call. Be safe and find time you join our family and friends this holiday season. And if you can, preferably do it with a pool involved. Thanks very much.

Bye.

Operator

[Operator signoff]

Duration: 65 minutes

Call participants:

Caitlin Churchill -- Investor Relations

Mike Egeck -- Chief Executive Officer

Steve Weddell -- Chief Financial Officer

Ryan Merkel -- William Blair -- Analyst

Hannah Pittock -- Morgan Stanley -- Analyst

Steven Forbes -- Guggenheim Securities -- Analyst

Garik Shmois -- Loop Capital -- Analyst

Liz Suzuki -- Bank of America Merrill Lynch -- Analyst

Jonathan Matuszewski -- Jefferies -- Analyst

Andrew Carter -- Stifel Financial Corp. -- Analyst

David Bellinger -- Wolfe Research -- Analyst

Rudy Yang -- Berenberg Capital Markets -- Analyst

Bobby Friedner -- Piper Sandler -- Analyst

Dana Telsey -- Telsey Advisory Group -- Analyst

Peter Benedict -- Baird -- Analyst

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