Good afternoon, and welcome to the Third Quarter of Fiscal 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..

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 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.lesliespool.com. On the call today from Leslie's, Inc.

is Mike Egeck, Chief Executive Officer; and Steve Weddell, Chief Financial Officer. With that, I will turn the call over to Mike.

Mike?.

Thanks, Caitlin, and good afternoon, everyone. Thank you all for joining us today. I'd like to start by saying that we hope all of you and your families are staying healthy and safe in this current phase of the pandemic.

With regards to Leslie's, I am pleased to report that our Q3 performance was both a record third quarter and also the largest sales, gross profit and EBITDA quarter in our history. Sales for the quarter were a record $597 million. Comp sales increased 24% for the quarter on a reported basis.

And on a calendar basis, which adjusts for the shift created by the 53rd week in 2020, the comp increase was 19%. For both the quarter and year-to-date, the 2-year stack comp was 39%. Gross profit for the quarter was a record $284 million and margin rate expanded 364 basis points in the quarter.

EBITDA for the quarter increased 50% to a record $179 million. Our Q3 results exceeded our expectations embedded in the increased guidance we announced in June.

They also reflect the tremendous efforts and contributions of our associates and vendor partners to meet strong consumer demand in the face of constrained supply chains, especially in core chemicals and equipment. Chlorine tabs are a prime example of the demand and supply dynamic we saw in Q3.

Despite proactive steps to increase supply and instituting purchase quantity limits across channels to manage demand, we experienced periodic shortages and stock-outs in some locations.

Our data showed Leslie's, due to our scale and long-term supply contracts, to be the most consistent supplier of residential tabs in the quarter, but we were not able to meet the entirety of consumer demand. Sales of tabs doubled in the quarter, and we could have sold more.

Price was about 1/3 of the increase and volume represented about 2/3 of the increase. The demand we are seeing is being driven by the continuation of 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.

Consumers are continuing to focus time and investment on their homes, pursue healthy outdoor lifestyles, move to the suburbs and exurbs, particularly in the South and Southwest and increase their attention to safety and sanitization.

These macro trends are resulting in elevated levels of pool usage as evidenced by increasing sales of core and alternative sanitizers. Interest in pool ownership, one of the most searched options on multiple real estate apps is, does the house have a pool.

New pool installations, pool installations have increased from an average of 70,000 per year from 2014 through 2019 to nearly 100,000 last year to an estimated 110,000 this year. New pool installations are projected to stay at these levels for the next 5 years. And finally, pool construction backlogs, which are now reaching into 2023 in some markets.

The strong results being reported by suppliers to pool construction and remodeling are a particularly good sign for us because when a pool is completed, our business of water and equipment maintenance starts, and that annuity-like demand continues for the life of the pool.

Against this robust background of demand, the competitive advantages derived from our integrated system of physical and digital assets and our growth strategies continue to gain traction. I will start with omni.

In the quarter, our omnichannel capabilities, buy online pickup in store, ship from store, ship to store and buy online return in store, allowed us to utilize the inventory in our location network to ship digital orders that we would not otherwise have been able to fulfill.

Our omni capabilities, which we call Leslie's Connect, enabled more than 29% of Leslie's digital orders in Q3. Our consumer file continues to show strong growth. Total target file growth was 16% in the quarter. This result was particularly gratifying as we are now lapping our shift from direct mail to digital marketing from last year's third quarter.

Our new omni capabilities also accelerated omni consumer growth. New omni consumers, those that shop both our physical and digital channels, grew 285% in the quarter. In Q3, we launched our new loyalty program, Leslie's Pool Perks.

The launch drove loyalty file growth of 17% in the quarter, which represents a 700 basis point improvement over the Q2 growth rate. The pro market. We are now operating 10 converted and 3 new build pro locations, and they continue to outperform our pro forma expectations.

Based on those results, we have identified 25 additional pro conversion and targeted 5 additional pro new build locations for next pool season. Our pro affiliate program also continues to scale. We now have more than 500 pro affiliate agreements and continue to sign up new affiliates across our locations.

Year-to-date, our pro affiliate partner comp sales have increased 90%. The last component of our pro initiative, our pro e-commerce site went live in the quarter and has been well received by our pro consumers.

The new and converted pro locations, our expanding pro affiliate program and the launch of our new dedicated pro site helped grow our total pro business 59% in the quarter. On the M&A front, we closed on the acquisition of Hot Spring Spas of Southern Oregon during the quarter.

And in the current quarter, we closed on the acquisition of Capital Hot Tubs, which operates in the Greater Washington, D.C. metro area. We continue to see an abundance of acquisition opportunities across the highly fragmented pool and hot tub industry, and we continue to manage an active pipeline of targets.

Accordingly, we have 2 additional opportunities, which we expect to close in the fourth quarter. With regard to our residential white space opportunity, we opened 6 new locations in the third quarter, and we'll open an additional 5 new locations in the fourth quarter. We now expect to close the year with more than 950 locations.

Also and importantly, we launched AccuBlue Home, our connected pool technology solution and subscription service in the quarter. Despite launching somewhat late in the pool season, we are very pleased with the reaction from our consumers to Version 1.0 of the device and service.

Version 2.0 is currently in the prototyping stage and plan for launch next pool season. With regard to corporate governance, our Sustainability Working Group, comprised of internal resources and external advisers, continues to make good progress on our inaugural ESG report. We plan to complete that report by the end of our fiscal year.

To wrap up, we are pleased with our record results for the quarter and our outlook for the balance of the pool season and our fiscal year. We are encouraged by the durable demand we are seeing from our consumers and the momentum we have across our growth initiatives.

Looking ahead, we do believe challenges across portions of the supply chain will continue into our fourth quarter and likely the first half of 2022. However, we are confident that our associates, our organization and our vendor partners will continue to mitigate those challenges with superior execution.

And we will continue to provide our growing consumer base the products and services they need to confidently and safely enjoy their pools and spas. Therefore, we are raising guidance for the year. With that, I will hand it over to Steve to discuss the quarter and our revised guidance in more detail.

Steve?.

first, our third quarter results exceeded our expectations embedded in the full year guidance that we shared in June.

And second, while we expect our fourth quarter to be better than our previous expectations, we do expect our growth potential in the quarter will be impacted by the availability of certain products, particularly as it relates to chlorine tabs.

Before I review the updated guidance figures, it's important to note, as I mentioned earlier, that the calendar shift in the 53rd week effectively reduced fourth quarter sales by approximately $38 million and adjusted EBITDA by approximately $11 million when comparing to our prior year performance.

The tireless efforts of our associates and our business performance gives us confidence today to raise our guidance, which incorporates both sales and adjusted EBITDA growth in the fourth quarter on a year-over-year basis despite the nonoperational headwinds of the calendar shift in the 53rd week in the prior year.

For fiscal 2021, we're providing the following guidance. First, sales of $1.305 billion to $1.325 billion, which at the midpoint represents a total sales increase of 20% year-over-year after excluding the impact of the 53rd week in the prior year. This compares to our long-term growth algorithm of mid to high single digits.

Our increased sales outlook for fiscal 2021 incorporates comparable sales growth of 36% on a 2-year stack calendar basis. Second, adjusted EBITDA of $260 million to $270 million that at the midpoint represents a 54% increase year-over-year, excluding the impact of the 53rd week in 2020 and adjusting for public company costs.

This compares to our long-term growth algorithm of low double digits. And finally, adjusted diluted net income per share of $0.80 to $0.85. You'll also note that we now expect 192 million weighted average shares outstanding on a diluted basis for fiscal 2021 versus our year-to-date fully diluted share count of 190 million shares.

So in summary, the third quarter of fiscal 2021 was a record quarter by all measures. We drove strong financial results throughout our P&L.

Our entire organization is making great strides against our key growth initiatives and with the 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 over to the operator to open the line for Q&A. Thank you..

[Operator Instructions]. The first question is from Jonathan Matuszewski of Jefferies..

First one is on chlorine availability. You mentioned some periodic shortages and stock-outs in some locations. Sounds like supply chain issues will persist maybe into the first half of next year.

Do you think out of stocks will sequentially worsen in this final quarter? And what alternatives are you pursuing as you think about potentially heightened demand for chemicals next pool season? That's my first question..

Jonathan, it's Mike. First of all, we're at a bit of a low point in the flow of chlorine granules into our manufacturing, so we do expect the fourth quarter to be constrained to demand. We will have a nice comp in our chlorine tab sales, but we're not going to be able to drive the 100% comp that we saw in Q3. So that's the first comment.

The second comment is, we've been working very hard to secure additional chlorine for our next fiscal year. That pipeline is growing nicely, and we expect to have somewhere in the 40% to 50% increase in chlorine granules and pounds for next year.

So I think to sum it up, tight in the fourth quarter, for sure, better next year, but we don't expect supply to really normalize until after pool season 2022..

That's super helpful color. And just as a follow-up, you mentioned a 40% to 50% increase in chlorine granules and pounds for next year. A question we get from investors a lot is how to think about that long-term sales growth trend of 6% to 9% after two record years.

So not looking for formal guidance for 2022, but is it fair to say that kind of those building blocks are still on the table even after 2 record years, and we should see growth year-on-year?.

Yes. Well, look, it's too early for us to provide guidance. But here's how we're thinking about 2022. The first thing is, the secular macro trends that we're experiencing, they show no signs of slowing down. The recurring demand for our essential products and services is growing along with the installed base.

And the industry continues to be able to pass cost through to the consumer. So if you look at that setup for the industry, it's in great shape, great shape from a demand perspective. We also know we have great collaborative vendor partners.

But that being said, there likely will be some shortages of product into next year, I would say, especially chlorine. So we feel very confident in the momentum we have in our growth strategies. We're confident we're gaining share this year, and we'll gain share next year, but we're not providing any more specific guidance for 2022 yet..

The next question is from Steven Forbes from Guggenheim Securities..

Mike, maybe just to start, a follow-up question on the shortage, just the outlook here, right? Curious if you can comment on the behaviors of those customers that were underserved per se during the quarter and whether you think it's impacting your customer file growth trends? As you think about the traditional sort of funnel and wallet share capture in the customer journey, right, that you see, how is the shortage impacting the journey today? And what are you sort of doing to prevent migration right away from Leslie's in '21 and thinking about '22 as well?.

Yes. Steven, I think the first thing to note is, look, we're comping at very high rates in our tabs sales. We worked very diligently beginning last October to secure additional chlorine granules. So we feel good about the work we've done there. I did say we weren't able to meet all the demand and that's correct.

But we are definitively gaining consumers by having tabs when others don't. I mentioned the file growth of 16% in the year, excuse me, in the quarter. The new customer file was up plus 30%. And of that 30%, about 1/4 of it came from new customers who bought tabs. So we're actually seeing a boost to file growth from tabs currently.

It's not the preponderance of the growth, but it is a positive. And we expect with the work we've done now to secure additional supply for next year, we'll be able to keep or accelerate that dynamic..

And then just a quick follow-up. You've given us a stat in the past, right, just the percentage of sales generated by the loyalty members.

When we look at sort of the growth here accelerating sequentially, any sort of update on the percentage of sales or percentage of transactions being generated by the loyalty members?.

Yes. I will say this, with the launch of Pool Perks, we saw loyalty file growth grow. We also saw engagement grow. And we saw penetration increase about 500 basis points, penetration as a percent of total transactions. So we just, I mean, we feel really good about the dynamics we have in the regular file as well as the loyalty file.

One of the things I'm particularly encouraged about is new customers this quarter are spending 7% more than new customers did last year the same quarter. And our retained customers, basically last year's new customers, are buying 14% more this year than last year's retained customers.

So the dynamic that we've been talking about where we launch loyalty, it improves engagement, membership grows, total file grows, we get our consumer in a file, and then we're very good about laddering them up.

The last thing I would quote is, on a 3-year look-back basis, our customer lifetime value on contribution, not revenue, Q3 '21 versus Q3 '20 is up 14%. So kind of however we look at the file, we're very encouraged by the metrics..

The next question is from Kate McShane from Goldman Sachs..

My question is around pricing power.

Just with the amount of inflationary headwinds there seems to be across all of retail right now because of different drivers, could you remind us just how much pricing power you think you have? What actions you may have taken during the quarter and what we could expect for the rest of the year?.

Yes, Kate. We have said we expected inflation for the quarter to be around 6%. It's 6% to 7% as far as we are calculating it. And we haven't seen any resistance to passing that cost through. We're also doing fewer promotions.

So at this point, when we say we've been able to pass costs through, we haven't seen anything that would tell us we cannot continue to do that, meaning we haven't seen any hesitancy for the consumers to buy at a higher price. And if you take tabs just as an example. I mean, one way to look at it is, yes, chlorine tab pricing is up almost 40%.

So a 35-pound bucket of tabs, that's maybe $35 versus prior year. So a homeowner with a pool, a little higher income, that pool is a $50,000 to $100,000 plus asset and you're spending $30 or $50 more to pay to maintain a portion of it. I think that's very reasonable.

And I think when you think about it that way, it's intuitive that we should be able to pass that cost on..

Yes. And I'd add to that as well. When you look across our categories, given the nondiscretionary nature, we've seen that inflation and those price increases throughout our business. So Mike is calling out sanitizers and trichlor because it was the largest increase in Q3, but we saw increases across our entire portfolio of product categories..

The next question is from Garik Shmois of Loop Capital..

Great.

Just given the gross margin expansion this year and recognizing you're not providing guidance for 2022, but just how should we think about the step-up and how sustainable this new elevated level of gross margin is?.

Yes. I'll take that. So you're right, we're not going to provide guidance on gross margins going into next year and historically haven't done so either even for the current year, but we're clearly pleased with being up 358 basis points year-to-date over last year, which is well above our long-term growth algorithm.

When you think about our performance this year and what the core drivers were, you certainly saw rate improvements and occupancy leverage given the sales increase and was partially offset by business mix as we grow other portions of our business, including the wholesale channel as well as the hot tub business.

So when you think about those trends, very consistent with how we've discussed gross margins in the past and kind of core driver being rate improvement. And we talk about what allows us to drive rate improvements year in, year out. It's our direct vendor relationships. It's our proprietary product offerings.

It's our vertical integration of our supply chain and manufacturing operations. And ultimately, right, when you step back, gross margins are a very important part of our model. But ultimately, we're looking to drive EBITDA and earnings growth. So it's a balanced formula that we'll continue to focus on.

And the team is laser-focused on identifying opportunities to continue to improve rates irrespective of where we're starting from..

Okay. And then just on the M&A front, you made the 2 acquisitions in the quarter. Sounds like there's a couple more coming.

Can you just provide any more color on the acquisitions that you made and just in general how the pipeline is looking?.

Yes, Garik. I would characterize them as tuck-in acquisitions. And as I said in the remarks, just an abundance of opportunities out in the industry at the moment at very attractive multiples. So we're doing 2 things. We're being very active in managing that pipeline.

And we're also staffing up internally to increase our throughput because there's more opportunities available right now, and we'd like to be in a position to be able to take advantage of those, both the balance of this year and going into next year..

The next question is from David Bellinger from Wolfe Research..

So my first one, just a follow-up on the inability to meet customer demand you highlighted.

So is there any way to quantify the level of sales you missed out on in the quarter? And is that dynamic, is that potentially leading to some type of sales deceleration early into the fiscal Q4 period?.

Yes, David. It's a good question. And we thought about it internally and we can't come up with a number of demand that we missed. When I say we've had periodic outages, that has indeed been the case. I'm actually very proud of the team's work and our suppliers' work on keeping us in stock most of the quarter.

But again, like I said, there was periodic outages in some locations. So when you look at the next quarter, we spoke to the fact that we will have some supply chain challenges, particularly earlier in the quarter, which is right now around chlorine availability. So we doubled chlorine sales in the third quarter.

We're not going to be able to do that in fourth quarter..

Understood. Okay. And then my follow-up here. You mentioned the omni business flexing well, growing very nicely this quarter.

Can you talk about whether you view those sales as largely incremental in areas without a store presence? Are you reaching a new customer there? Are these somewhat cannibalistic to store sales? And also any color on the margin profile of online, if you could?.

Yes. Well, first of all, with regard to omni, we can track how much of it is pure incremental. And the way we'll do that is how we look at ship-from-store orders. The way we currently have that set up is we ship from stores when we don't have inventory in the DCs for a digital order. And that's running in the 10% to 15% range just on pure incremental.

So we're quite pleased with that. We don't see any trade out. And it was very advantageous in the third quarter to have buy online pickup in store because when you manufacture chlorine tabs, chlorine tabs to ship online need to be individually wrapped. They take longer to manufacture.

So we made the decision to manufacture less wrapped tabs so we can maximize the throughput on unwrapped tabs, but we were still able to offer those online with buy online pickup in store. So just a really key capability to have this last quarter..

Yes. More broadly, when we talk about profitability by channel, we don't give specifics. But when you think about the total contribution, so get past the gross margin line, get the total contribution, very attractive business. And so ultimately, we're going to serve consumers how they want to be served.

And as Mike's talked through, we're seeing great traction through our omni initiatives and a lot of benefit to having the capabilities in the market today..

The next question is from Ryan Merkel from William Blair..

So my first question is on labor shortages.

Has this been an issue at all for you? And if so, how you managed it?.

Yes. Good question, Ryan. So certainly have had challenges across the country from a staffing perspective. I think we're very happy with the levels of staffing across the organization. I think we've managed through a little bit more turnover in certain markets at certain times. As you know, that's been a very kind of uneven reopening of the economy.

And so our team has worked through the challenges. And ultimately, we think we were appropriately staffed throughout our network to serve consumers, but it's been an area of focus for us. So I would expect that to continue, but not concerned about the level of labor availability to serve consumers..

Yes, Ryan. I think I would give a little bit more color on that, Ryan. We're fully staffed as Steve mentioned. I think the nuance is, we're having to use a little bit more temp labor than we would like.

So going in with schools, we believe and hope, reopening in September and stimulus coming to an end, then we expect the labor market to improve somewhat but very pleased with the way we were able to manage through any tightness year-to-date..

Okay. Good to hear. And then secondly, peak pool is a concern for some. Mike, based on your comments, it doesn't sound like it's a concern for you as we sit here today.

But I know you're not giving guidance for next year, but any reason that the industry wouldn't see its normal mid-single-digit growth? Is there any puts and takes that you can call out here today?.

Yes, Ryan. I don't see any, right? I mean, the elevated level of pool builds seem very intact. I know there was some concern last year with the backup in permits and some backlog at construction, people would just get tired of waiting and cancel out. We haven't seen anything to that effect.

And if anything, construction backlog seem to be growing and permits are growing and installations are growing. So fundamentally, when you think about pool spaces, as you know, it's about the installed base. And it's grown every year for 50 years and seems to be growing faster now. So we feel good about the industry setup for next year..

The next question is from Liz Suzuki from Bank of America..

Are you finding that pool owners are able to stretch the life of their existing chlorine because they just don't really have a choice in the matter if there's that much of a shortage? And I guess on top of that, what kind of lasting damage do you think underchlorination causes? And does that represent an opportunity for future sales of corrective measures?.

Yes. Steve, do you want to talk about underchlorination? You know more about that than I do..

Sure. Yes. It's pretty cute when there's underchlorination because you end up with algae blooms and it has to be handled. So I think more likely folks are finding alternatives. We're seeing growth in alternative sanitizers. The growth is not as large as kind of chlorine tab growth that we've seen. But again, we sell all solutions.

So if a consumer wants a salt cell generator, we can sell it to them. We can install it for them in many markets. If they want to buy alternative sanitizers beyond kind of the traditional trichlor, we carry that as well. So the sense that we have is that consumers are not ignoring their chlorine need.

We have talked with a pretty loud voice with our consumers about how to optimize their chlorine usage. If you think about the balancers that are required to keep chlorine effective, it can limit your need for excessive chlorination. And so there are certain processes that you can utilize to extend the life of chlorine.

But clearly, that's a benefit to our consumers and ultimately deepens the relationship that we have with our consumers..

Great. And as you plan to enter the off season, which is usually a time of investment, I mean, what are the biggest areas of opportunity that you'll be focused on for next season? And if you could talk a little bit more about AccuBlue Home 2.0, just be curious to hear about what you have planned there..

Yes. Sure, Liz. First of all, the first thing I'll say is, our slow seasons are certainly not as slow as they used to be. Steve and I recently toured our distribution centers and one of the consistent themes was that they're busy all the time, which we feel very good about.

In terms of next year, the work that's going on right now is to secure the appropriate amount of supply. And we are buying forward further into next year than we ever have before, specifically for equipment and also chlorine commitments and other key categories.

So it's the same process we go through every season, but we are doing it sooner this year, and we are making commitments further into the season. And then with regards to AccuBlue, we launched in mid-July, which it's a little bit late in the pool season.

And I would characterize it as a soft launch, meaning there was no marketing other than a couple of e-mails. We didn't offer it in stores. It was online only. And that was purposeful, right? We wanted to see kind of a slow build. Despite really no marketing, we've sold through more than 80% of what we produced.

And to be clear, we only made a few thousand. The best way to think about this is an extended user experience test. What we're very pleased to say is that it was well received. And by well received, I mean, first of all, it works. There's actually a fair amount of the competitors' products that don't consistently work.

So we're getting great feedback on that. It's relatively easy to use, though Version 2.0 will improve usability a lot. It matches the in-store results. So the AccuBlue Home is matching the AccuBlue store. I think our consumers are anxious to see if that was the case, and it is. That really makes it superior to other residential water testing systems.

Some really good learnings as well. We're fine-tuning the customer onboarding and the learning collateral, particularly around the how-to videos. And the device comes with a calibration disk, which is causing a little bit of confusion because you don't need to calibrate the device prior to using it.

The calibration disk is only needed if you have to do a diagnostic recalibration and that's highly unlikely. So we're likely to take that calibration disk out of the offering for Version 2.0. Version 2.0, I've got prototypes in the office. It's dramatically evolved design, much, much better user experience. It's a very commercial product.

And next year, we will be ready to scale it. We're not giving any guidance yet on what to expect for Version 2.0. But as we do give our formal 2022 guidance, we will certainly include it..

The next question is from Peter Keith from Piper Sandler..

Mike, you talked about the installed base growing, which clearly we can see with that backlog and adding 100,000 new in-ground pools every year.

But what about the aboveground pools that were purchased during 2020 and 2021? Do you think there could be some elevated level of abandonment that potentially could take down the total pool installed base at some point in the next year or 2?.

Yes. It's a really interesting question, and it's something we're watching. I guess the first thing I'd say is, over the course of the history of the aboveground pool business, there's been a fairly high percentage of abandonment. It's a very tough number to get at, but 1/4 is not out of the question, maybe more. So we do expect some abandonment.

That is typical of the industry. I think also this time, though, what we're seeing is, and I've said this before on some of our calls, it's a little bit of like a gateway drug, an aboveground pool. We see people buying aboveground pools who are waiting for an in-ground pool.

So some of that abandoning of the pools they purchased is when they get their in-ground. So it's a squishy number to try to get at, for sure. We expect some abandonment rate, probably a little bit higher than historical. That would make sense to us.

Our aboveground pool and hot tub sales for the quarter doubled, but it's still less than 5% of our total sales for the quarter..

Okay. And as a customer and you go through the AccuBlue process and you kind of log in your pool specs, so you guys should have a pretty good picture of the percent of in-ground pools versus aboveground versus hot tub.

Where do you think you stand now as a percent of your loyalty program or your customer base that's an aboveground pool owner?.

Yes. Peter, you're right. We're getting a lot of rich data from the devices, but it's early days. It was three weeks ago, we launched. So that is the number we're very interested in, and we should be able to get at, but not something we are currently able to quote..

I'm sorry, Mike, just to clarify, I was talking about the in-store testing. That part you guys do collect pretty good information on the pool size and things like that..

Yes, yes. I'm sorry. I'm sorry. Yes, we do. Steve, I can't recall that number.

Do you know that number?.

No. Just when you think about loyalty and water test increasing and you think about the overall percentage of sales for aboveground, I think it's instructive to understand it's less than 5%. So we're not going to have an outsized percentage of our customer base being aboveground. Aboveground is spending a smaller amount of money.

So I don't think it's a large portion of the file..

The next question is from Simeon Gutman from Morgan Stanley..

This is actually Hannah Pittock on for Simeon. I wanted to ask you about the updated guide. It looks like top line change is kind of in line with the beat this quarter but the net income change is a little below. So I was just wondering if you could bridge kind of the quarter's beat versus the updated guide for the full year..

Yes. Great question, Hannah, certainly appreciate it. And when you think about when we gave our guide last in early June, right, we were 8 weeks through our third quarter. So we had a fairly good visibility on what our expectations were going to be for Q3.

Now look, we performed better, and so we had a strong finish and outperformed even those expectations. And then when we look into Q4, provided us a stronger conviction about the demand and better visibility into Q4 inventory availability. So as Mike talked about, no doubt, we think we can serve more consumers if we get more inventory.

We're working very aggressively to procure more inventory to serve those consumers. And I think one of the keys as you think about you preparing that bridge between Q4 last year and Q4 this year are the numbers that I provided based on the calendar shift and the 53rd week.

When you think about Q4 from a shift perspective, Q4 will lose the first week of July, which is one of our peak weeks, and you pick up a week at the end of September or early October. So that's about $20 million. And then we talked about the $18 million just loss of the 53rd week.

So when you adjust it, and I normally talk about EBITDA on a calendar basis. But if you adjust for some of the calendar shift and that extra week, it shows more growth than is going to be reflected on a reported basis..

Got you.

And there's no kind of incremental factors we should be considering at the operating margin level?.

Yes. Good question as well. So as we think about from a rate perspective on EBITDA margin, that shift again when you think about that peak week in July, that's a very high profitability week for us. And so about 75 basis point impact on EBITDA margin reduction because of the calendar shift.

And then because of the year we're having and the opportunities that we see to continue to invest in the business, we are pulling forward some investments into Q4 that will drive future growth, and that's probably another 100 basis points in Q4.

So those are the 2 key call-outs that I'd provide impacting kind of the margin rate, if you will, on EBITDA for Q4 year-on-year..

[Operator Instructions]. The next question is from Joe Feldman from Telsey Advisory Group..

Great. I wanted to ask again on the chlorine side of things. I guess, why can't it be produced faster? Like I thought last quarter also you guys had some new relationships with some suppliers and were able to procure more than the competition.

And like did that change over the past quarter or is their supply just gone away? So kind of two parts to that..

Yes. I think I'm following the question, Joe. We were able to secure quite a bit more this year in the range of 30% more. And we've been able to manufacture it.

What we did not anticipate was the level of demand, right? And to be clear, we will have a very strong comp in chlorine tab sales in Q4, but we don't currently own enough inventory in the raw chlorine to be able to comp 100% like we did in Q3. So still a very healthy growing part of the business, and it is a constant emphasis for us to acquire more.

And as I've mentioned, we've acquired quite a bit more for next year already, and we continue to look for additional incremental resources..

And then I think, Steve, maybe you mentioned that the shift towards other alternatives like saltwater, did you guys see an increase in that this past quarter? Because I remember last quarter, same thing, like I thought you were starting to see that.

I know it's a fairly costly transition to move to saltwater, but what did you see on that front?.

Yes. As I mentioned, we saw alternative sanitizers increase quarter-on-quarter or sorry, year-over-year in the quarter, but not as much as trichlor, so the chlorine tab sales. So not a big shift from an overall percentage. And again, we've talked a lot about this, but we're agnostic.

If the consumer wants an alternative sanitizer, we're going to provide that solution for the consumer. So certainly seeing some increases, but not compared to what we're seeing in the chlorine tab market..

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

Thanks, Sachi. We appreciate you all joining us today and your interest in Leslie's. We look forward to speaking with you again at our year-end call. And in the meantime, stay safe. Thank you..

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day..