Leslie’s Inc. is in hot water with its stockholders after investors filed a class-action lawsuit against the pool retail giant.

Leslie’s, founded in 1963 and based in Phoenix, Arizona, is the largest retailer of swimming pool supplies and related products in the United States. The company, which became publicly traded on October 29, 2020, was accused of violations of the Exchange Act in September 2023.

According to the lawsuit, Leslie’s neglected to inform investors that from February 2021 to July 13, 2023, Leslie’s customers were purchasing more chemicals than necessary, at significantly inflated prices, to stockpile pool chemicals in case of a chlorine shortage. The complaint states that rather than disclose that its impressive sales growth was based on artificial demand and excess panic buying, the company claimed its growth initiatives were responsible for the impressive financial results and produced “healthy ongoing consumer demand” that was “durable” and “showed no signs of slowing.”

Those in the pool industry will recall that at the time that Leslie’s became a publicly traded company, the industry was experiencing a boom in new pool construction and maintenance as increased consumer demand for stay-at-home activities surged during the beginnings of the COVID-19 pandemic. It was unprecedented. In August of 2020, the price of trichlor skyrocketed when a fire at the Biolab facility in Westlake, Louisiana, knocked out about a third of the country’s supply. Later in the year and continuing into 2021, bottlenecks at most of the world’s ports and other transportation problems caused a supply-chain crisis, contributing to inflation that is only today showing signs of dampening. In April 2021, national media outlets began covering the chlorine shortage and attendant price spikes, which led to pool owners flying off to their nearest pool stores to stock up on chlorine.

It is within this landscape that investors bought Leslie’s stock and may well have been unaware that the pool and spa industry was experiencing an unexpected, and in many ways artificial, explosion of profitability. Leslie’s SEC filings state that “Due to the non-discretionary nature of our products and services, our business has historically delivered strong, uninterrupted growth and profitability in all market environments.”

In December 2021, Leslie’s issued a press release that quoted CEO Michael Egeck highlighting the “strongest year in Leslie’s history with a record fourth-quarter performance as the execution of our strategic growth initiatives drove significant sales growth and cash generation.”

According to the suit, rather than pointing to unprecedented growth in the pool industry in addition to a host of other factors that contributed to increased consumer demand, Egeck stated, “These results are a testament to the caliber of our teams and the deep partnerships we have with our vendor community that enabled us to meet the heightened customer demand we saw throughout the year.”

However, it was only during a May 2023 earnings conference call that the CEO revealed that in late 2021 to early 2022, the company sent out letters to its customers encouraging them to purchase pool chemicals early because the company couldn’t guarantee that it would have any in stock.

“Consumers were very concerned about scarcity of product during pool season, as were we,” Egeck said in the 2023 call. “And we, at one point last year in the first quarter, actually sent a letter to our loyalty file, saying we couldn’t guarantee product availability in the second half and encouraged them to purchase early prior to the pool season. And whether on their own or because of that letter, we saw a lot of that.”

According to the suit, the letter had its intended effect of sustaining large volume purchasing and customer stockpiling.

The complaint states that throughout the class-action period, Leslie’s continued to tell investors that it was “very durable” and experiencing “recurring demand” and that consumer purchasing “showed no signs of slowing.”

In November 2022, Leslie’s announced the financial results for its fourth quarter, showing increases across the board, and offering guidance for fiscal 2023, where the company projected the outlook for sales to be between $1,560 to $1,640 million and gross profit to be between $667 to $708 million.

But during the first two quarters of 2023, the company began reporting losses and decreases in profits. Despite this, in both quarterly reports, the company continued to affirm its guidance for fiscal 2023. In conference calls, Egeck stressed that the slowdown in sales was expected.

“Given the seasonality of our business, the loss in the quarter was anticipated and does not change our expectations for the full year,” Egeck said in his first-quarter call with analysts.

Regarding losses in the second quarter, CFO Steven Weddell said, “it is important to note that we believe this behavior impacts the timing of sales, not the absolute dollars expected to be generated this year.”

Weddell confirmed that “based on performance for the first half of the year, which is in line with historical seasonal trends prior to the pandemic, we are reaffirming our outlook.”

The bottom fell out on July 13, 2023, during the company’s announcement of its preliminary financial results for the third quarter, when it reported continued losses and lowered its fiscal 2023 earnings-pershare guidance by 60 percent.

“Our fiscal third quarter results were well below our expectations as low double-digit traffic declines in our residential and pro businesses drove negative comps across both discretionary and non-discretionary categories,” Egeck stated. “While abnormal weather continued to pressure traffic levels, customer surveys conducted towards the end of the quarter also indicated increased price sensitivity and that consumers entered the pool season with a greater-than-normal amount of chemicals left over from last year.”

The press release also announced that CFO Weddell was stepping down.

Four days later, Leslie’s stock plummeted by more than 40 percent, where it currently hovers at about $5.50 a share, down from $9.52. The stock’s all-time high was $29.76 on June 4, 2021; it started trading at $21.97 on October 30, 2020.

The plaintiffs allege that Leslie’s “employed devices, schemes, and artifices to defraud; (ii) made untrue statements of material fact and/ or omitted to state material facts necessary to make the statements not misleading; and (iii) engaged in acts, practices, and a course of conduct that operated as a fraud and deceit upon the purchasers and acquirers of the company’s securities in an effort to maintain artificially high market prices for Leslie’s common stock in violation of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder.”

The suit states that as a result of the Leslie’s wrongful acts and omissions, and the precipitous decline in market value of the company’s common stock when the truth was disclosed, class members have suffered significant losses and damages.

The suit, entitled West Palm Beach Police Pension Fund v. Leslie's Incorporated et al was filed in the United States District Court in the District of Arizona on September 8.

The plaintiffs demand a jury trial.