Pool Lags Consensus, Cuts Guidance

Zacks

Pool Corp.’s (POOL) second quarter 2012 adjusted earnings per share of $1.34 were a penny short of the Zacks Consensus Estimate but 13% above the year-ago level. Earnings per share bore an unfavorable impact of foreign currency translation by a penny.

The year-over-year increase in earnings was mainly driven by modest top-line growth as well as reduced cost structure. Net sales in the reported quarter increased 7.0% year over year to $757.2 million but lagged the Zacks Consensus Estimate of $768.0 million.  

Some demand was carried forward mostly to first quarter and early second quarter as the season reached its peak much before than the usual time because of milder winter. However, after outshining in first-quarter and early second-quarter, sales began to loose momentum from June.

Inside the Headline Numbers

Overall Base business sales of Pool improved 5% year over year even after considering an adverse impact of 1% from currency translation. Blue business sales increased only 4.8% in the quarter, while Green business sales were up 10.7%. Swimming pool side business in the three largest markets namely California, Florida and Texas were strong, assisting overall sales growth in the second quarter. In those markets, pool maintenance and repair were crucial contributors to sales.

Gross profit grew 5% year over year to $222.4 million but gross margin fell 50 basis points (bps) to 29.4% due to cutthroat competition, tough year-over-year comparison owing to vendor price increases last year and an adverse customer mix. Operating expenses as a percentage of sales fell 110 bps to 14.9%.

Financials

Cash and cash equivalents increased 35% year over year to $50.3 million. Net receivables nudged up 2% from the prior-year period to $270.1 million.

The inventory level upped 3% year over year to $402.3 million at the end of the second quarter. Total long-term debt was $309.8 million versus $206.0 million in the year-ago quarter.

Pool bought back 1.2 million shares for $42.1 million in the first half of 2012.

Guidance

After increasing the full-year earnings per share guidance in the last quarter, management slashed it this time to the range of $1.75–$1.82 from $1.75–$1.85. An early peak season in 2012 leaves the second half of the year in uncertainty. Moreover, slowdown in the global economic environment that led to a possible pullback in consumers’ discretionary spending was another reason for lowering the guidance.

Our Take

Pool’s management still hopes to grow earnings per share over 20% this year which, if achieved, will be third year in a row. However, management said tough seasonality and faltering consumer confidence could prove detrimental for Pool’s second half. We are also supportive of management’s view.

However, on a positive note, there are some commendable attributes in the stock like efficient cost containment effort, a steady turnaround of the Green business, which was once a struggling side, and market share gains.

Pool, which competes with the likes of Johnson Outdoors Inc. (JOUT) and Golfsmith International Holdings Inc. (:GOLF), holds a Zacks #2 Rank (short-term Buy recommendation). We reiterate our long-term Neutral recommendation on the stock.
 

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