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Pool Corp. Overcomes Weather Issues to Snare Record Results

Asit Sharma, The Motley Fool

In many consumer-based industries, the weather seems to be used as a frequent and often-tenuous excuse by management when quarterly results miss shareholder expectations. In Pool's (NASDAQ: POOL) case, however, inclement or extreme weather really can hamper quarterly sales.

Yet despite weather challenges in the second quarter of 2019, things have gone swimmingly for world's largest wholesale distributor of backyard pool products over the last three months, as earnings results released on July 18 revealed. Let's plunge into headline numbers and critical details from the quarter. Note that all comparative numbers are presented against those of the prior year's quarter.

Pool: The raw numbers

Metric Q2 2019 Q2 2018 Change
Revenue $1.12 billion $1.06 billion 5.7%
Net income $131.4 million $117.0 million 12.3%
Diluted earnings per share $3.22 $2.80 15%

Data source: Pool.  

A man standing at the edge of a pool, skimming the surface with a cleaning net.

Image source: Getty Images.

What happened with Pool this quarter?

  • Revenue set a quarterly record and was propelled by base growth of 4%. Base growth is Pool's term for organic growth, and it's determined primarily by excluding results of sales centers that have been acquired, closed, or opened in new markets during the trailing-15-month period.
  • The company amplified its top line despite record rainfall and colder temperatures in Arizona, California, and Texas -- three of the company's biggest markets. This impact was offset by more benign conditions in the southeastern United States.
  • In North American end markets, retail sales rose just 1%, hampered by poor weather. However, commercial sales, building materials, and equipment sales went up by 8%, 9%, and 6%, respectively. European sales improved by 5% in local currency terms.  
  • Gross profit of $330.3 million also set a company record. Gross margin  improved by 30 basis points, which management attributed to "benefits from strategic inventory purchases."
  • Selling and administrative expenses jumped by 7.6% to $157.8 million, which had the effect of holding operating margin of 15.4%, nearly even with the prior year.
  • The company recorded a $7.8 million income tax benefit from adjustments related to updated accounting standards on share-based compensation for employees. This had a positive impact of $0.19 on per-share earnings during the quarter.
  • Since the beginning of the year, Pool has acquired four sales centers, opened five new centers, and consolidated one location, bringing its total number of sales centers to 372 at the end of the second quarter.

What management had to say

During the company's earnings conference call, CEO Peter Arvan discussed the effect of wet and cold weather on second-quarter results, but in his prepared remarks, he also noted new avenues of opportunity:

[I] would like to describe a few areas of growth and capacity creation that we have been investing in. [Online platform] POOL360 is one area where we have continued to invest and are seeing good results. Year-to-date sales on the app are up 29%, which adds capacity for our team and convenience and value for our customers.

In total, 11% of our sales orders are now coming in through this portal. We are in the process of redesigning and remerchandising our customer service areas and showrooms and implementing enhancements to our order picking process, which are showing positive initial results in driving incremental sales and speed at the counter and creating more capacity for our customers and sales centers.

Additionally, we have begun to see success in our truck utilization by moving to market-based transportation, which has curtailed the need for more drivers and trucks.

Of the two initiatives Arvan outlines, the exploration of market-based transportation may have a more immediate effect on profitability. Turning to outsourced freight reduces the addition of fixed costs to Pool's books, as Arvan explains. Now is also an opportune time to explore this model, as a bit of overcapacity in the trucking market has caused third-party freight spot rates (real-time shipping rates) to fall in the first half of 2019.  

Looking forward

Given results year to date and with just a few months left in the pool season, Pool Corp. tightened its projected full-year earnings per share (EPS) range, trimming the high mark of its guidance. The company now expects 2019 EPS to land between $6.09 and $6.34, against an earlier projection of $6.09-$6.39. Management appears confident heading into the remaining six months of 2019, given strong consumer demand and a healthy sales backlog. If the company hits the middle of its revised EPS range, it will achieve annual growth of 11% over the $5.62 in diluted EPS booked in 2018.

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Asit Sharma has no position in any of the stocks mentioned. The Motley Fool recommends Pool. The Motley Fool has a disclosure policy.