Pool Corp.’s (POOL - Analyst Report) second-quarter 2013 earnings per share of $1.39 missed the Zacks Consensus Estimate by a penny but were 3.0% higher than the year-ago level. Lower interest expense and share repurchase activity helped drive the year-over-year improvement in earnings.
Net sales in the reported quarter increased 4% year over year to $790.4 million, ahead of the Zacks Consensus Estimate of $776.0 million. Blue business sales were up 8.3%. Green business sales increased 10.2% owing to the gradual recovery of the housing market in some of the key regions.
Although net sales beat the Zacks Consensus Estimate, we believe, earnings missed due to margin shortfall. Investor should note that, back in mid June, the company had lowered its earnings outlook for 2013. The guidance cut resulted from an unexpected cooler and wetter weather conditions in some markets of North America and Europe leading to the late start of the pool season and the consequent slowdown in sales.
Gross profit grew 3% to $228.2 million but gross margin fell 50 basis points (bps) to 28.9% due to adverse product and geographic mix. Increased sales from lower margin product lines such as heaters and lighting products compared to higher margin ones were held responsible for the margin decline. Also, a delayed start to the pool season and related consumer purchases in some high margin regions hurt Pool’s margins.
Operating income in the quarter increased 4% to $112.0 million while operating margin dipped 10 bps to 14.2% owing to higher operating expenses ratio.
For 2013, management reiterated its expectation for earnings per share in the range of $2.03—$2.13. This guidance, lower than the prior range of $2.13−$2.23 per share, was issued on Jun 18 in the wake of inclement weather in North America and Europe.
Pool expects base business operating margins to increase in the latter half of the year. Management continues to buy back shares during the balance of the year.
During the quarter, Pool bought back 130,000 shares for a total of $6.6 million leaving shares worth $81.8 million available for further buyback.
Although Pool appears to hold promise over the longer term based on some commendable attributes like a steady turnaround of the Green business and overall market share gains, its performance in the upcoming quarters can be a concern.
Pool’s business is susceptible to changes in weather. While abnormally hot and dry conditions are generally favorable for the company's operations, abnormally cool or rainy weather patterns can adversely affect sales.
Hence, with the company stepping into the second half of the year, which is seasonally weak, Pool is likely to underperform in the near term. Further, the full-year guidance cut prior to second-quarter earnings release remains another overhang. Pool currently holds a Zacks Rank #5 (Strong Sell).
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