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Pool Corp.’s (POOL - Analyst Report) third-quarter 2013 earnings per share of 68 cents missed the Zacks Consensus Estimate of 73 cents by about 6.9% but were 15% higher than the year-ago adjusted earnings per share. Higher sales, lower interest expense and share count helped drive the year-over-year improvement in earnings.

Net sales in the reported quarter increased 10% year over year to $578.2 million, ahead of the Zacks Consensus Estimate of $572.0 million. Base business sales were up 9% thanks to favorable weather. Both the year-round markets and seasonal markets delivered strong performances, recording a respective 11% and 7% growth in the quarter.

Irrigation product sales increased 12% owing to the gradual recovery of the housing market in some of the key regions. Easy year-over-year comparison also added to sales in the quarter under review. Although net sales beat the Zacks Consensus Estimate, we believe, earnings fell short due to margin shortfall.

Gross profit grew 7% to $162.6 million but gross margin fell 60 basis points (bps) to 28.1% due to adverse product mix. Similar to the previous quarter, increased sales in lower margin product lines such as heaters and lighting products compared to higher margin products were responsible for the margin decline. Higher margin product lines comprising goods related to basic pool maintenance and minor repair activity experienced low sales growth.  

Operating income in the quarter increased 30% to $53.4 million while adjusted operating margin grew only 10 bps to 9.2%.

Guidance

For 2013, management narrowed its expectation for earnings per share in the range of $2.03—$2.08 from the prior range of $2.03—$2.13. This is the second time that Pool has reduced its guidance this year. Prior to this, on Jun 18, management lowered its earnings per share guidance from the range of $2.13−$2.23 per share to $2.03—$2.13 per share in the wake of inclement weather in North America and Europe.

Share Repurchase

During the quarter, Pool bought back 786,000 shares for a total of $41.8 million. So far in the month of October, Pool has repurchased 99,000 shares, leaving shares worth $29.3 million available for further buyback.

Our Take

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 mainly due to a shift in consumer spending.

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 last quarter of the year, which is seasonally weak, Pool is likely to underperform in the near term. Further, the reduction in full-year guidance remains another overhang. Pool currently holds a Zacks Rank #4 (Sell).

Other Stocks to Consider

Not all stocks in the consumer discretionary sector are performing poorly. There are some stocks in the restaurant industry that are currently doing well and are worth considering. These include Sturm, Ruger & Co. Inc. (RGR - Snapshot Report), Polaris Industries, Inc. (PII - Snapshot Report) and Johnson Outdoors Inc. all carrying a Zacks Rank #2 (Buy).
 

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