Pool Beats on Higher Top Line

Pool Corp. (POOL - Analyst Report) reported third quarter 2011 earnings of 50 cents, beating the Zacks Consensus Estimate of 48 cents per share and showing an improvement from the year-ago earnings of 45 cents. The outperformance was mainly driven by solid top-line growth.

Net sales in the reported quarter jumped 11% year over year to $503.6 million. Acquisitions and new locations contributed $21.0 million to sales but not to operating income as it includes higher investment charges.

Inside The Headline Numbers

Overall Base business sales of Pool improved 9% year over year, including a favorable exchange rate impact of 1%. Moreover, market share gain along with increases in replacement and construction activities contributed to the strong upside.

Blue business sales increased 9.4% in the quarter, while Green business sales were up 8.9%. Arizona emerged as the largest market for the company’s blue business, with a robust 19.0% growth followed by Texas (16.0%), Florida (9.0%) and California (5.0%). All other markets were up 8% collectively.

Gross profit climbed 13% year over year to $147.9 million and gross margin spiked 60 basis points (bps) to 29.4%, attributable to Pool’s pricing discipline coupled with improvements in sales trends, purchase execution and mid-year vendor price increases. Further, higher freight income helped gross margin by 12 bps and also compensated for steeper delivery costs. Operating income expanded 10% year over year to $40.9 million while operating margin was flat at 8.1%.

Financials

Cash and cash equivalents declined 37% year over year to $20.7 million. Net receivables grew 3% from the prior-year period to $160.6 million attributable to improved customer collections partially offset the combined impact of higher September sales, a lower allowance for bad debt and balances related to recent acquisitions. The inventory level upped 10% year over year to $337.7 million at the end of the third quarter, reflecting stock piling due to a price hike by vendors, inventory related to recent acquisitions and higher purchase levels in anticipation of sales growth. Total debt outstanding was $268.7 million versus $37.5 million in the year-ago quarter.

Outlook

For full-year 2011, management elevated its earnings guidance on both ends. The company now expects earnings per share in the range of $1.43–$1.47, up from $1.38–$1.45 on the back of strong third quarter results. Pool anticipates modest increases in base business operating expense in the fourth quarter of 2011 and beyond.

Our Take

The company reported better-than-expected results, but we expect estimates to go down in the coming days as the upcoming fourth quarter is seasonally the weakest. Pool is expected to witness a sequential decline in revenue in the fourth quarter and report a loss as well.

However, management realizes the opportunity to grow earnings per share over 20% per year for the next five years. We are also supportive of management’s view and believe that the company is experiencing an uptrend, even in its green business which was once struggling.

However, the macro economy is yet to show definitive signs of recovery, which might restrict replacement, renovation and new construction in the near term. Consequently, Pool, which competes with the likes of Johnson Outdoors Inc. (JOUT - Snapshot Report) 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.