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Analyst Blog

Pool Corp.’s (POOL - Analyst Report) third quarter 2012 adjusted earnings per share of 59 cents were ahead of the Zacks Consensus Estimate of 56 cents and 18% above the year-ago level.  One less selling day than the third quarter of 2011 led to a tough comparison in the quarter under review.

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 5.0% year over year to $528.0 million but lagged the Zacks Consensus Estimate of $531.0 million.  

Inside the Headline Numbers

Overall Base business sales of Pool improved 3% year over year. Sales from swimming pool side business increased only 3% in the quarter, while sales from irrigation business were up 8%. Results were benefited by market share gains, offset somewhat by 1% decline by adverse currency translation.

Among the three largest markets of swimming pool side business, Florida performed relatively better while California and Texas were a little lower than the company average. In those markets, year-over-year comparison made a crucial difference to sales growth.

Gross profit grew 2% year over year to $151.5 million but gross margin fell 70 basis points (bps) to 28.7% due to cut-throat competition, tough year-over-year comparison owing to vendor price increases last year and an adverse customer mix. Operating margin fell 30 bps to 7.8%.

Liquidity

Cash and cash equivalents increased 40% year over year to $28.8 million. Net receivables climbed 9% from the prior-year period to $175.5 million.

The inventory level escalated 3% year over year to $349.3 million at the end of the third quarter. Total long-term debt was $214.3 million versus $268.7 million in the year-ago quarter.

Guidance

After slashing the full-year earnings per share guidance in the last quarter, management raised it this time to the range of $1.80–$1.83 from $1.75–$1.82.

Our Take

Management still expects earnings per share to grow over 20% this year, which if achieved, will mark the third consecutive year of earnings growth. However, tough seasonality in the fourth quarter and faltering consumer confidence mainly in Europe, representing 6% of Pool’s total sales are some causes of concern.

However, on a positive note, there are some commendable attributes in the stock like efficient cost containment efforts, a steady turnaround of the Green business, which was once struggling, and market share gains. The increase in full-year guidance also portrays the company’s inherent strength.

Pool, which competes with the likes of Johnson Outdoors Inc. , holds a Zacks #1 Rank (short-term Strong Buy recommendation). We reiterate our long-term Neutral recommendation on the stock.

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