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Expansion Efforts to Drive Pool Corp (POOL), High Costs Ail

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Pool Corporation (POOL - Free Report) is likely to benefit from its expansion efforts, remodeling and replacement activities as well as solid base business. However, a rise in labor and delivery expenses along with coronavirus-related woes is a concern.

Let us discuss the factors that highlight why investors should retain the stock for the time being.

Factors Driving Growth

Pool Corp focuses on expansion initiatives to boost revenues. The company is foraying into newer geographic locations to expand in existing markets and launch innovative product categories to boost market share. It is also trying to expand through various acquisitions. In this regard, the company is assimilating the TWC Distributors acquisition and expanding in the Florida market with nine additional sales centres. The company expanded its Horizon network in the Florida and California markets. The company continues to progress with organic growth, the greenfield expansion and acquisitions. Notably, the acquisitions and new locations are likely to boost customer relationship and services, which will boost the top line. So far this year, the company has opened nine new locations (seven on the blue side and two on the green side).

Pool Corp continues to benefit from the company’s remodeling and replacement activities. During second-quarter 2021, building materials sales increased 33% year over year following growth rates of 34% (as of first-quarter 2021), 42% (as of fourth-quarter 2020) and 29% (as of third-quarter 2020). The company is gaining from strong demand in the construction and remodel markets. Equipment and chemical sales increased 35% and 28% year over year, respectively, in the second quarter. The upside was primarily driven by solid demand for heaters, pumps, filters, lighting, automation and pool remodeling. Chemical sales benefited from increased dichlor and trichlor product pricing. The company believes that the flexibility of the new work-from-home norm is likely to act as a catalyst for investments in home improvements. It expects to benefit from new products (such as automation and the connected pool), continuation of the de-urbanization trends and the strengthening of the southern migration.

Pool Corp is also gaining from the solid performance of its base business segment. In second-quarter 2021, the company’s base business segment contributed 94.4% to total revenues. During the quarter, revenues from base business increased 31.9% year over year to $1,687.7 million. In the previous four quarters, revenues from base business increased 50.7% (as of first-quarter 2021), 39% (fourth-quarter 2020), 27% (third-quarter 2020) and 14% (second-quarter 2020) on a year-over-year basis.

Given the company’s ability to drive organic growth and manage cost structure through execution and capacity creation, it raised its guidance for 2021. Pool Corp anticipates 2021 earnings per share in the range of $13.75-$14.25, up from the prior estimate of $11.85-$12.60. The company anticipates robust demand to continue backed by strong single-family housing market, new product launches as well as higher maintenance and repair activities.

Concerns

Pool Corp, which shares space with Vista Outdoor Inc. (VSTO - Free Report) , Acushnet Holdings Corp. (GOLF - Free Report) and Academy Sports and Outdoors, Inc. (ASO - Free Report) in the Zacks Leisure and Recreation Products space, has been affected by the coronavirus pandemic. Risks stemming from resurgence of COVID-19 cases in some markets, new stay-at-home orders or government mandates and unfavorable economic conditions triggered by the crisis could negatively impact the business. The company stated that it expects tougher year-over-year comparisons and industry capacity constraints for the second half of 2021.

The company is continuously shouldering higher expenses, which are denting margins. Higher labor and delivery costs and investments in information technology systems as well as hardware are increasing expenses. During second-quarter 2021, cost of sales surged 36.2% from the prior-year quarter’s number. Selling and administrative expenses also increased 27.1% year over year. We believe that the company has to work hard toward cutting expenses in order to achieve high margins.