News

Shares in wholesale swimming pool products distributor Pool Corp. (NASDAQ: POOL) declined by 15.5% in June, according to data provided by S&P Global Market Intelligence. The move comes after a disappointing swimming pool season update in late June that caused the company to lower its full-year earnings estimates.

Pool Corp. updates the market

The second-quarter update referenced "persistently weak demand for new pool construction." Management now believes new pool units will decline by 15% to 20% in 2024 compared to 2023, with remodeling activity down by up to 15%. That's compared to a previous estimate for remodeling activity between flat and a decline of 10% on 2023.

Given the importance of spring and summer to Pool's yearly sales, management took down its full-year estimate for earnings per share (EPS) from a range of $13.19 to $14.19 to a new range of $11.04 to $11.44.

Why Pool Corp.'s sales have disappointed

It comes down to a lack of willingness among consumers to spend on big-ticket discretionary items "like swimming pools and outdoor living projects," according to Pool's management.

There are two reasons for this. First, relatively high interest rates are pressuring consumer discretionary spending and slowing the housing market. When the latter happens, individuals often have concerns over the value of their house and slow expenditures in it accordingly.

Second, a natural correction occurred following the boom years when the lockdowns pulled forward spending on leisure activities at home.

The following chart shows how revenue surged at Pool Corp. and two significant suppliers, Pentair, and Hayward Holdings, from 2020 to 2023, only to decline from 2023 onward.

POOL Revenue (TTM) data by YCharts

As such, investors hope that a combination of lower interest rates in the future and a return to a more normalized trend of spending on pools will return. On a positive note, while spending on new pool units is declining in 2024, the installed base of new pools is still growing. That will spur spending on equipment sales over the long term. Equipment sales tend to be more sticky in a downturn, and management noted that its equipment sales were only down 2% for the year, compared to an 11% decline in sales of building materials used to make new pools.

Maintenance-based revenue will help support the pool company while investors wait for new pool spending to rise again.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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