Pool Corp

Moat: 4/5

Understandability: 2/5

Balance Sheet Health: 4/5

Pool Corp is a leading wholesale distributor of swimming pool supplies, equipment, and related products.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Pool Corp, often referred to by its ticker POOL, operates as a wholesale distributor, connecting manufacturers with a diverse customer base of pool builders, retailers, and service companies. Its network is expansive, spanning the globe with locations primarily in North America.

Business Overview

Revenue Distribution: POOL’s revenue is primarily derived from the sale of products for both new pool construction (approximately 30% of sales) and pool maintenance and repair (approximately 70% of sales). These products include everything from pool equipment (pumps, filters, heaters, cleaners, etc.) to construction materials, chemicals, and accessories.
Industry Trends: The pool industry is impacted by various factors including housing starts, climate, and discretionary consumer spending. The replacement and remodeling of existing pools is the largest and most stable source of revenue. Increasingly, there is a trend towards technology integration in pool equipment (automation, energy-efficient systems) and a growing demand for higher quality products that enhance the pool experience. Supply chains have had issues recently, mainly because of supply chain constraints of certain semiconductors.
Margins: Pool Corp has traditionally maintained good gross margins ranging from high 20s to low 30s, with stable operating margins typically falling around 10%. Strong operating margins come from the ability to maintain operating expenses as fixed and grow revenues.
Competitive Landscape: The pool supply distribution market is fragmented, with POOL holding a leadership position due to its scale, geographic reach, and proprietary brands. While local distributors exist, they struggle to match the breadth of POOL’s offerings and their access to both manufacturers and customers. It has been noted in the past earnings calls that the company is not losing market share to other large distributors, it is mainly seeing an increase of new players from smaller players that are trying to leverage technology. This may pose a future threat if these smaller players gain a foothold.
What Makes POOL Different? POOL’s main moat resides in its vast distribution network across multiple countries, its long-term relationships with suppliers, and its efficient logistics operation. It has a large network of distribution centers, where they hold around 85,000 products in stock. The company has done well in creating brand equity, as they own several proprietary brands, such as GLI, which manufactures high-quality pool liners. They also have been consistently growing their private-label program, offering products directly from factories, without branding.

Financials (Based on Recent Earnings Calls, Reports, and 10-Ks)

The company is undergoing some operational changes that have some positives and negatives. In the positive side they have been shifting operations towards digital and data optimization that will result in increased efficiency, and they are taking care to remove bottlenecks in the supply chain and manufacturing. But at the same time, sales volume has been impacted by high costs which has resulted in lower revenues, lower gross profits, and they have reported a slightly lower profitability overall.

Revenues: Q3-2022 results reported 22% sales growth compared to the same period in 2021, but revenues have declined by 5% YoY in 2023 Q3. This was due to declines in sales volumes of products sold.
Profitability: Gross margins have decreased to 29.5% in the last quarter of 2023, compared to over 30% in the same period in 2022. This is due to increased prices that they haven’t been able to pass to consumers.
Cash Flow: Free cash flow generation has been strong over the past several years because of the highly stable and resilient business, however, with revenues decreasing, this will likely decrease in the next years, also.
Leverage: Pool has been taking on debt in the last years, but continues to remain within a prudent target.

Moat Analysis: 4 / 5

POOL has a strong and defensible moat, however some recent factors have made it weaker than before. I would rate their moat as a strong 4 out of 5, mainly because the competitive threats have been increasing.

Distribution Network (Wide): Pool’s main moat lies in its distribution network of over 400 centers, this makes the company the go-to choice for pool professionals. These facilities need a great deal of upfront investment to achieve scale. Their vast network allows for extremely fast delivery of goods, which is crucial to its customer base (contractors).
Supplier Relationships (Medium): Decades of relationships with the biggest suppliers in the market, give POOL an edge in getting products, often at preferential pricing.
Switching Costs (Medium): Contractors tend to stick with a certain distribution company for their supplies, since they tend to create relationships with the people and there is the implicit risk in switching to a new distributor. There are also smaller factors that create a moat, like their robust delivery systems and proprietary brands.

Risks to the Moat and Business Resilience

Economic Downturns: A recession can impact sales of both new pools and discretionary spending on maintenance and repairs.
Increased Competition: While local players are less likely to steal market share, new competitors are more willing to make a deal with manufacturers to obtain good prices. Further, with a good online presence, some new entrants may offer similar products and fast shipping, disrupting the current market.
Disruption of Supply Chains: The business was deeply affected by supply chain bottlenecks and other issues. This showed how exposed the company is to global economics, so a continued slowdown or disruptions may hurt performance for quite a while. They have a limited amount of control on this.
Change in Consumer Preferences: Consumers might shift their spending habits from discretionary projects towards other goods. Pool supplies are discretionary spending and are highly dependent on a good economy.
Inflation: As inflation becomes a more prominent issue, the company will have to pass pricing on to consumers, which is less predictable in terms of volume. Lower margins may lead to competitors trying to compete on price, eroding the margin.

Understandability: 2 / 5

The company provides a commodity service, distributing pool supplies. The business model is straightforward, however, there are many subtleties in the operations of the company and how they have managed to get their margins. Also, they have a somewhat intricate financial statements that require careful analysis to determine the profitability and solvency. I would rate understandability as 2 out of 5, fairly easy to understand, but requires due diligence.

Balance Sheet Health: 4 / 5

Pool Corp maintains a reasonably healthy balance sheet. They have been taking on debt in the last years but their cash flow remains high enough to justify this, considering the nature of their business and consistent profits. The high levels of inventory are not optimal but needed due to the recent issues of supply-chain bottlenecks. I would rate their balance sheet health as 4 out of 5, quite healthy but with increased financial obligations.

Recent Concerns / Controversies and Problems:

Slowing Growth and Revenue Contraction: Latest earnings calls and reports show that there is a significant slowdown in revenue growth as compared to 2021 and 2022. Also, that the prices being charged to end customers are high, reducing demand.
Supply Chain Issues and Inventory Management: The company has struggled to procure parts and inputs, this has affected production timelines, and increased inventories in an unbalanced manner.
Labor Costs: Wage inflation has put downward pressure on gross profit margins.
Goodwill and Acquired Intangibles: A considerable portion of the company’s value is derived from goodwill and other intangible assets obtained from acquisitions. These are not the most secure long-term assets and are worth noting when looking at financial data.

Management stated that the supply chain issues are starting to resolve, and they have already implemented measures to tackle the rising costs and lower their reliance on outside vendors, which should lead to better performance in the future. However, they did warn about a looming economic slowdown that will probably affect sales for at least a couple of quarters.