Pool Corp (POOL, Financial) dropped to 52-week lows today after cutting its FY24 guidance, impacting peers Latham Group (SWIM, Financial) and Leslie's (LESL, Financial). The pool supplies and equipment maker operates in a highly discretionary and seasonal industry. Demand surged during the pandemic but has since declined. Many markets, including North America and Europe, have climates unsuitable for swimming year-round, limiting the potential for pool installations. Additionally, pools require significant upkeep, which becomes burdensome in an inflationary environment.
The housing market's elevated interest rates continue to pose challenges. In late April, POOL noted that high interest rates had significantly reduced new pool starts, with permits dropping 15-20% year-over-year in Q1, more than management anticipated. These factors have created turbulence for POOL. After a strong rally in November due to optimism about 2024 interest rate cuts, POOL shares have fallen about 30% since their late-March highs.
- POOL's reduced guidance is particularly disappointing given its optimistic remarks in late April. Management had expected FY24 construction levels to be flat to down 10%, supported by easier year-over-year comparisons and early signs of market stabilization.
- However, new pool construction and remodeling did not meet expectations, leading to the slashed guidance. The company now projects FY24 EPS of $11.04-11.44, down from its previous guidance of $13.19-14.19 and its initial outlook of $13.00-14.00 from February. POOL also expects new pool units to decline by 15-20% year-over-year in FY24, significantly worse than the previously anticipated flat outlook.
- On a positive note, POOL reported steady demand for non-discretionary and recurring pool maintenance. While not a major silver lining, it indicates that consumers continue to rely on POOL for maintenance, aiding organic market share growth.
- Management remains confident that the demand for swimming pools and outdoor living projects will eventually rebound, despite current economic headwinds.
POOL might be correct about a lasting consumer interest in swimming pools. The pandemic triggered a move to the suburbs, increasing the desire for pools. Similar to other outdoor activities like camping and skiing, COVID-19 likely created a permanent demand shift. However, the macroeconomic conditions have worsened since the pandemic, reducing short-term interest in these discretionary activities. While POOL's recent stock decline might present a long-term buying opportunity, short-term challenges could hinder its recovery.
