Pool Corporation (POOL) Earnings

Management highlights

**Strategic Direction & Core Priorities** - New CEO John Watwood confirmed the company's long-standing strategy: to be the leading global distributor of outdoor lifestyle products, growing customer share, building network density, and prioritizing consistent operational execution. All investments must improve customer experience, strengthen supplier partnerships, boost productivity, and deliver appropriate returns; no investments are made without this justification. - Four core strategic priorities were defined to drive profitable growth: - *Sales excellence*: Equip sales teams with talent, training, and tools to grow existing customer revenue and acquire new customers, leveraging the company's digital platform, proprietary products, and in-center expertise. - *Pricing and supply chain discipline*: Maintain competitive, market-aligned pricing, grow private label/proprietary brands to deepen loyalty and improve margins, and manage cost pressures from inbound freight. - *Operational execution*: Maintain high service standards across 455 existing locations, continue ramping recently opened greenfield locations to full profitability, and drive efficiency through existing process improvements and digital tool adoption. - *Disciplined M&A*: Pursue opportunistic acquisitions that add density, new markets, or capabilities with clear strategic, cultural, and financial fit. **Operational Highlights** - Resilient overall performance: Strength in recurring maintenance and building materials offset softness in new pool construction and discretionary demand. U.S. pool permits are tracking down low single digits year-to-date, with discretionary demand most muted in year-round sunbelt markets, while seasonal markets grew 6% YoY. - Network expansion: The company added one new location in a key U.S. market and closed one underperforming Horizon location, maintaining a deliberate, productivity-focused approach to greenfield expansion. Greenfield locations opened from 2022 onward are trending in the right direction but still have room to mature to target profitability. - Balance sheet and capital allocation: Inventory grew 4% YoY to $1.4 billion, with moderated growth after peak season stocking and management noted comfort with inventory quality and positioning. Total debt was $1.3 billion, with a leverage ratio of 1.78x (within the 1.5-2.0x target range) and a weighted average interest rate of 4.3%. Year-to-date, the company returned $93 million in dividends and $86 million in share repurchases, with $580 million remaining in available repurchase authorization. - Technology adoption: Pool360 digital platform adoption reached 18% of sales, an all-time high, with continued integration progress across service and water testing tools. Management noted prior technology investments are complete, and focus has shifted to increasing returns on existing investments.

Guidance

- Full-year 2026 adjusted earnings guidance remains unchanged at $10.87 to $11.17 per diluted share, as slightly better top-line growth offset lower expected gross margin. Reported diluted EPS guidance is updated to $10.66 to $10.96, reflecting $0.21 per share in one-time CEO transition costs. - Full-year net sales are expected to grow low single digits, with pricing contributing 2% to 3% for the full year. Pricing contribution will moderate in the second half to ~2% as the company laps 2025 mid-year vendor price increases. - Full-year gross margin is now expected to be approximately 30 basis points lower than the prior year, down from the previous expectation of being in line with the prior year. This downward revision reflects higher-than-expected inbound freight costs and unfavorable customer mix experienced in Q2, which is expected to persist through the second half of 2026. - Adjusted operating expenses are expected to increase 2% to 3% full-year, with growth at the higher end of the range in Q3 and the lower end in Q4, due to non-recurring IT expenses in Q4 2025. The forecast includes modest incremental incentive compensation relative to 2025. - Full-year interest expense is projected to be between $49 million and $51 million, with an effective full-year tax rate of approximately 25%. Weighted average diluted shares outstanding are expected to be ~36.4 million, reflecting year-to-date share repurchases. - Long-term 6% to 9% sales growth guidance is not reiterated under current market conditions; management will reevaluate the outlook after 2026 once market conditions normalize.

Segment performance

Pool Corporation reported overall Q2 2026 net sales of $1.8 billion, a 2% year-over-year increase, with 3% contributed by pricing. Gross profit grew 1% to $541 million, with a gross margin of 29.7% (down 30 bps YoY). Reported operating income was $268 million (down 2% YoY), while adjusted operating income increased 1% to $276 million (15.1% adjusted operating margin). Adjusted net income rose 1% to $196 million, with adjusted diluted EPS of $5.38 (up 4% YoY). - **Maintenance & Remodel Business**: This core recurring segment saw healthy demand, offsetting softness in new construction and drove overall low single digit full-year growth expectations. It contributed the majority of the firm's stable base revenue. - **Building Materials**: Grew 4% YoY, outperforming other segments, supported by national showrooms and broad product breadth. This segment contributed roughly 20% of total quarterly sales based on performance commentary. - **Proprietary/Private Label & Pool360**: Private label offerings continued to gain traction, with Pool360 (the company's digital platform) reaching 18% of total sales, deepening customer engagement. - **Chemicals**: Declined 2% YoY on lower pricing, creating margin drag during the quarter. - **Equipment**: Grew 3% YoY driven by pricing and repair-related demand. - **Horizon Irrigation & Landscape (concentrated in California, Texas, Arizona, Florida)**: This segment saw significant pressure from slowing residential projects, dragging down results in key sunbelt markets, with overall sales down mid-single digits in these markets. A new leader has been appointed to turn around performance. - **Europe**: Sales grew 11% YoY, a bright spot driven by strong demand, hot weather, and increased backyard home investment, with improving regional sentiment. - **Retail & Franchise**: Sales to retail customers were down 1% YoY, while Pinch-a-Penny franchise sales were flat YoY.

Risks & headwinds

- Persistently soft U.S. new pool construction and residential landscape/irrigation demand, concentrated in key sunbelt markets, is creating sales drag and pressure on the Horizon business segment. - Higher inbound freight costs have created gross margin headwinds that cannot be fully recouved via pricing in 2026, leading to a full-year downward revision to gross margin expectations. - Ongoing industry customer consolidation (toward larger dealers) has created a continued unfavorable customer mix headwind, as larger customers have lower margin profiles than smaller independent dealers. - Soft discretionary consumer demand is a continued near-term headwind to overall sales and margin performance, though management views this as cyclical rather than structural. - Recent greenfield locations opened over the past five years still require 1-3 years of additional ramp time to reach target profitability, particularly given the lack of market tailwinds in the current cycle. - Potential retail channel disruption from industry competitor activity creates uncertainty around near-term retail customer dynamics, though no material disruption has been observed to date.

Analyst Q&A

• Q: What areas are attractive for M&A, and what operational fine-tuning has been done for the sales force and branch economics? /

  A: Management prioritizes tuck-in acquisitions that are core to the existing business, with any deal requiring strong strategic, cultural, and financial fit. For operational execution, the company has already made investments in sales force and branch operations, and is currently refining initiatives in-season rather than making large changes. Major adjustments will wait until after the 2026 pool season to prepare for 2027.

• Q: Where does management see meaningful incremental market share gain opportunities, given investor skepticism? /

  A: Management sees substantial share gain opportunities in building materials and other categories, built on the company's existing hard-to-replicate distribution network and untapped capacity. The current priority is gathering customer and supplier feedback to identify areas for improvement, then adjusting execution to capture share by becoming the preferred go-to-market channel for suppliers and the most valuable partner for customers.

• Q: What is the opportunity from prior technology investments, and what is the profitability outlook for key newer businesses like private label, Horizon, and Europe? /

  A: Technology investments, particularly for the Pool360 digital platform, are delivering positive results, with adoption reaching a record 18% of sales. Continued integration with service and water testing tools is progressing, and focus is now on increasing returns on these already completed investments. Private label has a strong margin profile and continues to grow, so the company will double down on the segment. Horizon is facing market headwinds, but a new leader has been appointed and management sees long-term potential. Europe is a bright spot with double-digit growth driven by hot weather and increased backyard investment.

• Q: Why was full-year gross margin revised, and when will higher freight costs be recovered through pricing? /

  A: The 30 basis point full-year gross margin downward revision is driven entirely by higher-than-expected Q2 inbound freight costs and unfavorable customer mix, with no impact from recent third-party supplier news. Actions to offset higher freight costs will start in early Q3 2026, but management does not expect to recover all incremental costs in 2026, so the full-year headwind is reflected in current guidance. Recovery is expected to be largely a 2027 event.

• Q: Is the current large customer mix headwind temporary or permanent, and how will it be managed? /

  A: Ongoing dealer consolidation has increased the share of lower-margin large customers, a trend that is not expected to reverse in the near term. However, the company is well-positioned to serve large customers, and can offset margin pressure through growth in higher-margin private label and proprietary product categories. Management expects the mix headwind to moderate longer term as discretionary demand improves and smaller independent customers return to the market, particularly on the new build side.