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Latham's (NASDAQ:SWIM) Q4 Sales Top Estimates But Stock Drops 12.3%


Full Report / March 12, 2024

Residential swimming pool manufacturer Latham (NASDAQ:SWIM) reported Q4 FY2023 results topping analysts' expectations, with revenue down 15.8% year on year to $90.87 million. On the other hand, the company's full-year revenue guidance of $505 million at the midpoint came in 6.9% below analysts' estimates.

Latham (SWIM) Q4 FY2023 Highlights:

  • Revenue: $90.87 million vs analyst estimates of $86.95 million (4.5% beat)
  • EPS: $0 vs analyst estimates of -$0.12 ($0.12 beat)
  • Management's revenue guidance for the upcoming financial year 2024 is $505 million at the midpoint, missing analyst estimates by 6.9% and implying -10.9% growth (vs -18.3% in FY2023)
  • Gross Margin (GAAP): 23.3%, up from 17.9% in the same quarter last year
  • Market Capitalization: $378.7 million

Started as a family business, Latham (NASDAQ:SWIM) is a global designer and manufacturer of in-ground residential swimming pools and related products.

Latham was created to provide high-quality, long-lasting swimming pools and has since evolved into a globally recognized company in the residential swimming pool sector. Over time, the business expanded its reach and product line, adapting to changing consumer needs and the evolving landscape of outdoor home improvement.

Latham's primary offerings encompass a range of in-ground residential swimming pools, including fiberglass and vinyl-liner models, along with various pool-related products like covers, liners, and safety fencing. The company addresses the need for durable, aesthetically pleasing, customizable pool solutions for residential settings.

Latham generates revenue through both direct sales and an extensive dealer network spanning multiple countries. This business model allows the company to maintain a balance between broad market reach and the provision of personalized, localized service. The company's products primarily appeal to homeowners seeking to improve their properties and builders and contractors looking for reliable and high-quality pool solutions.

Leisure Products

Leisure products cover a wide range of goods in the consumer discretionary sector. Maintaining a strong brand is key to success, and those who differentiate themselves will enjoy customer loyalty and pricing power while those who don’t may find themselves in precarious positions due to the non-essential nature of their offerings.

Competitors in the outdoor recreation and water leisure industry include Brunswick (NYSE:BC), MasterCraft Boat (NASDAQ:MCFT), and Malibu Boats (NASDAQ:MBUU).

Sales Growth

A company’s long-term performance can give signals about its business quality. Even a bad business can shine for one or two quarters, but a top-tier one may grow for years. Latham's annualized revenue growth rate of 12% over the last three years was mediocre for a consumer discretionary business.

Latham Total Revenue

Within consumer discretionary, product cycles are short and revenue can be hit-driven due to rapidly changing trends. That's why we also follow short-term performance. Latham's recent history shows a reversal from its already weak three-year trend as its revenue has shown annualized declines of 5.2% over the last two years.

This quarter, Latham's revenue fell 15.8% year on year to $90.87 million but beat Wall Street's estimates by 4.5%. Looking ahead, Wall Street expects revenue to decline 4.1% over the next 12 months.

Operating Margin

Operating margin is an important measure of profitability. It’s the portion of revenue left after accounting for all core expenses–everything from the cost of goods sold to advertising and wages. Operating margin is also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Latham was profitable over the last two years but held back by its large expense base. Its average operating margin of 3.7% has been paltry for a consumer discretionary business. Latham Operating Margin (GAAP)

In Q4, Latham generated an operating profit margin of negative 9.9%, up 9 percentage points year on year.

Over the next 12 months, Wall Street expects Latham to maintain its LTM operating margin of 2.8%.

Key Takeaways from Latham's Q4 Results

We were impressed by how significantly Latham blew past analysts' operating margin and EPS expectations this quarter. On the other hand, its full-year revenue and EBITDA guidance missed estimates as the company expects more industry softness in 2024, projecting a ~15% decline in new pool installations in its markets. Despite the weakness, management noted it gained market share in 2023, especially with its fiberglass pools (fiberglass products accounted for ~73% of the company's in-ground pool sales in 2023). Zooming out, we think this was still a decent, albeit mixed, quarter, showing that the company is staying on track. The market was likely frightened by Latham's outlook, and the stock is down 12.3% after reporting, trading at $2.88 per share.

Is Now The Time?

Latham may have had an okay quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We cheer for all companies serving consumers, but in the case of Latham, we'll be cheering from the sidelines. Its revenue growth has been mediocre over the last three years, and analysts expect growth to deteriorate from here. On top of that, its projected EPS for the next year is lacking, and its operating margins reveal poor profitability compared to other consumer discretionary companies.

Latham's price-to-earnings ratio based on the next 12 months is 22.5x. While we've no doubt one can find things to like about Latham, we think there are better opportunities elsewhere in the market. We don't see many reasons to get involved at the moment.

Wall Street analysts covering the company had a one-year price target of $3.63 per share right before these results (compared to the current share price of $2.88).

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