Business Overview and History:

Latham Group, Inc. (NASDAQ: SWIM) is the largest designer, manufacturer, and marketer of in-ground residential swimming pools in North America, Australia, and New Zealand. With an impressive operating history spanning over 65 years, Latham has established itself as a leading force in the pool industry, known for its innovative product offerings and strong customer relationships.

Latham Group was founded in 1956 and has since grown to become the undisputed market leader in the in-ground pool space. The company's portfolio includes a wide range of products, including fiberglass pools, custom vinyl pools, pool liners, and automatic safety covers. Latham's strategic focus on vertical integration and product diversification has allowed it to maintain a dominant position in the industry.

Over its long history, Latham has pioneered several innovative approaches in the pool industry. One of its most significant contributions was the introduction of the first direct-to-homeowner digital and social marketing strategy. This revolutionary approach transformed the homeowner's purchasing journey in the pool industry, disrupting the traditional business-to-business model where pool manufacturers primarily sold to dealers. By creating a direct relationship with homeowners, Latham was able to generate demand for its pools and provide high-quality, purchase-ready consumer leads to its dealer partners.

Throughout the decades, Latham has continuously expanded its product portfolio, now offering the industry's broadest range of in-ground swimming pools, pool liners, and pool covers. This diversification has strengthened the company's market position and allowed it to cater to a wide range of customer preferences.

The company has demonstrated resilience in the face of various challenges throughout its history. In 2020, Latham successfully navigated the COVID-19 pandemic, which had significant impacts on consumer spending and demand. The company's strong leadership position and adaptability enabled it to weather this storm effectively. Additionally, Latham has faced and overcome other macroeconomic challenges, such as inflation and supply chain disruptions, by adapting its operations and strategies as needed.

In 2021, Latham made its public debut through a successful initial public offering, raising $399.3 million in net proceeds. This infusion of capital has enabled the company to accelerate its growth initiatives, including investments in manufacturing capacity, research and development, and acquisitions.

One of Latham's key strengths is its robust dealer network, which encompasses over 1,850 employees across 30 locations. The company has enjoyed long-tenured relationships with its dealers, averaging over 14 years. This strong dealer partnership model has been integral to Latham's success, allowing it to effectively reach and serve its customer base. Latham supports its dealers with business development tools, co-branded marketing programs, in-house training, and a comprehensive operations platform.

Financial Performance and Outlook:

Latham's financial performance has been mixed in recent years, reflecting the cyclical nature of the pool industry. In the fiscal year ended December 31, 2023, the company reported net sales of $566.5 million and a net loss of $2.4 million. However, the company's adjusted EBITDA for the year was $61.6 million, demonstrating its ability to generate healthy margins.

For the first nine months of fiscal 2024, Latham reported net sales of $421.2 million, a 11.4% decrease compared to the same period in the prior year. Net income for the period was $11.3 million, a significant improvement from the $2.5 million net loss in the first nine months of fiscal 2023. Adjusted EBITDA for the nine-month period stood at $76.6 million, with a margin of 18.2%.

Looking ahead, Latham has provided guidance for the full fiscal year 2024, anticipating net sales in the range of $500 million to $510 million and adjusted EBITDA between $77 million and $83 million. The company's management has emphasized its focus on driving operational efficiencies, including through lean manufacturing and value engineering initiatives, which are expected to support margin expansion.

In the most recent quarter (Q3 2024), Latham reported revenue of $150.50 million, representing a 6.4% decrease year-over-year. Net income for the quarter was $5.90 million. The decrease in revenue was primarily driven by lower sales volumes, which was consistent with expectations for a 15% decline in new pool starts in 2024. However, the year-to-date outperformance was driven by Latham's leadership in the faster-growing fiberglass pool and automatic cover markets.

Competitive Landscape and Growth Opportunities:

Latham operates in a highly competitive industry, facing challenges from both regional and national pool manufacturers. However, the company's market-leading position, innovative product portfolio, and strong dealer relationships have allowed it to maintain a significant competitive advantage.

One of Latham's key growth initiatives is the continued expansion of its fiberglass pool offerings. Fiberglass pools have gained popularity due to their cost-efficiency, ease of installation, and lower maintenance requirements compared to traditional concrete pools. Latham's 12 fiberglass manufacturing facilities across North America and Australia position the company well to capitalize on this growing market segment.

Additionally, Latham has identified the Sand States (Florida, Texas, Arizona, Nevada, and California) as a strategic focus area, where it aims to increase its market share through targeted sales and marketing efforts. The company believes that this region represents a significant growth opportunity, as it currently accounts for an estimated 70-75% of new pool installations in North America.

Latham has also made strategic acquisitions to strengthen its product portfolio and distribution channels. In August 2024, the company acquired Coverstar Central, a leading automatic safety cover dealer, further solidifying its position in the high-margin pool cover market.

Risks and Challenges:

Despite Latham's strong market position, the company faces several risks and challenges that investors should consider. The pool industry is heavily influenced by macroeconomic factors, such as consumer confidence, housing market trends, and interest rates, all of which can impact Latham's sales and profitability.

Additionally, Latham operates in a highly competitive landscape, with regional and national players vying for market share. The company's ability to maintain its competitive edge and continue its growth trajectory will depend on its capacity to innovate, adapt to changing customer preferences, and execute its strategic initiatives effectively.

Another potential risk factor is the company's reliance on its dealer network. While Latham's long-standing relationships with its dealers have been a key driver of its success, any disruptions or changes in this distribution channel could have a significant impact on the company's performance.

Financials:

Latham's financial performance has shown both strengths and areas for improvement. The company's ability to generate healthy margins, as evidenced by its adjusted EBITDA, is a positive sign. However, the recent decline in net sales and the net loss reported in the previous fiscal year highlight the challenges faced by the company in a cyclical industry.

For the fiscal year 2023, Latham reported revenue of $566.49 million and a net loss of $2.39 million. Operating cash flow (OCF) for the year was $116.37 million, while free cash flow (FCF) stood at $83.18 million.

In the most recent quarter (Q3 2024), Latham's revenue was $150.50 million, with a net income of $5.90 million. The company generated an operating cash flow of $37.24 million and a free cash flow of $33.21 million for the quarter.

Latham conducts its business as one operating and reportable segment, focusing on in-ground swimming pools, pool liners, and pool covers. For the first three fiscal quarters of 2024, in-ground swimming pools accounted for $215.57 million in net sales, pool liners generated $105.55 million, and pool covers contributed $100.13 million.

The in-ground residential swimming pool industry has seen a compound annual growth rate (CAGR) of approximately 5-7% over the past 5 years, driven by strong demand for outdoor living spaces. However, the industry is currently facing a cyclical downturn, with expectations for a 15% decline in new pool starts in 2024 due to macroeconomic headwinds.

Liquidity:

As of September 28, 2024, Latham's liquidity position showed a cash balance of $59.86 million. The company had a $75 million revolving credit facility, which was undrawn as of that date. Latham's debt-to-equity ratio stood at 0.68, indicating a moderate level of financial leverage. The company's current ratio of 2.44 and quick ratio of 1.60 suggest a healthy ability to meet short-term obligations.

The successful IPO in 2021, which raised $399.3 million in net proceeds, likely bolstered Latham's liquidity position and provided resources for growth initiatives. This strong liquidity position allows the company to invest in its operations, pursue strategic acquisitions, and navigate potential industry downturns.

Conclusion:

Latham Group is a well-established player in the in-ground pool industry, boasting a dominant market position and a diverse product portfolio. The company's focus on fiberglass pools, strategic expansion into the Sand States, and recent acquisitions position it for continued growth. However, investors should closely monitor Latham's ability to navigate the cyclical nature of the pool industry, maintain its competitive edge, and effectively execute its strategic initiatives.

Despite the current industry headwinds, Latham's management remains optimistic about the company's future prospects. They believe that the operational and financial model has structurally changed, increasing its underlying earnings capabilities and enabling longer-term margin expansion. The company plans to continue investing in sales, marketing, and product development initiatives to capture incremental share of the in-ground pool market as the industry recovers.

As Latham continues to innovate and adapt to changing market dynamics, it may present an interesting investment opportunity for those seeking exposure to the thriving outdoor living category. However, potential investors should carefully consider the company's performance in light of the expected industry downturn and its ability to execute its growth strategies in a challenging macroeconomic environment.