Pool (NASDAQ:POOL) held its second-quarter earnings conference call on Thursday. Below is the complete transcript from the call.
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Summary
Pool Corporation’s net sales grew 2% in Q2 2026, driven by strength in recurring maintenance and building materials, despite challenges in new construction and discretionary spending.
CEO John Wapwood emphasized strategic priorities including sales excellence, pricing and supply chain discipline, operational execution, and disciplined M&A to drive growth and competitive advantage.
Gross profit increased by 1% with a gross margin of 29.7%, impacted by higher inbound freight costs and unfavorable customer mix. The company expects full-year gross margins to be about 30 basis points below the prior year.
Pool Corporation maintained its full-year adjusted earnings guidance of $10.87 to $11.17 per share, with expectations of low single-digit top-line growth primarily from pricing.
Operational highlights include the successful adoption of digital platform Pool360, which accounted for 18% of sales, and strong sales growth in Europe.
Management acknowledged challenges in the Horizon irrigation and landscape business, particularly in key states like California, Texas, Arizona, and Florida, which saw declines due to market conditions.
The company is focusing on maintaining competitive pricing and leveraging technology investments to enhance customer engagement and operational efficiency.
Full Transcript
OPERATOR
To ask a question, you may press Star then one on your telephone keypad and to withdraw your question, please press Star then two. We do ask that you please limit yourself to one question and one follow-up. Please also note today’s event is being recorded. I’d now like to turn the conference over to Kristin Byers, Director of Investor Relations. Please go ahead.
Kristin Byers, Director of Investor Relations
Welcome to our second quarter 2026 earnings conference call. During today’s call, our discussion, comments and responses to questions may include forward-looking statements, including management’s outlook for 2026 and future periods. Actual results may differ materially from those discussed today. Information regarding the factors and variables that could cause actual results to differ from projected results are discussed in our 10-K. In addition, we may make references to non-GAAP financial measures in our comments.
A description and reconciliation of non-GAAP financial measures are included in our press release or posted on our corporate website in the Investor Relations section. Additionally, we have provided a presentation summarizing key points from our press release and today’s call, which can also be found on our investor relations website. I am now pleased to introduce John Wapwood, our President and CEO, who will begin today’s call.
John Wapwood, President and CEO
Thanks, Kristin. Good morning everyone, and thank you for joining our call. Before we cover the results for the quarter, I first want to thank our employees for their tireless efforts and their dedication to our customers day in and day out, especially during these critical pool season months. I also want to take a moment, as this is my first earnings call as Pool CEO, to share my perspective on our business and where we are headed. I came into Pool with a deep appreciation for what makes distribution businesses successful: branch-level execution, strong supplier partnerships, technical sales expertise, disciplined inventory and service level management, and seamless coordination across local markets. These capabilities have supported Pool’s value proposition for more than 30 years and provide us a strong foundation for continued growth. Additionally, the structural drivers of Pool’s business model are powerful: a large installed base of pools that naturally grows each year and generates recurring revenues from ongoing maintenance and periodic remodel activities, a professional customer base that depends on our scale and service, and a distribution network that is difficult to replicate.
With our eyes set on crisp execution, I believe we can continue to generate above-market growth and control how we respond to any type of industry backdrop. Our fundamental strategy is unchanged. We aim to be the best worldwide distributor of outdoor lifestyle products by growing our share with our customers, building density in our network and executing consistently across every market we serve. Our products must be on the shelves when the customer walks in the door, and winning comes down to service, supplier relationships and operational discipline.
Every investment and initiative we make has to support the customer experience, strengthen supplier relationships, improve productivity and generate an appropriate return. If it doesn’t, we don’t do it. And where it does, we will invest with discipline to deliver on that strategy. We are focused on four priorities, each built to grow the business. First, sales excellence. Our growth starts with serving our customers better than anyone else. We are equipping our sales teams with the talent, training and tools to help our existing customers grow their business with us and to broaden our reach to new customers.
Our digital platform, our proprietary products and the expertise in every sales center are how we deliver that value. When we make our customers more successful, we capture share and we grow. Second, pricing and supply chain discipline. Pricing sharply and competitively, running strong chemical and building materials playbooks and growing our private label and proprietary brands, which deepen customer loyalty and strengthen our margins. Third, operational execution.
Running our sales centers with speed and consistency, holding a high service standard across all 455 locations and getting our recently opened greenfields to their full potential. And fourth, growth through disciplined M&A, adding density, new markets and capabilities where the operational and financial fit is clear. Together, these four priorities are how we drive profitable growth, widen our competitive advantages and create long-term value for our shareholders.
None of this works without our people at every level of the organization. Our team should know what’s expected of them, understand how their work matters and feel empowered to serve our customers. Over the last six months, I’ve spent significant time in the field with our operators, customers and suppliers, met with employees across various functions, levels and locations, and more recently with our shareholders. Everything I’ve seen and heard confirms what excited me about joining Pool.
This is a great business built by passionate employees, the best suppliers and hundreds of thousands of customers who trust us to service and partner with them. I am proud to lead Pool’s global team of employees as we work to deliver even higher levels of performance. Now I’ll discuss how the business performed during the quarter and Melanie will take you through the financial detail. Net sales grew 2% in the second quarter, a result that reflects the resilience of our model as strength in our recurring maintenance business and continued share gains in building materials offset a soft new construction and discretionary environment.
Where we serve our customers best, we win. Our large and growing installed base drove healthy recurring maintenance demand. Building materials grew 4% and that outperformance reflects our national pool trend showrooms, our product breadth and the way our teams help builders bring their projects to life. Our proprietary and private label offerings continued to gain traction, and Pool360 reached 18% of sales, deepening how our customers engage with us and extending our reach.
In Europe, sales grew 11% on strong demand and improving sentiment. The softness we saw was concentrated where the cycle is weakest. New pool construction stayed muted as U.S. pool permits are tracking down low single digits year to date, and discretionary demand remained measured, felt most in our year-round markets. Our overall sales in California, Texas and Arizona were down mid-single digits and Florida declined 1%. Much of that drag was our Horizon irrigation and landscape business, which is concentrated in those markets and saw further pressure as residential projects slowed.
Our seasonal markets, by contrast, grew 6%. Equipment grew 3% on price and repair-related demand, while chemicals declined 2% on pricing. Sales to retail customers were down 1% and Pinch A Penny franchise sales were flat. On gross margin, higher inbound freight was the primary pressure and it’s an area we’re actively working to offset. Melanie will cover the additional details behind our gross margin performance and implications to the full year.
Consistent with our productivity-first posture, we remain deliberate on network expansion, adding one location in a key U.S. pool market and closing one Horizon location. The greenfields we’ve opened over the past year continue to ramp and their performance is improving. The class of 2022 and the remaining classes are trending in the right direction, but we still have room to grow as these locations mature. Across the rest of our network, ongoing process improvements and the continued adoption of our digital tools remain a focus for driving efficiency and productivity and getting more from the investments we’ve already made.
Taken together, the quarter reinforces our strategy and our confidence, and we remain on track to achieve our adjusted earnings guidance range of $10.87 a share to $11.17 a share. In closing, I would like to emphasize how honored I am to lead the Pool team and generate further value from the fundamentals of our business and the investments put in place over the past several years. We compete in large markets with recurring, repeat demand and I don’t take for granted the advantages we have built to serve them: a distribution network that’s hard to replicate, supplier relationships built over decades, and one of the broadest product assortments in the industry. We are continually investing in the tools and services that make it simpler for customers to grow their businesses with us, and we are doing that from a position of financial flexibility with ample capital available to reinvest, positioning us to emerge stronger as the cycle recovers. I’m grateful to our employees, suppliers and customers for the solid foundation they have built. I will now turn the call over to Melanie Hart, our Chief Financial Officer, to review our second quarter results in more detail.
Melanie Hart, Chief Financial Officer
Thank you, John, and good morning, everyone. We delivered a solid second quarter, growing sales to 1.8 billion, holding expenses tight, and generating strong earnings. Net sales increased 2% over prior year with a 3% contribution from pricing as we lapped prior-year mid-season vendor price increases. We were pleased to see that building materials volume grew again even with softer demand in other discretionary categories, and noted a 2% decline in chemicals on lower pricing.
Gross profit grew 1% to $541 million with a gross margin of 29.7%, down 30 basis points year over year. Product mix overall was neutral. The decline was driven primarily by inbound freight cost, which we were not able to fully recoup in selling price this quarter, and by unfavorable customer mix as we saw a higher portion of our sales from larger customers. Supply chain gains partially offset these areas. We made strong progress on expense discipline this quarter, managing adjusted operating expense growth down to 1% from 5% in the first quarter.
Our continued focus on capacity absorption kept compensation and outbound freight costs well managed as reported operating expenses were 273 million, up 4%. The adjusted figure excludes a one-time $8.3 million charge, primarily the non-cash acceleration of unvested equity grants tied to the CEO transition. Adjusted operating income increased 1% to 276 million with an operating margin of 15.1%. Reported operating income was 268 million, a decrease of 2% versus prior year.
Interest and other expenses increased $2 million versus the second quarter of last year, driven by higher average debt outstanding. Adjusted net income increased 1% to 196 million. On a reported basis, net income was 188 million, down 3% from a year ago without the after-tax impact of CEO transition cost. Earnings per diluted share increased 4% to $5.38 compared to $5.17 in the second quarter of last year. As reported, earnings per diluted share was $5.17 in both periods.
Next I will discuss our balance sheet and capital allocation. Inventory increased 4% to $1.4 billion at June 30 compared to $1.3 billion at the end of second quarter of prior year, consistent with the seasonal early buy and opportunistic purchases we discussed last quarter and the normal seasonal drawdown we anticipated. We sold through our peak season stocking levels, moderating year-over-year inventory growth. We are comfortable with the quality and positioning of our inventory.
Second quarter represents our peak debt levels as we stock up for season and pay vendor early-buy payments ahead of cash collections on in-season sales. Total debt was 1.3 billion, an increase of 111 million over the past 12 months. Our weighted average effective interest rate improved to 4.3% from 4.7% last year, as we continue to benefit from our swap agreements that are in place and expire in February of 2027 at 1.78%. We remain within our expected debt leverage ratio of 1.5 to 2 times.
On capital allocation, we are anticipating another strong cash flow year with cash from operations expected to come in around 100% of net income. We return capital to shareholders through dividends and share repurchases, paying 93 million in dividends and completing approximately $86 million in share repurchases year to date. In April, our board increased our share repurchase authorization to $600 million, of which $580 million remains available.
As a reminder, the second half of the year, as we exit the season, is when we generate the bulk of our operating cash flow. With the first half behind us, here is how we see the balance of the year. We expect trends consistent with year to date on pricing. That means higher inflation on equipment, modest inflation on all other products, and continued chemical pricing drag. On the demand side, slight growth in the maintenance portion of the business, some incremental remodel activity, and still soft but stable pool build.
Together, we expect low single-digit top-line growth for the full year with approximately 2 to 3% from pricing. The benefit from pricing is expected to be lower in the second half of the year. Second quarter margins reflected higher inbound freight and an unfavorable customer mix. We still expect pricing and supply chain benefits in the second half; however, on a comparable basis, these are tempered by last year’s mid-season price increases. Given the second quarter’s weight in the year, we now expect full-year gross margin approximately 30 basis points below prior year versus in line previously.
We are pleased with the expense progress we made in the second quarter, and we will continue to operate efficiently through the rest of the year. As a result, we expect adjusted operating expenses to be an increase of approximately 2 to 3% for the full year, including a modest amount of incentive compensation recovery over the prior year. This likely will be an expense increase on the higher end in the third quarter and lower end in the fourth quarter.
This is because the fourth quarter prior year had incremental IT expenses that are not expected to reoccur in 2026. We have opened fewer new sales centers this year, so these additional investments have moderated as we continue to focus on expanding profitability at the greenfield locations opened over the last several years. Interest expense is still estimated to be between 49 and 51 million. Our full-year tax rate is forecasted to be approximately 25%, with a lower rate in the third quarter and no additional benefit from ASU for the remainder of the year.
Our weighted average shares outstanding are expected to be approximately 36.4 million, reflecting the incremental share repurchases completed to date. Within our full-year outlook, the puts and takes have shifted modestly. We now expect slightly better top-line growth offset by lower gross margin, largely reflecting the higher inbound freight and customer mix we saw this quarter. On balance, these roughly offset. As a result, our underlying adjusted earnings guidance is unchanged at $10.87 to $11.17.
In the current quarter, we recognized $0.21 related to one-time CEO transition expenses and have updated our diluted EPS range to $10.66 to $10.96. The season is playing out largely as we expected and our team executed well through the peak month. We are focused on a clear set of strategic priorities across sales, pricing, supply chain, and operations aimed at unlocking profitability and extending our competitive advantage. While our gross margin reflects cyclical pressure from this environment, we view it as temporary rather than structural.
We continue to expand our network in a way that strengthens our competitive position for the long term, and we’re confident that the actions we’re taking today will leave us better positioned as discretionary demand recovers. We will now move to our question and answer session.
OPERATOR
Thank you. We will now begin the question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. If you’re using a speakerphone, we ask that you please pick up your handset before pressing the keys. If at any time your question has been addressed and you’d like to withdraw your question, please press star, then two. And once again, we do ask that you please limit yourself to one question and a single follow-up.
Today’s first question comes from David Manti at Baird. Please go ahead.
David Manti, Analyst at Baird
Thank you. Good morning, everyone. John, relative to the four priorities here, just a couple of questions. One on M&A: if you could outline broad areas that might be attractive to you, and then two on operational execution: could you talk about any fine-tuning actions around the sales force or branch economics that you’ve initiated so far?
John Wapwood, President and CEO
Yeah. Good morning, David. Thanks. So, look, on the M&A piece, you know, obviously tuck-ins, anything that’s core to the business, we would be super interested in, and that’s where our focus has been. And then as you break that down a little further, you get to more product category-specific opportunities. Outside of that, everything’s got to have the right strategic fit, cultural fit, financial fit as well. So that pretty much summarizes where our views are without giving too much detail or information.
On the operational execution, you think about sales excellence and operational execution. We’ve already made some investments in both of those and are looking to refine what we’re getting out of it and iterate as needed. So we’re to a point now in season where we’re seeing what’s working and maybe what needs to be tweaked a little bit. Without getting into too much detail there, I’m pleased with where we’re at. I think we can get a little sharper focus in some areas around some of our product category-specific initiatives.
But overall, you know, you can’t really change too much in season. It’s just all about execution right now. So any kind of big changes come after we get through this season, as we prepare for the next selling season going into 2027.
David Manti, Analyst at Baird
Makes sense. And then as a follow-up, we’ve discussed this before, but I was hoping you could talk about it in this forum. The market seems skeptical about your ability to gain market share—and I mean the stock market and investors in general. Could you just outline some of the key areas where you think Pool can gain incremental share within the…
John Wapwood, President and CEO
Yeah, look, I think we’ve got a lot of right to win when it comes to building materials and when it comes to chems, and I think even in other areas with some better connectivity up and down the organization throughout the industry as well. I believe we have a lot of opportunities. Now, I’ve obviously been out meeting with a lot of customers, and I think the first step of that is listening to the customers and understanding where they’re at, where they’re going, and how they view us right now and where we need to pivot.
And secondarily, it’s with our suppliers as well—how do we make sure we’re the best partner, the best go-to-market channel for them? So I think when you take all that input, you look at where we’re at and where we’re going, I believe we’ve got a heck of a network to build off of, for sure. The foundation’s there and we’ve got a lot of capacity we can pull through that network. We listen to what the market’s telling us, we adjust, we execute on that.
I think our ability to go gain share is substantial.
David Manti, Analyst at Baird
That’s good, John. Thank you.
John Wapwood, President and CEO
Thanks, David.
OPERATOR
Thank you. And our next question today comes from Susan McLauri with Goldman Sachs. Please go ahead.
Susan Maklari, Analyst at Goldman Sachs
Thank you. Good morning, everyone. My first question is building off of your last answer, John. You mentioned listening to the customers. I guess when you’ve been out there, can you talk a bit about what you are hearing from customers about Pool—what’s working, what’s not working—and how that is shaping the strategy in the areas that you’re focused on?
John Wapwood, President and CEO
Yeah. Good morning. So, you know, I’m giving somewhat of a direct quote that I’ve heard several times, is that Pool is really good at doing the hard stuff. And I think when you want to break that down and say, what’s the hard stuff? I mean, that’s the operational execution day in, day out, within and outside the four walls. I believe that’s a testament to just having the decades of running a very large, very efficient network that we continue to improve on and continue to iterate on.
Do I feel like we can be more aggressive in the commercial? Of course I can. That’s why I’ve been harping on that. And I believe just the connectivity throughout the organization is key. I think it’s a key part of winning in this industry. And that’s really what I’ve heard from feedback is they want to learn more about where Pool’s going, they want to hear more from the executive team. And we’re going to make sure we’re more, I would say, vocal and present with industry associations and with all of…
Our customers as possible. So that’s really the two main, I’d say, feedback components I’ve gotten. Overall, it’s been super positive.
UNKNOWN Analyst
Okay, okay, that’s great. Color. That’s good to hear. And then when you think about the four initiatives that you outlined, are there some that perhaps need to come before others? Are you focused on all four sort of equally? Can you just give us any sense of how they sort of stack up and then how you’re thinking about the level of investment that’s required as you pursue these initiatives?
John Wapwood, President and CEO
Yeah, well, I mean, it all starts when you sell something, right? So that’s where our focus is at, and that’s a broad statement that’s got a lot up under it, right? That’s ground-level execution, connectivity throughout the organization, then the all operational execution that comes up under it as well. So those would be the two primaries if we’re going to rank anything here. And of course, pricing supply chain falls under that as well in its own category.
M&A is opportunistic, you know, so you got to have a—we’re a willing buyer, you got to have a willing seller, and all the other stars have to align. So you take that as you can get it. As far as the level of investment, again, when you’ve got the network we have already, there’s no significant major investments that really need to be made to execute on a lot of this. M&A stands on its own. It’s whatever the price is. But when you think about, again, sales excellence, pricing, supply chain discipline, operational execution, we got a lot under our roof right now that we can continue to refine, we continue to leverage.
So I’m pretty excited about what the future holds for us.
UNKNOWN Analyst
Okay, great. Thank you for the color and good luck with the quarter.
John Wapwood, President and CEO
Thank you.
OPERATOR
And our next question today comes from David McGregor at Longbow Research. Please go ahead.
David McGregor, Analyst at Longbow Research
Yes, good morning, everyone. John, you talked about sort of leveraging some of the investments that have been made up to this point, sort of transitioning, I guess, from sort of investment mode to leveraging those investments mode. Can you just talk specifically about the technology investments and the opportunity that you see there?
John Wapwood, President and CEO
Yeah. Yeah. Good morning, David. So, you know, there’s been a lot of, a lot of investment in technology. Been a lot of conversation about it. Excited to say, as you saw in our release, that Pool360 adoption is 18%. That’s a record. So we’re starting to see a lot more integrations in that area. I’d say a continued acceleration in integrations. We’re having some conversations about other pieces and parts of the business. You know, what those investments are giving us right now.
And I’d say so far, very positive. You know, when we look at water test, we’ve got some integrations going on with service as well. So I would say that the summary of that overall is we’ve made the right investments. We’re going to continue to listen to the customer and continue to iterate in the right directions in the right areas. And that’s really where our focus is right now and continue to benchmark where our right to win is. But I’m pleased with them.
Good to have them behind us. And then we just got to continue to increase our return out of those investments. But again, when you look at the 18% adoption in Pool360 continues to increase. That’s a very positive sign.
David McGregor, Analyst at Longbow Research
Good. And as a follow up, I guess, similar question around just the profitability of private label and Horizon and Europe and some of those businesses, how do you approach that?
John Wapwood, President and CEO
Yeah, so when we discuss private label, that’s more in chems and building materials, and obviously it’s a good margin profile for us. So that’s why you hear us talk about it a good bit. And that doesn’t come at the expense of any other product category. We just, you know, that’s what’s been driving the business for us and providing some continued growth there. So we’ll continue to double down on that and see what we can get out of the market. When you think about Horizon, yeah, it was a tough quarter for them for sure.
I mean, we typically don’t mention Horizon on its own, but as you’ve heard others that have come out and announced that are in that space, you know, the market’s not giving us a lot of tailwind right now. So happy to say though, we’ve brought in a new leader for Horizon as well. And so we’re investing in that business. We think there’s a lot of potential there. It’s a great group of people that are running it and that are out there executing every day.
So really got some excitement through the rest of this year and see what we can do in 2027. And then Europe was a bright spot for us. You know, it’s been very hot over there. So double-digit growth out of those guys. Super excited about their execution and what they brought to the table. And outside the heat, there’s a little bit of, you know, the comment I heard from various sources was a little bit of a mini COVID going on. Not from the sense of COVID but from the sense of investment in the backyard.
Right now people are kind of staying around the home and not taking vacations. And I think we’re realizing some benefits to some of those investments.
David McGregor, Analyst at Longbow Research
Good. Thank you very much. Good luck.
John Wapwood, President and CEO
Thank you.
OPERATOR
Thank you. And our next question today comes from Ryan Merkel with William Blair. Please go ahead.
Ryan Merkel, Analyst at William Blair
Hey everyone, thanks for the questions. First topic is just on revenue trends and cadence in the quarter. Just would love to hear how the quarter played out on a monthly basis. And then any comments on how July is starting?
Melanie Hart, Chief Financial Officer
Yeah, on the revenue trends, there wasn’t really anything significantly different when you look at the months across the quarter. You know, for us, when you get into season, you don’t see that same level of variability as you do in the first quarter or the fourth quarter. So no real major differences there. And I would say July is pretty much on point. As we look at kind of our forward-looking guidance, we talk about our expectations for second half would be a little bit less price because we’re lapping those mid-season price increases that took effect really late April, May of last year, and so that’s coming through.
But from the volume discretionary spends, no significant differences there in July.
Ryan Merkel, Analyst at William Blair
Got it. Okay, thanks for that. And then just a question on page four, you know, in terms of Horizon, do you think it gets any better in the second half or is it going to kind of stay down mid single digits? And then, you know, the big four states there, all those are negative. I’m curious, is that just chems deflation and the new pool market weak? Just talk about why that was.
Melanie Hart, Chief Financial Officer
Yeah. So on the Horizon side, that is—Horizon has a little bit, when you think about their mix of products, they generally have more commercial, and they’re also more tied to residential. That’s really what’s creating that drag overall in the Horizon market is just the mix there and some of the timing of those commercial projects. Then on the sales by state kind of across the board, you would see that roughly a point in each of those markets was the drag that was created by Horizon.
But also, if you recall, when you looked at first quarter, we did talk about in first quarter that we had higher early buy sales. And so some of those states that benefited from those extra early buy sales in first quarter, we had a slight shift on the blue side of the business with those sales between first and second quarter.
Ryan Merkel, Analyst at William Blair
I see. So absent some of that first quarter sort of, I guess pull forward if you will, or timing, nothing’s really changed in those big states. Is that the right reason?
Melanie Hart, Chief Financial Officer
That’s the right way to look at it.
Ryan Merkel, Analyst at William Blair
Yep, got it. Okay, thanks. Pass it on.
John Wapwood, President and CEO
Thanks, Ryan.
OPERATOR
And our next question today comes from Trey Grooms at Stevens. Please go ahead.
Ethan, Analyst at Stephens
Yeah. Hey, good morning, John and Melanie. This is Ethan on for Trey. Thanks for taking the questions. First, John, I wanted to start off on the efficiencies and productivity piece mentioned within the new strategic priorities. You guys have been focused on capacity absorption here for the last couple quarters. You’ve opened something in the range of 50 new sales centers over the past five years, obviously at different parts of the cycle. So can you just touch on the runway here in terms of improving the productivity of those recently opened locations.
John Wapwood, President and CEO
Yeah. You know, so the good news is when we open a location, it’s really not a new greenfield, right? We get to seed that location with a lot of existing inventory because we’re typically just following where the market is going in an individual space. Right. So we start from a position of at least some pretty good revenue flowing through. But as with any new location, right, you want to continue to refine and grow and then obviously make up the revenue.
It’s the old to trim, to grow. Right. Or cut to grow. So as we look at those locations, those new locations we’ve done over the past, I’d say, few years, we’re pretty pleased with the performance, but it’s always going to be a one- to two- to three-year runway, especially when you’re in a market that’s not really giving you a ton of tailwind here. So we just have to remain focused and diligent with these, what we call newer locations or focus stores, to make sure that they become accretive or at least, I would say, in line with our broader network.
Overall, as we look at future greenfields, I mean, we’re going to be very selective with where we need to go. Again, very specific, market-driven. If we feel like the market’s moving somewhere we’re not in, obviously we’ll make those investments. But I would say there’s not a tremendous amount of new greenfields moving forward that we’ll need to invest in at least in the near future.
Ethan, Analyst at Stephens
Right, got it, got it. Okay, that’s super helpful. And then switching gears, perhaps Melanie, on the revision to the gross margin guide. And it sounds like that revision is primarily a function of the lower 2Q gross margin and then perhaps some continued realization of these higher freight costs. So one, is that the right way to think about it? And two, from a gross margin standpoint, at what point do you expect to potentially recover the higher freight costs?
Is that more of a 2027 event? Just any more color there would be great, thanks.
Melanie Hart, Chief Financial Officer
So because Q2 is such a large portion of the year, that 30 basis points, when you’re looking at the year in total, it will have that impact on the year-over-year comparison. When we look out kind of third and fourth quarter at this point, we are projecting that we will have a similar 30 basis point differential when compared to the prior year. With that being said, we acknowledged what was happening early on and saw the changes and tracked the rates, the higher rates that were coming in from our vendors, particularly in some of those heavier density items such as the building materials.
And so we have actions underway that’ll be starting early third quarter to be able to start managing some of that. And so we are actively working to improve it, but recognize that we may not be able to recoup all of it immediately and so do expect to see the full-year impact.
Ethan, Analyst at Stephens
Got it. Okay. That all makes sense. Thanks so much.
OPERATOR
Thank you. And our next question today comes from Scott Schneeberger with Oppenheimer. Please go ahead.
Scott Schneeberger, Analyst at Oppenheimer
Thanks very much. Good morning. Just following up on that and the fuel. Melanie, how are you thinking about it for the second half? Flat at current levels, expecting it to increase or decrease? Just curious, what’s behind your assumptions in the guidance and then just a quick follow up on the supply chain, is it mostly transportation costs that are impacting you? Are there any significant changes you’re going to do on the front end on the inbound side or on the outbound side as a reaction or an add to the initiatives? Thanks.
Melanie Hart, Chief Financial Officer
Yeah. So right now we’re not expecting any significant change in the cost environment as it relates to freight. So with that, we have acknowledged that we need to look toward pricing and ensuring that we’re having those conversations with our customers to recoup the incremental cost that’s coming through. And so that doesn’t just flow through straight to us. So again, that process is what’s underway because we don’t see anything significant changing and that’s looking at the inbound side.
On the outbound side, we did earlier in the year put through some freight charges to help us to recoup the extra costs that we’re seeing just on the delivery side.
UNKNOWN Analyst
Thanks. And then with regard to we’ve been talking about supply chain initiatives for a long time. Could you delve in a little bit to what some of those initiatives are, John, maybe your comments on things that may be added and is there opportunity for there to be more financial power with some of the things that you’re doing over the back half and really more so into next year? Thanks.
John Wapwood, President and CEO
Yeah. So I think when supply chain initiatives as a whole, you know, you got a network as big as ours, it’s pretty efficient, but you can always look for efficiencies. And there was a lot of things already in play before I came to the company that we’re working through the process now to see what that return is going to be. And it could be how you shop, you know, where you stock, how you ship. Breadth of replenishment is, you know, what those gains are, I would say we’re not quite ready to come out and say quite yet.
We’re still working through the math behind it. But the freight’s a big piece, right. So we’ve been super focused on that as we started seeing it creep up and then it jumped on us pretty, pretty hot and heavy. So that’s really where our focus will remain for the remainder of this year. And I think there’s some things we can do not just to help with the here and now, but in the future as well. So I think that really sums up kind of where my thoughts are in the near term and then again in the long term as we continue to look for the most efficient way to operate the network is the right way to look at it.
And we’ll have more commentary on that going into next year.
UNKNOWN Analyst
Great. Thank you both.
OPERATOR
Thank you. And our next question today comes from Andrew Carter at Stifel. Please go ahead.
Andrew Carter, Analyst at Stifel
Thank you. Good morning. I wanted to ask about the change in kind of the gross margin assumptions because first off this year, updated guidance would imply a level of decline similar with the second half. And you are lapping kind of extraordinary pricing from last year. So that seems difficult. Second question I would ask is, given the Pentair update, what were your assumptions originally around the performance by customers and is that impacting kind of the gross margin given opportunistic purchases and also different levels of vendor rebates? Thanks.
Melanie Hart, Chief Financial Officer
So there is no change in our guidance that is reflective of anything that Pentair has reported. When we look at stocking levels and our opportunistic purchases, we talked about in first quarter that we were heavy because we had bought ahead and that we would expect to bring that down to more normalized levels throughout the season. And so what we had intended is how things played out. The impact to the gross margin is specific to the two items that I talked about, which is the higher inbound freight cost and then also a continued customer mix.
Andrew Carter, Analyst at Stifel
Okay, second question. In the script you said 2 to 3% pricing. The deck says 2%. I wanted to square that away real quick and I’ll pass it on.
Melanie Hart, Chief Financial Officer
Yeah. So that’ll be. It’s three in the second half. So you’ll look at both first and second quarter pricing was three. And then when we get into the back half, we’re expecting that to moderate because of last year’s midseason price increases. So it’ll be probably two, maybe slightly less. So we’ll finish up the year at two.
Andrew Carter, Analyst at Stifel
Thanks. Pass it on.
OPERATOR
Thank you. And our next question today comes from Colin Veron with Deutsche Bank. Please go ahead.
Colin Veron, Analyst at Deutsche Bank
Good morning. Thank you for taking my questions. I just want to start on the commentary around pricing. I think you called out pricing sharply and competitively going forward. Just curious as to what this means exactly. Was Pool price too high or too low kind of going into it and just sort of how you anticipate this shaking out and then around your initiative, your priorities, I guess any color as to sort of the long term sales growth algorithm, are you reiterating the 6 to 9% or would you make some adjustments based on the priorities that you outlined?
John Wapwood, President and CEO
Yeah, for sure. So on the pricing piece, when we say sharply and competitively, right. It’s not a matter of up and down, you know, indexing to one side or the other. It’s a matter of really understanding the market, the market conditions. And I’m not saying that we don’t do a good job of that now. But you know, when you, when you’ve got this prolonged downturn, obviously it’s a super competitive market out there and not that it wasn’t competitive prior to this downturn, but when we look at also some of the variabilities that we have, particularly in chems and with some of the freight coming through and things like that, all these factors coming at us, we just need to make sure we’re processing that information the right way. We’re listening to our customers, we’re doing the right thing by our shareholders, taking all that into account, understanding where we need to be on a local level. So it’s just a function of running a large distributor. Right. A large decentralized distribution network is taking the local input, understanding what that looks like, overlaying the macro conditions that you have and figuring out what that pricing file is going to look like.
So we break that down by product category. I would say we’re pretty good at it now. We can always get better. I think every distributor can get better. So I don’t think we’re in any different boat than anybody else. But it’s more of a matter of me acknowledging that too that in any particular industry that look, you got to be right on certain things, you got to be variable on certain things. And there’s other things that give you a little more leeway on stuff.
And that all quite frankly comes down to the customer. So it really ties into when we think about sales excellence, how are we arming ourselves with the right tools, technology and training to capture as much market share as we can. And then I think your other question was on, yeah, the long term growth algorithm. So, yeah, not really in a position to reiterate or change that, obviously. The point I will say on that is we’re going to need a little market help.
I’ve been very clear about that. Under current market conditions, I don’t think the 6 to 9 is on the table, but in normal market conditions we would go and we would talk about it at that point. More commentary on that as we get out of 2026 and we look into 2027.
Colin Veron, Analyst at Deutsche Bank
Great, that’s helpful. And then just a question on the operating expenses in the back half of the year. I think you said that you’re expecting operating expenses to increase 2 to 3% for the full year. Does that adjust out the CEO transition cost in that 2 to 3%? And how should we think about sort of the magnitude of the adjusted operating expense increases in 3Q and 4Q to get to the midpoint of the guide? Thank you.
Melanie Hart, Chief Financial Officer
That is an adjusted number with that range there. And so we would expect that expenses will be a little bit higher in the third quarter. So I mentioned that’ll be at the top end of the 2 to 3 and then lower in the fourth quarter. And I just want to add one more thing. I mentioned it in the script, but that does include some amount of incremental incentive based compensation that we are including in our assumptions there as well.
Colin Veron, Analyst at Deutsche Bank
Great. I appreciate all the color.
OPERATOR
Thank you. Our next question today comes from Sam Reid at Wells Fargo. Please go ahead.
Sam Reid, Analyst at Wells Fargo
Awesome. Thanks so much everyone. Wanted to just see if you could quantify the magnitude of some of the gross margin drivers that you cite in your bridge in slide six. And then you talk to changing customer mix. It sounds like, you know, more large customers. Any way to size what large customer actually means and what proportion of your mix are now large customers.
Melanie Hart, Chief Financial Officer
Yeah, so from a sizing standpoint, you know, we typically don’t come out with some detail, but when we look at it internally, the inbound freight is by far the most significant component. So if you’re looking at just the overall magnitude, inbound freight was the biggest impact in the quarter. I would say customer mix was a follow after that. And then we continued on the supply chain to get benefits from the things that we’ve been working on there.
As it relates to continued good progress on our private label, continued good progress on our exclusive products. Some of the areas as it relates to the building material, we saw some really nice pick up in some of the new products that we brought in there. So our expanded products that we brought in for the current season are helping us on the supply chain.
Sam Reid, Analyst at Wells Fargo
That’s helpful. And then I understand you’ve brought in some more, or I guess I should say some newer equipment, specifically move pumps. Just curious what the early uptake has been on that product and then whether that has shifted in any way how you manage inventory for some of your other large OEM suppliers.
John Wapwood, President and CEO
Yeah, so I’ll take the last question first. No, that’s not changed how we look at our inventory with, you know, just throw it out there, the big three, which is 40% of our COGS. So no impact on that whatsoever. I wouldn’t say move is material to the overall picture right now. So. But to also give you a little insight on how we view our product portfolio briefly is, you know, look, we’re tied in again, I mean, the big three are 40% of our revenue.
So that’s where our focus. And we just got through some really great meetings with all of our strategic suppliers, those that rank at that strategic level. So obviously we’re going to go hand in hand with those guys out in the market and understand. And that’s where the brand acceptance is at and that’s where the installed base is at. When we look at adding to our product portfolio. In the case of your question here, it’s, hey, is there something out there that might could bring more traffic in the door, not cannibalize.
And again, I think that’s the key point here. Bring traffic through the door that we weren’t getting or that. Or that maybe that was going somewhere else and that’s where our focus will be. So I think that distinction probably needs to be made. But ultimately, no, it hasn’t changed. It’s been good for us, don’t get me wrong. But I wouldn’t say it’s material at this point and it has not made any impact on any decision we’ve made with inventory decisions through our existing supplier base.
Sam Reid, Analyst at Wells Fargo
Appreciate the color. Thanks so much.
OPERATOR
Thanks. And our next question today comes from Steve Forbes at Guggenheim. Please go ahead.
Steve Forbes, Analyst at Guggenheim
Good morning, John, Melanie. John, maybe just revisiting priority number one, sales excellence. You mentioned commercial pricing, I believe earlier in the call here. So curious if you can just remind us what Pool’s commercial pricing strategy was from a regional perspective. And then with all your time in the field visiting the branch managers and talking to them, what are they asking for as it pertains to commercial, is it pricing flexibility and sort of like what are you implementing at the field level to maybe give the branch managers more control or tools, as you mentioned, to sort of drive shared dynamics.
John Wapwood, President and CEO
Yeah, I think there’s kind of one answer that summarizes all that, and it’s speed, agility, and flexibility. Right, within reason. And it’s not just pricing, it’s terms, it’s all those things that we’re dealing with and that all distributors are dealing with, and that’s really what our people are asking for. Right. You want to leverage your scale, you want to leverage your size, and obviously we’re the largest in the space, but you got to be locally oriented, locally focused.
And the balance, I mean, I’ve said this a lot with my one-on-one meetings and other meetings: distribution works best when there’s balance. There’s balance with the corporate initiatives and there’s balance with flexibility in the field. So I think to sum up what our pricing strategy is, to take that local input and to look at the, again, macro drivers and leverage our scale and just put the best plan together. So the tools and the technology that we’ll put in for that, or that we already have for that in some cases, is how do we do that quickly and effectively and also have a really good feedback loop to know what’s working and what’s not.
Steve Forbes, Analyst at Guggenheim
That’s helpful. And then just a quick follow-up. Obviously the retail channel dynamics here, given some industry news, remains, I guess, complex. So curious, maybe if you could just help us think through what the expectation is for the retail channel over the coming quarters here. Are you expecting disruption? Are you seeing sort of disruptive pricing dynamics transpiring? Is it an opportunity, right, for sort of your retail customers? How are you sort of thinking through what’s happening in the retail customer base today?
John Wapwood, President and CEO
Yeah, so I mean, obviously our business model is to support the independent retailer, and we’re going to do everything we can to make sure they’re happy and healthy and growing. And, you know, to get into the individual situations, you know, of our competitors and stuff, I’ll leave that to the announcements and whatever. Obviously we’re watching it. The competitive pricing on the retail side has been there. I mean, I don’t think anything’s significantly shifted broadly.
I would say market to market, you always get some noise for different reasons. Right. Somebody runs a sale, somebody gets some import product, whatever it may be. And we know how to attack those things and, more importantly, help our partners, our customers attack those things. So as we look, obviously the early buy season was really good on the retail side. I think that was a little bit of the impact of the numbers you see in Q2, as Melanie mentioned earlier, as we look to the rest of the year, we’ll wait and see.
I mean, I don’t see anything right now. I realize what’s out there on the news front, but can’t really speculate on how that’s going to impact anything until it plays out, if anything plays out.
Steve Forbes, Analyst at Guggenheim
Thank you.
OPERATOR
Thank you. And our final question today comes from Sean Kalnin with Bank of America. Please go ahead.
Sean Kalnin, Analyst at Bank of America
Hi, guys. Thank you for taking my questions. Just a couple on the gross margin. So the large customer mix headwind that’s been a headwind for a long time now. Is there something temporary in the market that’s driving that, or should we expect that to continue to be a headwind as some of your dealers consolidate over time?
John Wapwood, President and CEO
Yeah, so I’m going to take a piece of that, and Melanie may want to add in a little bit. You know, look, there’s roll-ups going on and that’s fine. We are well positioned to service the large customer, I mean, probably better than anybody else. So, you know, is it temporary? I wouldn’t say it’s temporary necessarily, but, you know, I think there’s ways we can offset some of the margin pressures and things like that in other areas, as we’ve talked about with product categories.
And as those get more implemented and, I guess, more accepted, or we do a better job of selling those product categories, you know, there’s, again, ways we can offset margin pressures from customer mix. But as it is right now, I think the roll-ups are relatively new to the industry and, you know, yeah, there’s competitive pressures there obviously, or I would say scale pressures there that we’re working through, you know, and will continue to. So probably haven’t done a great job with that answer.
Melanie, you want to add any color to it?
Melanie Hart, Chief Financial Officer
Yeah, I think the only thing I would add is when we start seeing the volume increase, we’ll start seeing some of the smaller customers that maybe have exited the market come back, particularly on the new build side. And so we generally have higher margins with some of those smaller customers, and so that’s part of the customer mix. So I do think there’ll be some improvement longer term when we start seeing some of that discretionary spend improve.
John Wapwood, President and CEO
Yeah. So to add on to that, I think it’s a great point too. I mean, we got to think about where the market’s at right now and then what happens later on once we start getting some tailwinds. We all believe we’re probably bouncing off the bottom right now. There’s some stability, some good signs that show stability. So I think long term, this will play out just fine. And again, we get some headwinds—or, excuse me, some tailwinds—from some market growth.
Maybe seeing what happens in the upcoming years, this will be less and less of a conversation.
Sean Kalnin, Analyst at Bank of America
Okay, great. Thank you.
And then just going back to the higher transportation costs. So you guys are including that as a headwind for the full year in your guidance and saying that you’re working to try and offset those. Are you including any of those actions to offset it, for example, like pricing in your price guidance, or is that not assuming any surcharges that you’re passing along?
Melanie Hart, Chief Financial Officer
Yeah, so we have. We’ve had some freight surcharges to date on outbound freight, so that is included in our pricing when you look out for the balance of the year. We’re still working through any impacts of what the future pricing might look like for some of that inbound. So we don’t have anything material included in the guidance at this time. So we’ll know more on that as we get through, as we get through third quarter.
Sean Kalnin, Analyst at Bank of America
Okay, great. Thank you.
OPERATOR
Thank you. And that concludes our question and answer session for today. I’d like to turn the conference back over to the company for any closing remarks.
John Wapwood, President and CEO
Thank you. Yeah. So thanks again, everybody, for participating in the call. You know, we’ve been working hard to deliver a strong summer season and are proud of performance in this quarter. However, as you can see, you know, there’s a lot more work to be done, and we’re moving with urgency on focused initiatives to strengthen our execution and further enhance our performance. We look forward to providing an update on October 22nd when we announce our third quarter 2026 results.
Have a great rest of your day.
OPERATOR
Thank you, sir. That concludes today’s conference call. We thank you all for attending today’s presentation. Thank you. You may now disconnect your lines and have a wonderful day.
Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company’s SEC filings and official press releases. Corporate participants’ and analysts’ statements reflect their views as of the date of this call and are subject to change without notice.
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