Latham Group (SWIM) Q1 2025: Gross Margin Expands 190bps as Sand State Push Accelerates
Latham’s Q1 2025 results underscore a disciplined margin expansion and early traction in high-potential Sand State markets, despite flat industry demand and tariff headwinds. Execution on fiberglass pools and auto covers, coupled with lean manufacturing, is enabling the company to outpace sector peers on profitability as it invests for long-term geographic growth. Management reaffirmed full-year guidance, signaling confidence in both cost controls and market share initiatives as peak season approaches.
Summary
- Margin Expansion Outpaces Volume: Gross margin gains reflect lean manufacturing and value engineering, offsetting soft demand.
- Sand State Strategy Gains Early Traction: Dealer partnerships and new models drive growth in underpenetrated Sunbelt markets.
- Tariff Mitigation and Pricing Actions: Proactive supply chain moves and targeted price increases help contain input cost risk.
Performance Analysis
Latham delivered Q1 revenue in line with expectations, with sales momentum building through March and April following a slow January start. Segment performance diverged: in-ground pool sales declined 4% year over year, reflecting flat market demand and weather impacts, while auto cover sales surged 18%, driven by both organic growth and the integration of CoverStar acquisitions. Liner sales, a smaller business line, fell 8%.
Gross margin expanded by 190 basis points to 30%, a notable achievement given flat volumes, attributed to lean manufacturing, value engineering, and the higher-margin profile of acquired auto cover businesses. SG&A growth was concentrated in Sand State expansion investments, as Latham ramps marketing and sales to penetrate Florida, Texas, Arizona, and California. Adjusted EBITDA margin contracted to 10% due to these investments, but management expects leverage to improve as revenue scales over the year.
- Auto Covers Outperform: CoverStar M&A and organic demand drove robust growth, with attachment rates rising in key markets.
- Sand State Revenue Mix Improving: Management targets a 200-300bps increase in Sand State share for 2025, with builder partnerships and new models resonating.
- Tariff Headwind Partially Mitigated: Pre-purchasing, supplier diversification, and price increases are expected to offset roughly half of the $20 million tariff impact.
Cash use was seasonally elevated due to working capital and inventory pre-buys ahead of tariffs, but revolver usage is expected to be repaid by Q2’s end. CapEx is ramping to support new molds and manufacturing capacity for Sand State demand.
Executive Commentary
"Our first quarter performance was in line with our expectations, and although this quarter represents only a small percentage of our annual seasonal demand, we were pleased with the direction it represents... We saw relative strength in our fiberglass and auto cover product categories."
Scott Rojeski, President & CEO
"We achieved a first quarter gross margin of approximately 30%, reflecting a 190 basis point increase above last year's 28%. This performance is primarily due to production efficiencies driven by our lean manufacturing and value engineering initiatives and the margin benefit from the three CoverStar acquisitions."
Oliver Glow, Chief Financial Officer
Strategic Positioning
1. Sand State Expansion as Core Growth Lever
Latham’s Sand State strategy targets the Sunbelt markets—Florida, Texas, Arizona, California— which collectively account for two-thirds of new pool starts but where Latham remains underrepresented. The company is investing in dealer partnerships, master plan community (MPC) penetration, and market-specific fiberglass models. Early progress includes active engagements with top builders, new product launches, and a marked increase in brand awareness, as evidenced by digital engagement metrics and rising search volume.
2. Fiberglass Pool Share Gains Supported by Labor Trends
Fiberglass pools, which offer faster installation and lower labor requirements than concrete pools, are positioned to gain further share as labor scarcity persists. Management expects another 1% share gain in 2025, aided by consumer preference for cost, speed, and eco-friendly features. Latham’s dealer network and AI-powered Measure by Latham tool are streamlining the buying and installation process, attracting new dealers and expanding market reach.
3. Auto Cover Category as Margin and Safety Driver
Auto covers, both organically and via CoverStar acquisitions, are outpacing pool sales growth, supported by safety, maintenance, and regulatory benefits. Penetration rates are rising in several markets, with some communities seeing 50%+ attachment rates. The company’s partnership with Olympic gold medalist Bodie Miller is intended to further raise awareness and drive adoption.
4. Lean Manufacturing and Value Engineering
Continued investment in operational efficiency is structurally enhancing Latham’s margin profile, even in a flat demand environment. The company is able to flex SG&A and production costs in response to market conditions, while maintaining capacity for growth as demand recovers. This discipline is a core differentiator in a cyclical, discretionary category.
5. Proactive Tariff Management
Tariff risk—exposure to imported raw materials—is being actively managed through supply chain actions and targeted price increases. Management estimates about half of the $20 million tariff headwind is offset through pre-purchases and supplier changes, with the balance addressed via pricing, helping to protect gross margin rate and dollars.
Key Considerations
This quarter’s results highlight Latham’s ability to execute margin expansion and strategic investments simultaneously in a challenging demand environment. The company’s Sand State focus, disciplined cost management, and product innovation are key themes for investors tracking long-term share gains.
Key Considerations:
- Sand State Penetration: Early dealer wins and new models are expanding presence in high-growth markets, but full impact will take time to materialize.
- Product Mix Evolution: Fiberglass and auto covers are gaining share, supporting higher margin and differentiation from legacy concrete pool competitors.
- SG&A Investment Pace: Elevated near-term spend is targeted at long-term growth, with leverage expected to improve as sales ramp in H2.
- Tariff and Cost Management: Supply chain agility and pricing power are critical to offsetting external cost pressures and maintaining margin trajectory.
- Cash Flow and Capital Allocation: Seasonal cash outflows are planned, with revolver drawdown to be reversed by Q2 and CapEx supporting future growth.
Risks
Flat industry demand and discretionary consumer spending remain key risks, particularly if macro conditions deteriorate or if Sand State expansion underdelivers. Tariff escalation or supply chain disruptions could pressure margins, while elevated SG&A may weigh on profitability if revenue fails to materialize as planned. Latham’s ability to flex costs and maintain operational discipline will be tested if end-market trends weaken further.
Forward Outlook
For Q2, Latham guided to:
- Seasonal revenue and margin ramp as peak pool building season accelerates
- Progressive improvement in SG&A leverage as sales scale
For full-year 2025, management maintained guidance:
- Revenue growth of 8% at midpoint (5% organic, 3% M&A)
- Adjusted EBITDA growth of 19% at midpoint
Management highlighted several factors that support guidance:
- Steady dealer and consumer demand signals through April and May
- Operating leverage expected to increase as Sand State and auto cover initiatives scale
Takeaways
Latham’s Q1 performance demonstrates margin resilience and strategic progress in a flat demand environment, with Sand State expansion and auto cover growth as key levers for future share gains.
- Gross Margin Gains: Lean manufacturing and higher-value product mix offset volume pressures and input cost headwinds.
- Sand State and Auto Cover Momentum: Dealer partnerships, new models, and marketing investments are driving early traction in target markets.
- Watch for H2 Leverage: Investors should track SG&A leverage and Sand State revenue mix as indicators of sustainable growth beyond 2025.
Conclusion
Latham’s disciplined execution on cost and targeted growth initiatives positions it to outperform in a flat pool market, with margin gains and Sand State expansion providing a foundation for long-term value creation. Investors should monitor the pace of share gains and cost discipline as demand recovers.
Industry Read-Through
Latham’s results and commentary signal ongoing margin pressure and the need for operational agility across the pool and broader home improvement sector. The company’s ability to offset input cost volatility and invest in targeted growth stands out against a backdrop of cautious consumer discretionary spending. Fiberglass and auto cover adoption trends highlight a shift toward faster, lower-labor, and safety-driven pool solutions, which may pressure legacy concrete and lower-end competitors. Tariff mitigation strategies and SG&A discipline will be critical for peers facing similar cost headwinds.