Watsco Returns to Growth as Margins Contract
Gross margin narrowed 180 basis points as prior-year pricing benefits faded.
Watsco, Inc. (WSO), the air-conditioning, heating and refrigeration equipment distributor, returned to quarterly revenue growth in the second quarter. Earnings declined as profitability weakened.
The sales improvement marked a trajectory shift after revenue was flat in the first quarter and fell 4% in the year-earlier period. The margin trend moved in the opposite direction after expanding through much of 2024.
Revenue increased 2% to $2.1 billion, including 1% same-store growth. Diluted earnings fell 12% to $4.00 a share, compared with a 3% decline in the first quarter.
HVAC equipment sales increased 3% excluding acquisitions, improving from declines in both the first quarter and the year-earlier period. Sales of other HVAC products decreased 1%, and commercial refrigeration sales accelerated to 19% growth.
Domestic residential equipment sales rose 5%, with unit volume and average selling prices each up 2%. That balance represented a normalization from a year earlier, when double-digit pricing tied to the A2L refrigerant transition was offset by lower unit volumes.
Gross profit decreased 4% to $579 million, and gross margin fell to 27.5% from a record 29.3% a year earlier. About 130 basis points of the comparison were due to outsized 2024 manufacturer pricing and A2L-transition benefits that did not recur.
Operating income declined 12% to $238 million as the operating margin narrowed to 11.3%. Selling, general and administrative expenses increased 3% and consumed a larger share of sales.
First-half operating cash use improved by $164 million to $21 million. E-commerce sales grew 13% during the period, and OnCallAir gross merchandise value increased 14% to $1 billion.
Watsco completed its acquisition of Jackson Supply in June, adding about $230 million in annualized sales and 25 Sunbelt locations. The company remained debt-free, though cash and short-term investments declined to $464 million from $593 million at the end of the first quarter.