Watsco Defends A 26.4% Gross Margin: 'A Lot Of Noise,' Says President, With 30% Still The Goal
Executives fielded margin questions all call, citing customer mix, tough comparisons and a long-run climb from 24% to 25%.
Watsco President A.J. Nahmad told analysts on the company's third-quarter earnings call that "There's a lot of noise" in quarterly gross margin and that the company still sees a path to its 30% long-term goal. Gross margin was 26.4% in the quarter, against 27.5% a year earlier, and analysts pressed on it repeatedly.
Noise, signal and a 30% goal
Watsco, which distributes air conditioning, heating and refrigeration equipment and parts to heating and cooling contractors, posted record sales of $2.22 billion, up 7%, and 4% on a same-store basis. Gross profit was a record $586 million, operating income $225 million and earnings per share $3.77.
A.J. Nahmad said the company used to run at 24% to 25% gross margins, climbed to 29%, and is at "27-plus now year-to-date" with a goal of 30. He said the path "will not be a straight line" and warned of "choppiness, certainly quarter-to-quarter."
A Stephens analyst opened by predicting margin would dominate the call and asked whether share gains in new construction with larger, lower-margin customers explained it all. CFO Barry Logan said he wished it were that simple, "but not quite." A year ago, he said, new-construction equipment sales were down double digits; this year they are up double digits.
Comparisons, Jackson and consolidation
Executive Vice President Rick Gomez said a refrigerant shortage a year ago helped last year's margin. He added that Jackson Supply, bought June 1, is not yet at Watsco's 27% range and weighed a little on the quarter.
On customers consolidating into larger accounts, Executive Vice President Paul Johnston said consolidation is about 7% to 8% of the market. Logan put that group at a $400 million to $500 million business for Watsco and said the margin effects are "10, 15, 20 basis point discussion items," with lower cost to serve offsetting some of it.
Fourth quarter, pricing and October
Asked by a Baird analyst about the fourth quarter, Logan said a 10-year average implies about 20 to 30 basis points of improvement over the seasonal pattern. He stressed it was not guidance. He said manufacturer price increases should come earlier and look more ordinary than recent volatility. Johnston said rising metal and freight costs lead him to expect price increases this fall going into next year.
Management said October is better than September, and revenue is up double digits so far this quarter, including acquisitions. The company ended the quarter with $649 million in cash and no debt, then used some of it for the October purchase of Granite Group, which has about $500 million in annual sales.
Logan's own summary of the year on costs: "progress, not optimized, but good progress."
Sources
- Watsco Q3 2026 Earnings Call Transcript - Watsco (NYSE:WSO) — benzinga.com
- Watsco Reports Record Third Quarter Sales, Strong Cash Flow and Improving Demand — Yahoo Finance
- Watsco: Q3 Earnings Snapshot — Associated Press
- Watsco GAAP EPS of $3.77 misses by $0.32, revenue of $2.22B beats by $10M (WSO:NYSE) | Seeking Alpha — seekingalpha.com
- Watsco (WSO) Q3 Earnings: How Key Metrics Compare to Wall Street Estimates — Yahoo Finance
