$WSO · WATSCO INC
Watsco reported Q3 FY2026 results with record revenue of $2.22B (+7% YoY, +4% same-store) but EPS declined 5% to $3.77 from $3.98 a year ago. Gross margin compressed to 26.4% from 27.5%, driven by customer mix, lower OEM pricing, and product mix shifts. Operating income fell 4% to $225M. The company highlighted two major acquisitions — Jackson Supply ($230M annual sales, closed June 2026) and Granite Group ($500M annual sales, closed October 2026) — expected to add ~10% to annual revenue. Nine-month operating cash flow jumped 79% to $304M.
- Q3 diluted EPS of $3.77 missed last year's $3.98, a 5% decline.
- Gross margin contracted 110 bps YoY to 26.4% (vs. 27.5%), driven by customer mix and lower OEM pricing.
- Q3 revenue rose 7% to a record $2.22B, including $78M from Jackson Supply acquisition.
- Nine-month operating cash flow surged 79% to $304M, reflecting improved working capital.
- Acquisitions of Jackson Supply ($230M annual sales) and Granite Group ($500M) add ~10% to annual revenue.
Extended-hours trading shows WSO at $285.85, down 6.38% from the regular close of $305.33. The after-hours selloff reflects disappointment with the margin compression and EPS miss despite record revenue, on a $12.71B market cap.
Watsco's margin erosion amid record revenue signals that HVAC distribution pricing power is weakening post-A2L transition, even as the company scales aggressively through M&A.
Watsco's margin compression mirrors broader HVAC distribution headwinds as OEM pricing actions moderate post-A2L transition. The company's aggressive acquisition strategy (107 new locations, $730M annualized revenue added) contrasts with peers relying on organic growth.
Gross margin erosion from customer mix shift toward larger customers, lower OEM pricing actions in 2026 vs. 2025, and differing equipment vs. non-equipment growth rates. SG&A rose 8% including 30 new/acquired locations, outpacing gross profit growth.