Watsco, Inc. (WSO) Earnings & Analysis

Latest quarter

Watsco reported Q2 FY2026 revenue of $2.1 billion, up 2.06% from a year earlier, when revenue also rounded to $2.1 billion. Diluted earnings per share fell to $4.00 from $4.52. The available consensus comparison relates to the later quarter ended September 30, 2026: revenue beat consensus by 0.28%, while adjusted EPS missed, with a −8.72% surprise.

In its filing, Watsco said second-quarter residential HVAC equipment sales increased while commercial equipment sales declined. Domestic residential compressor-bearing system unit sales rose 2.00%, which the company attributed primarily to market stabilization after the A2L product transition affected 2025. Acquired locations also contributed to revenue growth.

Gross margin fell to 27.5% from 29.3%. Watsco attributed the decline primarily to passing through manufacturers’ inflationary pricing actions from 2025. Operating margin declined to 11.3% from 13.2%, and the company said higher facilities and transportation costs increased same-store selling, general and administrative expenses.

Free cash flow was −$11.6 million, compared with −$14.0 million a year earlier. Watsco said operating cash used was lower primarily because of the timing of vendor payments and a smaller increase in inventory, partly offset by higher receivables.

Adjusted EPS is the figure the consensus estimates, not the GAAP EPS above.

What management said on the call

On the available first-quarter earnings call, CEO Albert Nahmad said the transition to A2L products had matured and results pointed to improving stability. He expected a simpler business environment for the year, though he said it was early in the summer season. Executive Vice President Barry Logan said the industry was moving toward a more normalized environment after years of supply-chain disruptions, regulatory changes, tariffs and inflation.

Asked about conditions beyond the early selling season, Albert Nahmad said Watsco was seeing improvements but that it was too early to make a call on market conditions further out. CFO Rick Gomez said the company was not yet in the full selling season and expected to have a better basis for comparison after the second quarter.

On pricing, Albert Nahmad said several manufacturers had already announced increases and he expected broader increases because of duties paid by some manufacturers. He added, “I cannot quantify it yet.” Executive Vice President Paul Johnston said realized increases are generally lower than announced increases because they do not always apply fully to every customer segment, including customers with longer-term contracts.

Albert Nahmad said Watsco’s longer-term margin plan included pricing technology and consolidated purchases. President Aaron Nahmad said online sales carried higher gross margins and cost less to serve than offline sales; he expected Watsco to continue investing in e-commerce tools and customer adoption to grow.

In response to inventory questions, Aaron Nahmad said Watsco had bought product for the summer selling season and expected better inventory turns as the supply chain became more reliable. Logan said the goal was to hold less inventory on average while continuing to serve customers. Aaron Nahmad also said Watsco had not bought ahead of expected tariff-related price increases.

Guidance

On the first-quarter call, Albert Nahmad said Watsco expected OnCallAir gross merchandise value to exceed $2.0 billion in FY2026. He also reiterated the company’s long-term goal of a 30.0% gross margin, supported by pricing technology and consolidated purchasing.