Earnings call transcript: Watsco Q2 2025 misses forecasts, stock dips

Watsco Inc. reported a Q2 2025 earnings and revenue miss, posting EPS of $4.52 against a $4.80 forecast and revenue of $2.06 billion versus $2.23 billion expected, causing its stock to fall over 3% and continue declining in premarket. The underperformance stemmed from a challenging market and the significant transition to A2L refrigerants, which impacted sales volumes. Despite these headwinds, the company achieved record gross profit margins and increased EBIT through pricing actions and internal optimization, while also highlighting strong e-commerce growth and strategic investments in technology like AI. Management remains confident, outlining a "Dream Plan Two" targeting $10 billion in revenue, 30% gross margins, and 5 inventory turns, and is actively exploring M&A, signaling a focus on long-term growth and market share despite current softness.

Analysis

Watsco Inc. (WSO) reported a challenging second quarter for 2025, missing both top and bottom-line analyst expectations. The company posted an earnings per share of $4.52, a 5.83% miss against the $4.80 forecast, while revenue of $2.06 billion fell 7.62% short of the $2.23 billion consensus. The 4% year-over-year sales decline was attributed to significant operational headwinds, including a complex industry-wide transition to A2L refrigerants affecting 55% of its product line, soft market conditions, and a pronounced 15-20% downturn in residential new construction. Despite these top-line pressures, which drove the stock down 3.45%, the company demonstrated notable operational resilience by achieving record gross profit margins and an increase in EBIT. This margin strength was fueled by OEM price increases and the successful deployment of its internal pricing optimization platform. Management is navigating the current market softness by focusing on long-term strategic initiatives, including a "Dream Plan Two" targeting $10 billion in revenue and a 30% gross margin, aggressive technology investment in e-commerce and AI, and an active M&A strategy supported by a debt-free balance sheet.

Key Decisions for Investors

• Investors should closely monitor the firm's inventory levels and progress on reducing the elevated stock from the A2L transition, as achieving its target of five inventory turns is critical for improving cash flow and efficiency.
• The divergence between weak sales volumes and record gross margins presents a key consideration; long-term oriented investors might evaluate the current stock price, near its 52-week low, as a potential entry point if they have confidence in management's technology-driven growth and margin expansion strategy.
• Pay close attention to gross margin sustainability in the upcoming quarters to see if it can remain above the 27% floor guided by management, particularly as the algebraic benefits from initial OEM price hikes begin to fade.
• Potential M&A activity, which management indicated they are actively exploring with at least one target of size under review, represents a significant potential catalyst for the stock.