Watsco (WSO) Q1 2026 earnings review
Revenues Stabilize as A2L Pricing Masks Severe Volume Declines
Watsco broke a four-quarter streak of revenue contraction, posting flat YoY sales at $1.53B. However, the surface stability hides a troubling underlying dynamic: a 9% surge in HVAC equipment prices (driven by the A2L refrigerant transition) masked an implied double-digit collapse in unit volumes. The company is leaning heavily into its technology ecosystem and M&A—highlighted by the $230M acquisition of Jackson Supply—to manufacture growth in a demand-constrained environment. Working capital is normalizing, reversing last year's severe cash burn, but the core equipment replacement cycle remains heavily pressured.
🐂 Bull Case
The $230M Jackson Supply acquisition adds ~3% to annualized revenue and deepens Sunbelt market density, proving Watsco can deploy its fortress balance sheet to buy growth during market lulls.
E-commerce sales jumped 16% in Q1, now representing 36% of the business ($2.6B LTM). Highly engaged digital contractors show significantly lower attrition rates.
🐻 Bear Case
With equipment ASP up 9% and total equipment revenue down 1%, underlying unit volume dropped approximately 10%. Pricing power cannot indefinitely sustain the top line if physical demand continues to evaporate.
Non-U.S. markets plunged 11% YoY, extending a multi-quarter streak of underperformance that management has struggled to reverse.
⚖️ Verdict: ⚪
Neutral. Management is executing flawlessly on controllables—cost discipline, cash flow recovery, and M&A. But an investment case reliant on forced regulatory price hikes to obscure structural volume declines is inherently risky.
Key Themes
A2L Transition Forcing Massive Price Increases
The regulatory shift to A2L refrigerants is fully underway, impacting 55% of products sold across 650 locations. This shift drove a massive 9% increase in average selling price (ASP) for HVAC equipment. While volume is suffering, the structural step-up in equipment pricing is successfully anchoring the top line and is expected to create a higher long-term revenue base.
Severe Unit Volume Contraction
Despite management's optimism about normalizing markets, the math contradicts the rosy narrative. HVAC Equipment sales fell 1% YoY. When combined with a 9% ASP increase, this implies unit volumes declined roughly 10%. Consumers are clearly pushing back on the higher costs of A2L systems, potentially extending the repair cycle and delaying replacements.
Jackson Supply Acquisition Restarts Growth
Watsco announced the acquisition of Jackson Supply Company, a Sunbelt distributor with $230M in annual sales. This is a material addition, representing roughly 3% of Watsco's trailing revenue. Executed with a debt-free balance sheet, it validates the company's 'buy and build' strategy during industry troughs.
E-Commerce Ecosystem Scaling Rapidly
Digital adoption continues to accelerate. Q1 E-commerce sales grew 16% YoY, reaching $2.6B LTM (36% of total revenue). The HVAC Pro+ app user base hit 74,000, and the OnCallAir consumer quoting platform generated $394M in Gross Merchandise Value (+20% YoY). This tech stack lowers cost-to-serve and dramatically reduces customer churn.
International Market Hemorrhage
While U.S. markets stabilized (+2% YoY), international sales plummeted 11%. This deceleration follows a 10% decline for the full year 2025. Management has yet to demonstrate a clear path to stabilizing operations in Canada and Latin America.
Working Capital Normalization and Cash Flow Recovery
Reversing. In Q1 2025, Watsco burned $178M in operating cash flow to build A2L inventory ahead of the transition. In Q1 2026, cash burn was reduced to just $19M—a $159M YoY improvement. Management expects 'more conventional working capital trends' going forward, paving the way for improved inventory turns and higher return on invested capital.
Macro Headwinds Weigh on Seasonal Setup
The company relies heavily on the summer selling season (Q2 and Q3), but persistent macro weakness—manifesting in lower housing turnover and delayed consumer discretionary spending—remains an overhang. The A2L cost step-up is colliding directly with a tapped-out consumer.
Other KPIs
Accelerating. While HVAC equipment declined, the smaller Commercial Refrigeration segment (5% of sales) posted robust double-digit growth. This provides a small but highly profitable offset to residential weakness.
Stable. SG&A was perfectly flat YoY despite inflationary pressures. Management attributes this to 'improved operating efficiency and a simpler operating environment' as the chaotic phase of the A2L transition concludes.
Guidance
Management reiterated its goal to generate annual operating cash flow in excess of net income. Given the massive inventory unwinding expected in 2026 following the A2L build-up, achieving this target is highly probable.
Accelerating. The Board increased the annual dividend by 10% in April 2026, marking the 52nd consecutive year of dividend payments. This signals high internal confidence in forward cash generation despite current volume headwinds.
Key Questions
Unit Volume Floor
With equipment ASP up 9% but total equipment sales down 1%, underlying volumes clearly took a hit. Are consumers delaying replacements entirely due to sticker shock, and at what point do you expect unit volumes to hit a floor?
Jackson Supply Integration
The Jackson Supply acquisition brings $230M in revenue. How quickly can Watsco integrate its pricing optimization (Pricefx) and e-commerce platforms to drive margin expansion on this newly acquired base?
International Strategy
International sales fell another 11% this quarter. Is this purely a macro-driven decline, or are there structural/competitive issues in Canada and Latin America that require a strategic pivot?