Watsco (WSO) Q3 2026 earnings review
Watsco's unit sales accelerate, but its profit drops 5%
Watsco, North America's largest distributor of heating and cooling equipment, sold more systems this summer even as its profit declined. Sales from businesses it owned a year ago rose 4% as home air-conditioner unit volumes grew 5%, while recent acquisitions lifted total revenue to $2.22 billion. However, gross margin slipped to 26.4%, pulling profit per share down 5%. Chief executive Albert H. Nahmad said demand keep improving into October and announced the purchase of The Granite Group, adding $500 million in yearly sales.
| Sales from businesses owned a year ago | +4% +1% last quarter |
|---|---|
| Total revenue | $2.22B +7.4% from a year ago |
| Gross profit margin | 26.4% 27.5% a year ago |
| Profit per share | $3.77 -5.3% from a year ago |
⚖️ Verdict: ⚪ Neutral
The story is unchanged because recovering unit demand and a big acquisition were offset by another step down in gross margin. On the positive side, home unit volumes accelerated during the peak cooling season and two acquisitions add $730 million in yearly revenue. The bad news: gross margin fell below management's stated 27% floor to 26.4%, and inventory stayed 15% above last year's level despite a pledge to hold less stock.
The question now is whether a ~26.5% gross margin is the new normal once extraordinary manufacturer price hikes fade, or just a temporary dip from customer mix. If pricing software and parts growth work as promised, gross margin should rebound above 27%; if lower inventory rebates and equipment mix dominate, margins stay near 26%. Fourth-quarter gross margin and year-end inventory levels will tell.
🐂 Bull Case
Home Air-Conditioner Volumes Accelerated in Peak Season
Watsco distributes heating and cooling equipment across North America. Chief executive Albert H. Nahmad said "Third quarter results and early fourth quarter sales trends are indicative of continued improvement in end-market demand." Sales from businesses it owned a year ago rose 4%, up from 1% growth last quarter, showing "continued stabilization of residential end-markets" after last year's switch to A2L, a newer and less polluting refrigerant.
- Home heating and cooling equipment sales: up 7% at existing branches, after 5% growth in Q2
- Home air-conditioner and heat-pump unit volumes: up 5%, accelerating from 2% last quarter
- Average selling price for home units: up 2%, matching the second quarter's pace
- Commercial equipment sales: down 5%, a smaller drop than last quarter's 8% decline
This matters because the company is growing by selling more physical units rather than relying on big manufacturer price increases. Nahmad said underlying sales momentum continued into October, which supports the argument that last year's 17% volume drop was a one-off adjustment rather than a lasting slump.
What to watch: fourth-quarter unit volume growth in home equipment. Sustained growth above 4% would show that homeowner replacement demand holds up outside the summer cooling peak.
Two Acquisitions Add $730 Million in Annual Sales
Watsco grows by buying family-owned distributors and plugging them into its software and supplier network. In October, the distributor bought The Granite Group, a Northeast plumbing and heating supplier with 82 branches and about $500 million in yearly sales. Nahmad said the deal takes the business "into the growing community of HVAC and plumbing contractors".
Meanwhile, Jackson Supply, the Sunbelt distributor acquired in June with $230 million in yearly sales, brought in $78 million during the third quarter. That was up 16% from a year ago and beat an even quarterly share of its annual plan by 36% by our math. Together, the two deals add 107 branches and lift annual revenue by about 10%.
What to watch: whether Watsco paid for The Granite Group with cash, its new $750 million credit line, or more shares in the third-quarter filing. Paying with cash would avoid diluting existing shareholders while earnings per share are still down.
Contractor Quoting Tool Cleared $2 Billion
OnCallAir is Watsco's mobile app that contractors use to show product options and price quotes to homeowners. After staying at $1.9 billion for two straight quarters, the total value of products sold through OnCallAir over the past 12 months reached $2.0 billion, up 14% from a year ago across 351,000 household quotes.
By our math, third-quarter sales through OnCallAir reached $600 million, while online orders through the e-commerce platform grew 10% and made up 37% of total revenue over the past year. Because digital customers buy more items per order and leave at lower rates, steady online adoption helps Watsco take market share from smaller rivals.
What to watch: first revenue or customer numbers for SupplySync, its new ordering platform for big institutional buyers. The release still describes SupplySync as a pilot programme without giving adoption figures.
🐻 Bear Case
Gross Margin Slipped Below the 27% Floor
Nahmad said "Our long-range objectives for sales, margin and cash flow generation remain fully intact", referring to Watsco's long-standing 30% gross margin target and management's recent claim that 27% is the baseline floor. Instead, third-quarter gross margin fell 1.1 percentage points from a year ago to 26.4%, and reached 26.5% at branches owned for over a year.
Cost of sales — what the distributor pays manufacturers for units and parts — rose to 73.6% of revenue from 72.5% a year ago, while overhead and branch costs stayed near 16.7% of revenue. The company called the 26.4% reading "more in-line with historical seasonality", blaming sales to larger contractors, homebuilding mix, and smaller manufacturer price hikes.
Because lower gross margin pulled operating profit down 4% despite record sales, the drop undercuts the claim that pricing software and digital orders have permanently lifted margins above 27%.
What to watch: fourth-quarter gross margin against last year's 27.1% reading. Another sub-27% quarter would confirm that normal manufacturer pricing leaves Watsco's margin below management's stated baseline.
Inventory Rose Despite Goal to Own Less
Last quarter, management pledged to hold less inventory over the second half of 2026 than a year earlier to improve inventory turnover toward its 5-times target. At the end of September, inventory stood at $1.84 billion, down only $49 million from June and up 15% from $1.60 billion in September 2025.
Even after removing roughly $60 million of stock added with Jackson Supply, inventory at existing branches is higher than a year ago by our math. The HVAC distributor funded that stock by taking longer to pay suppliers, as accounts payable jumped by $402 million since December, which helped nine-month operating cash flow rise 79% to $304 million.
What to watch: year-end inventory against last December's $1.39 billion balance, adjusted for Jackson Supply and The Granite Group. Missing that mark would break management's second-half inventory commitment.
Equipment Outgrew Higher-Margin Parts Again
Watsco launched sourcing and logistics programmes this year to accelerate sales of non-equipment products — replacement parts, ductwork and supplies — which carry higher gross margins than whole air-conditioning units. The company estimates parts and supplies make up 40% of the industry, compared with 29% of its own third-quarter revenue.
In the third quarter, underlying sales of parts and supplies rose 2%, lagging the 5% increase in heating and cooling equipment. Because lower-margin equipment keeps growing faster than parts, product mix continues to drag on gross margin rather than lifting it toward the 30% long-term goal.
What to watch: whether The Granite Group's plumbing supplies lift the non-equipment share above 30% of sales in the fourth quarter. A rising share is needed to reverse the mix drag on gross margin.
Risks this quarter didn't answer
Four standing risks from prior filings received no update in the third-quarter earnings release and await the full quarterly filing.
- Carrier supplier concentration: Carrier accounted for 64% of purchases last quarter; the 10-Q related-party note will show whether reliance rose further.
- Gree distribution lawsuit: litigation over whether the exclusive US distribution deal renewed was not mentioned; the legal contingencies footnote will update it.
- 410A equipment sales after the EPA rule change: no disclosure on whether selling older-refrigerant units after the deadline removal held back average selling prices (+2%).
- Russell Sigler minority put option: a $472 million contingent obligation to buy out joint-venture partners, capped at $125 million a year, sits against $649 million in cash and short-term investments.
👓 Other Themes
Manufacturer Price Hikes Returned to Normal
In 2025, equipment manufacturers raised prices by about 15% as they introduced A2L refrigerant units and passed through tariff and inflation costs, which temporarily boosted Watsco's gross margin. This quarter, Watsco said manufacturer price increases returned to normal levels, leaving residential average selling prices up 2% from a year ago and creating a tougher profit comparison.
💲 Other KPIs
Third-quarter operating cash flow dipped 8.5% from last year's record $355 million as net income fell and inventory stayed elevated. Over the first nine months, operating cash flow jumped 78.8% to $303.7 million because Watsco stretched supplier payables, though nine-month cash generation still trails $467.1 million of net income.
Sales of commercial refrigeration products at existing branches grew 10% from a year ago, following 19% growth in the second quarter and 11% in the first. Although refrigeration makes up 4% of revenue, it has outpaced heating and cooling equipment for four straight quarters, rising 14% over the first nine months.
Diluted shares rose 1.7% from 37.92 million a year ago, the fastest increase in two years, after the distributor issued 517,884 shares in June to buy Jackson Supply. The higher share count widened the drop in earnings per share (-5.3%) compared with net income attributable to Watsco (-3.8%).
🔮 Guidance
Raised. Watsco does not issue quarterly revenue or profit forecasts, but it raised its expected annual revenue from recent acquisitions to $730 million after buying The Granite Group ($500 million) in October alongside Jackson Supply ($230 million). By our math, the two businesses add about 10% to annual revenue.
Cut. The annual spending rate on technology and digital platforms edged down by $4 million from last quarter's $68 million mark, while five-year cumulative spending reached $280 million. That trim slows technology cost growth while operating profit is down 7% over the first nine months.
Unchanged. Management kept its annual goal to generate more operating cash flow than net income. After nine months, operating cash flow of $303.7 million sits $163.4 million below consolidated net income of $467.1 million, so Watsco needs a large fourth-quarter inventory drawdown to hit the target.
❓ Key Questions
How did Watsco pay for The Granite Group?
Watsco bought Jackson Supply with stock near a three-year low in June, then signed a $750 million credit facility in October. Did it fund the $500 million Granite Group deal with cash and debt, or issue more shares?
Why is 26.4% gross margin now called normal seasonality?
Last quarter management called 27% the baseline gross margin going forward. With third-quarter gross margin down to 26.4% (26.5% at existing branches), has the baseline dropped below 27% under normal manufacturer pricing?
Can inventory finish the year below 2025 levels?
Inventory at September 30 was $1.84 billion versus $1.60 billion a year ago, even after adjusting for Jackson Supply. Does management still expect to own less same-store inventory at year-end than last December's $1.39 billion?
How many institutional buyers are using SupplySync?
After launching SupplySync last quarter for big institutional accounts, the release again calls it a pilot programme with no customer or sales figures. When will Watsco disclose adoption numbers for this channel?