Key Highlights

  • Diluted EPS was $3.77 against $3.98 a year earlier, below the $4.09 estimate as screened (a 7.93% shortfall).
  • Revenue rose 7% to $2,220.4 million, with same-store sales up 4%.
  • Gross margin fell to 26.4% from 27.5%, and operating margin eased to 10.1% from 11.4%.
  • Residential HVAC equipment sales rose 7% while commercial equipment fell 5%, excluding acquisitions.
  • Nine-month operating cash flow rose 79% to $303.7 million, and cash stood at $498.7 million.

Watsco Earnings: Why Did a Revenue Gain Still Produce a Profit Decline?

Watsco (NYSE:WSO) reported third-quarter results on Tuesday, October 27, with diluted earnings per share of $3.77, down 5% from $3.98 a year earlier. The figure sits below the $4.09 consensus as screened. Revenue rose 7% to $2,220.4 million from $2,067.0 million, and same-store sales grew 4%.

The gap between sales and profit came from margin. Gross profit rose 3% to $586.3 million, but gross margin slid 110 basis points to 26.4%, while SG&A climbed 8% to $370.7 million, including 30 new and acquired locations.

Operating income fell 4% to $225.2 million, with operating margin at 10.1% against 11.4%. Net income attributable to Watsco was $155.4 million versus $161.6 million.

Watsco Margins: What Squeezed Gross Profit in the Quarter?

Management pointed to four drivers: a larger share of sales to bigger customers, the mix between replacement and new residential construction, the timing and smaller size of 2026 OEM pricing actions compared with 2025, and equipment growing faster than non-equipment products. Same-store gross margin was 26.5%.

Management said the quarter looked more in line with normal seasonality, and that year-to-date margins reflect current conditions, including more conventional OEM pricing. For nine months, gross margin was 27.2% against 28.3%, and diluted EPS was $9.72 versus $10.48.

Excluding acquisitions, HVAC equipment (67% of sales) rose 5%, with residential up 7% on roughly 5% unit growth and a 2% higher average selling price. Commercial equipment fell 5%. Other HVAC products (29%) rose 2%, and commercial refrigeration (4%) rose 10%.

Watsco Cash and Deals: How Are Granite Group and Jackson Supply Changing the Footprint?

Operating cash flow for nine months was $303.7 million, up 79% from $169.8 million. Cash and equivalents were $498.7 million, short-term investments were $150.0 million, and inventories were $1,841.8 million against $1,386.3 million at year-end.

Watsco bought Jackson Supply in June 2026 (about $230 million of annual sales across 25 locations) and The Granite Group in October 2026 (about $500 million of sales across 82 locations). Together they add roughly $730 million of annualised revenue and are expected to lift annual revenue by about 10%. Jackson contributed $78 million of third-quarter sales, up 16% on the prior-year comparable period.

In October the company signed a five-year, $750 million unsecured revolving credit facility designed for seasonal working capital. The annual dividend was raised 10% to $13.20 per share in April, the 52nd consecutive year of dividends, and $392.0 million was paid in dividends over nine months. The release does not describe share repurchases.

Watsco Outlook: What Should Investors Watch After the Early Fourth-Quarter Signal?

Watsco gave no numeric guidance. Management said third-quarter results and early fourth-quarter sales trends indicate continued improvement in end-market demand, and that its long-range objectives for sales, margin and cash flow generation remain intact. Its stated goal is annual operating cash flow above net income.

The items to track are whether gross margin returns toward the 27.5% level seen a year ago, how quickly the Granite Group and Jackson Supply locations are integrated, and whether commercial equipment, down 5%, stabilises while residential volume stays firm.