Core & Main's Q2 2026 Earnings Call: Contradictions Emerge on Residential Market Outlook, Municipal Momentum, SG&A Costs, and Pricing Trends

The above is the analysis of the conflicting points in this earnings call

Date of Call: September 9, 2025

Financials Results

• Revenue: $2.1B, up ~7% YOY (organic ~5%)
• EPS: Adjusted diluted EPS $0.87, up ~13% YOY (vs $0.77 prior year)
• Gross Margin: 26.8%, up 10 bps sequentially and 40 bps YOY

Guidance:

• FY2025 net sales expected at $7.6B–$7.7B (lowered)
• FY2025 adjusted EBITDA: $920M–$940M; H2 EBITDA margin slightly below H1
• Operating cash flow: $550M–$610M
• End-market volumes slightly down; municipal +low single digits; nonres ~flat; residential lot development down low double digits
• Pricing neutral for the year; gross margins stable vs Q2
• SG&A dollars to decline in H2; targeted cost-outs underway; larger savings in FY2026
• 53rd week: one less sales week in Q4; ~$8–$10M EBITDA impact
• Expect 2–4 pts of above-market growth

Business Commentary:

* Revenue Growth and Market Performance: - Core & Main, Inc. reported net sales growth of nearly 7% in Q2 2025, with an organic sales increase of roughly 5%. - The growth was driven by strong municipal demand, stable nonresidential volumes, and momentum from data centers.

• Residential Market-Specific Challenges:
• The residential market declined in Q2 and is expected to weaken further through August, resulting in an updated outlook of a low double-digit decline for the full year.

• This is attributed to higher interest rates, affordability concerns, and lower consumer confidence.

• Gross Margin and Cost Management:

• Core & Main's gross margin improved to 26.8%, up 10 basis points sequentially from Q1 and 40 basis points year-over-year.

• The improvement reflects strong execution of private label and sourcing initiatives, though operating costs were elevated due to factors like employee benefit costs.

• Acquisition Strategy and Market Expansion:

• The company's acquisition of Canada Waterworks, a distributor in Ontario, Canada, will enhance its presence in the Canadian addressable market.
• The acquisition aligns with Core & Main's strategy to drive long-term growth through organic investments and strategic acquisitions.

Sentiment Analysis:

• Company lowered FY2025 guidance due to higher operating costs and softer residential demand, but reported net sales up ~7% with gross margin up 40 bps YOY. Management expects stable pricing and gross margins, cost reductions to partially benefit H2 with larger impact in 2026, and continued municipal strength offsetting residential weakness.

Q&A:

• Question from Brian Biros (Thompson Research Group, LLC): Beyond the weaker residential outlook, what are the puts and takes behind the revenue guidance change?
  Response: Residential softness is the main driver; offsets include strong treatment plant and fusible HDPE initiatives and healthy municipal demand, plus contributions from M&A.

• Question from Brian Biros (Thompson Research Group, LLC): Where are the biggest growth opportunities as water demand evolves (e.g., data centers)?
  Response: Municipal remains robust with improved funding; rising data center water needs add demand; investments position CNM to capture multiyear infrastructure tailwinds.

• Question from Matthew Bouley (Barclays): Why does EBITDA cut nearly match the revenue cut—timing of cost actions or mix?
  Response: Cost-outs are underway but partially offset by stubborn inflation; more benefits arrive in FY2026; earlier targeted cuts (e.g., fire protection) preserved service.

• Question from Matthew Bouley (Barclays): How did residential trend in Q1 vs Q2, and what’s implied for H2?
  Response: Resi was decent in Q1 but weakened through Q2 into August; expect low double-digit declines for the rest of the year until rates/affordability improve.

• Question from David Manthey (Robert W. Baird & Co. Incorporated): Residential growth in H1 and implied H2 to reach full-year low double-digit decline?
  Response: H1 was down mid- to high-single digits; H2 expected slightly worse to land at low double-digit decline for FY2025.

• Question from David Manthey (Robert W. Baird & Co. Incorporated): What were M&A contributions to sales and SG&A this quarter?
  Response: M&A added about 2 points to sales growth and ~3 points to SG&A growth.

• Question from David Manthey (Robert W. Baird & Co. Incorporated): Is Q2 the high watermark for SG&A dollars this year?
  Response: Yes; SG&A should decline in H2 as synergies ramp and one-time items abate, with sequential rate improvement aided by seasonality.

• Question from David Manthey (Robert W. Baird & Co. Incorporated): How to think about seasonality ex-M&A?
  Response: Q2 and Q3 are typically similar; Q4 down ~15%–20% from Q3; Q1 roughly in line with Q4.

• Question from Richard Reid (Wells Fargo Securities, LLC): How should gross margin trend sequentially in H2?
  Response: Stable versus Q2, supported by private label and sourcing gains.

• Question from Richard Reid (Wells Fargo Securities, LLC): Size of private label and SG&A initiative sizing?
  Response: Private label ~4% of revenue and growing; SG&A work focuses on M&A synergies and controllable spend, though inflation and incentives lift the rate near term.

• Question from Michael Dahl (RBC Capital Markets): What SG&A items were worse than expected, and how are actions segmented?
  Response: Medical/insurance surge and inflation in facilities/fleet exceeded plans; M&A/onetime ~half of growth; cost-outs ongoing with headcount tightly managed.

• Question from Michael Dahl (RBC Capital Markets): Pricing trends between commodities and finished goods?
  Response: Overall pricing neutral; increases in non-pipe/imported products offset PVC pipe moderation; expect stability ahead.

• Question from Collin Verron (Deutsche Bank AG): What drove meter sales decline and outlook from here?
  Response: Tough 48% YOY comp and some project delays; backlog supports H2 shipments; long-term outlook remains strong.

• Question from Collin Verron (Deutsche Bank AG): Greenfield vs M&A—economics and ramp?
  Response: Acquisitions add revenue/profit faster; greenfields typically break even within ~2 years and reach company averages in 3–5; pursuing both.

• Question from Patrick Baumann (JPMorgan Chase & Co): Why is the residential revision larger than starts data suggests?
  Response: Some early lot build-up and Sunbelt slowdown reduced activity; starts lagged expectations; view the weakness as temporary with pent-up demand building.

• Question from Patrick Baumann (JPMorgan Chase & Co): Canada Waterworks deal in guidance and pipeline update?
  Response: Not in guidance; 3 branches (~$15M typical branch size) expand Canada platform; M&A pipeline remains healthy across sizes.

• Question from Asher Sohnen (Citigroup Inc.): Any change in the competitive environment?
  Response: No material change; competition stable with occasional regional skirmishes; CNM’s scale and service provide stability advantage.

• Question from Asher Sohnen (Citigroup Inc.): Which products are most exposed to resi, and any mix/inventory shifts?
  Response: Mix is broadly similar across end markets; fire protection skews nonres; focus is on reallocating resources to stronger markets rather than inventory shifts.

• Question from Julian Nirmal (Truist Securities, Inc.): Pricing outlook for Q3 vs Q4?
  Response: Flattish in both quarters; overall pricing remains stable.

• Question from Nigel Coe (Wolfe Research, LLC): Will SG&A dollars step down in H2, and 53rd-week impact?
  Response: Yes, SG&A dollars decline in H2; 53rd week means one less sales week in Q4 with ~$8–$10M EBITDA impact.

• Question from Nigel Coe (Wolfe Research, LLC): Direction of nonresidential into 2026?
  Response: Expect roughly flat near term: highways and data centers strong, offset by softer commercial/retail.