Watsco's Q2 2025: Navigating Contradictions in Inventory Strategy, Market Uncertainties, and Hurricane Impacts

Inventory investment and turns strategy, impact of market uncertainties, 410A to A2L transition and inventory management, inventory turns and strategic goals, impact of hurricanes on business are the key contradictions discussed in Watsco's latest 2025Q2 earnings call.



Sales Performance and Market Conditions:
- Watsco reported a 4% decline in sales for the second quarter of 2025, despite double-digit pricing gains for new equipment.
- The sales decline was partly due to a late start to the summer season and subdued sales in residential new construction and international markets.

Gross Margin Improvement:
- Watsco achieved record gross profit margins, despite the sales decline, with an EBIT increase and expanded EBIT margins.
- The improvement was attributed to OEM pricing actions and the use of a pricing technology platform, Pricefx, which contributed significantly to the margin increase.

Inventory and Transition Challenges:
- Watsco's inventory investment was $2 billion at its peak, which is more than anticipated due to lower-than-expected industry demand.
- This situation was caused by the significant product transition to next-generation equipment containing A2L refrigerants, which affected inventory needs, staffing levels, and supply chains.

Technology and Growth Initiatives:
- E-commerce sales reached $2.5 billion, accounting for 34% of sales, and mobile apps had 70,000 users, growing by 17% year-on-year.
- Watsco is investing in technology to separate itself from competitors, expanding its product mix towards parts and supplies, and implementing AI platforms for improved customer experience and operational efficiency.