Core & Main's Q2 2026 Earnings Call: Contradictions in Residential Growth, SG&A Costs, Pricing, and Municipal Funding Spark Concerns

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

Date of Call: None provided

Financials Results

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

Guidance:

• FY2025 net sales expected at $7.6–$7.7B.
• Adjusted EBITDA expected at $920–$940M.
• Operating cash flow expected at $550–$610M.
• End-market volumes slightly down; municipal +LSD, non-residential ~flat, residential lot development down low double digits.
• Pricing neutral for full year; above-market growth of 2–4%.
• 2H adjusted EBITDA margins slightly lower than 1H; gross margin stable vs Q2; SG&A rate higher.
• Cost-out actions underway; larger benefits in FY2026.
• 53rd-week impact on Q4 EBITDA estimated at ~$8–$10M.

Business Commentary:

* Sales Growth and Market Share: - Core & Main reported nearly 7% net sales growth in Q2 2025, with roughly 5% organic growth. - Growth was driven by strong municipal demand, stable non-residential end markets, and momentum from data centers.

• Earnings and Cost Management:
• Adjusted diluted earnings per share increased approximately 13% to $0.87 compared to the prior year.

• The increase was due to higher adjusted net income and a lower share count, despite elevated costs and inflationary pressures.

• Acquisition and Expansion Strategy:

• The company announced significant acquisitions, including Canada Waterworks, enhancing its Canadian presence.

• These strategic moves are aimed at enhancing market positions and driving long-term growth through both organic and M&A activities.

• Residential Market Challenges:

• Residential lot development slowed, particularly in previously fast-growing Sunbelt markets, leading to a low double-digit sales decline outlook.

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

• Cost Out Actions and Margin Expansion:

• Gross margins performed well at 26.8%, up 10 basis points sequentially and 40 basis points year-over-year.
• Despite cost pressures, the company is implementing targeted cost-out actions to improve productivity and operating margins, with anticipated savings from 2026.

Sentiment Analysis:

• Management lowered FY2025 guidance due to higher operating costs and softer residential demand, expecting 2H EBITDA margins slightly below 1H. Yet they reported net sales up nearly 7% to $2.1B and gross margin at 26.8%, up 40 bps YOY, with stable pricing and municipal strength. Cost-out actions are in progress with larger benefits targeted for 2026.

Q&A:

• Question from Brian Biros (Thomson Research Group): What are the key puts/takes behind the revenue guidance cut beyond weaker residential?
  Response: Guidance reduction is primarily from residential lot development turning down low double digits; strength in municipal, treatment plants, and fusible HDPE plus M&A partially offsets.

• Question from Brian Biros (Thomson Research Group): Where are the biggest growth opportunities as water demand evolves (e.g., data centers)?
  Response: Municipal remains healthy with funding and local rate support; data centers increase water needs; Core & Main is investing to capture multi-year infrastructure tailwinds.

• Question from Matthew Adrien Bouley (Barclays): Why is EBITDA cut similar to revenue cut despite cost actions—timing and mix?
  Response: Cost-outs began but inflation and weaker residential mix pressure margins; savings ramp in 2H with the majority realized in FY2026.

• Question from Matthew Adrien Bouley (Barclays): How did residential trend in H1 and what’s implied for H2?
  Response: Residential was decent in Q1 but weakened through Q2 and August; expect low double-digit declines in 2H to yield a full-year low double-digit decline.

• Question from David John Manthey (Baird): What was residential growth in H1 and what does the outlook imply for H2?
  Response: H1 residential was down mid-to-high single digits; H2 expected down low double digits to reach a full-year low double-digit decline.

• Question from David John Manthey (Baird): Provide organic vs M&A impact on SG&A and whether Q2 is the SG&A dollar peak.
  Response: M&A added ~2% to sales and ~3% to SG&A growth; Q2 likely the high watermark for SG&A dollars, with synergies and fewer one-times aiding 2H.

• Question from Sam Reid (Wells Fargo): What is the gross margin path in 2H vs Q2?
  Response: Gross margin expected to be stable vs Q2 and favorable YOY, supported by private label and sourcing execution.

• Question from Sam Reid (Wells Fargo): Size of private label and SG&A optimization context?
  Response: Private label is ~4% of revenue and growing; SG&A actions focus on acquisition synergies and controllable spend, but inflation and incentive comp lift the 2H rate.

• Question from Michael Glaser Dahl (RBC): What drove SG&A above expectations, and how are actions segmented?
  Response: SG&A rose on M&A, one-times, higher medical/insurance claims, facility/fleet inflation, incentive comp, equity comp, and growth investments; actions span synergies, controllable spend, and selective headcount management.

• Question from Collin Andrew Verron (Deutsche Bank): Why did meter sales decline and outlook ahead?
  Response: Decline was mainly a tough comp (+48% LY) plus project delays; backlog supports stronger shipments in 2H and positive full-year metering growth.

• Question from Patrick Bauman (JP Morgan): Why was residential revised more than starts suggest and where is lot development now?
  Response: Some lot build-up and notable softness in Sunbelt markets led to scaled-back projects; weakness seen late Q2 into Q3 is viewed as temporary with pent-up demand.

• Question from Patrick Bauman (JP Morgan): Is the Canada Waterworks deal in guidance and what’s the M&A pipeline?
  Response: Not included; ~3 branches around $15M each; pipeline remains healthy with opportunities of varying sizes.

• Question from Asher Sonin (Citi): Has the competitive environment changed amid residential slowing?
  Response: No meaningful change; stable competitive dynamics with Core & Main’s scale and service resonating with customers.

• Question from Julie (True Securities): How do you expect pricing in Q3 vs Q4?
  Response: Pricing expected to be flattish for both Q3 and Q4.

• Question from Nigel Edward Coe (Wolfe Research): Will SG&A dollars step down in 2H and what’s the 53rd-week impact?
  Response: Yes, SG&A dollars should decline in 2H on cost actions and lower volumes; 53rd-week effect estimated at ~$8–$10M EBITDA in Q4.

• Question from Nigel Edward Coe (Wolfe Research): How do you view non-residential into 2026?
  Response: Expect generally flat: highway/street and data centers remain strong, offsetting softer commercial/retail.