Core & Main's Q3 2026 Earnings Call Contradictions: Residential Demand, SG&A Savings, and Construction Outlook Diverge

Date of Call: None provided

Financials Results

• Revenue: $2.1B, up 1% YOY (organic volumes/prices roughly flat; acquisitions contributed ~1 point)
• EPS: Adjusted diluted EPS $0.89, up ~3% YOY (vs $0.86 prior year)
• Gross Margin: 27.2%, up 60 basis points YOY

Guidance:

• Full-year net sales $7.6–$7.7B and net sales growth 4%–5% (excludes ~2% headwind from one fewer selling week)
• Adjusted EBITDA $920–$940M
• Operating cash flow $550–$610M
• End-market volumes: flat to slightly down (residential down low double-digits; municipal up low- to mid-single digits; non-residential roughly flat)
• Pricing expected neutral for the year; gross margin expected to improve year-over-year
• On track to deliver 2–4 percentage points of above-market growth

Business Commentary:

* Municipal and Non-Residential Project Demand: - Municipal construction remains strong, contributing over 40% of sales, with local utility rate revenues and municipal bonds as reliable funding sources. - Non-residential projects, particularly complex infrastructure projects like data centers, are growing, offsetting softness in commercial sectors. - The growth in municipal and non-residential projects is driven by favorable funding environments and increased demand, particularly from data centers.

• Pricing and Margin Expansion:
• Despite a 15% year-over-year decline in municipal PVC pipe pricing, the company sustained a stable pricing environment overall.
• Gross margin improved by 60 basis points year-over-year to 27.2%, driven by private label initiatives and disciplined sourcing and pricing execution.
• This margin expansion is attributed to the success of private label products and strategic cost management.

• Residential Market Softness and Recovery Outlook:
• Residential demand softened, particularly in Sunbelt markets, impacting less than 20% of sales.
• The company expects stabilization and potential recovery in residential demand as housing affordability improves.

• The long-term outlook remains attractive, supported by population growth and a structural undersupply of housing.

• Strategic Growth Initiatives:

• The company expanded into new markets with five new branches opened through fiscal year-end, enhancing proximity to high-growth areas.
• Strategic acquisitions, such as the expansion into Canada, are expanding the addressable market and strengthening customer relationships.
• Investments in areas like data centers, smart meters, and treatment plants are expanding product offerings and market share.

Sentiment Analysis:

Overall Tone: Positive

• Management reaffirmed full-year guidance, highlighted 'gross margin expansion' (27.2%, +60 bps YOY), announced a $500M buyback authorization increase, and repeatedly expressed confidence in municipal funding and long-term growth drivers such as data centers and private-label expansion.

Q&A:

• Question from Brian Biros (Thompson Research): Can you talk about the large, complex projects you referenced — market share, growth rates, revenue exposure, and the role of distributors?
  Response: Data-center and other complex projects align with Core & Main’s local-distribution scale; exposure is low-single-digit today but growing rapidly, with local relationships and one-stop supply driving share gains.

• Question from Brian Biros (Thompson Research): The municipal outlook was raised slightly to low-to-mid single digits — is that timing or signaling stronger municipal demand ahead?
  Response: The uplift reflects confidence in durable municipal funding sources (state/local/IIJA tailwind still largely unspent) and municipalities increasing rates, supporting stronger municipal demand across horizons.

• Question from Matthew Bouley (Barclays): Any early directional thoughts for 2026 across municipal, non-residential, and residential?
  Response: Municipal should remain steady-to-strong into 2026; non-residential is mixed (strength in complex projects, softness in light commercial); residential may be a headwind early in 2026 but could rebound as affordability improves.

• Question from Matthew Bouley (Barclays): Is the ~27% gross margin a new normal and what drove the strength?
  Response: Q3 may be near-year peak; management expects annual gross-margin expansion driven by private label and sourcing/purchasing execution, with Q4 margins between Q2 and Q3 levels.

• Question from David Manthey (Baird): Is the residential stabilization you noted better than you expected 90 days ago?
  Response: Residential softened as expected (down low double-digits to mid-teens for the quarter) and generally performed in line with prior expectations; no material recovery yet.

• Question from David Manthey (Baird): How much is private label and other sourcing initiatives contributing to gross-margin improvement and what runway remains?
  Response: Private label (~5% of sales) was a major driver this quarter; long-term target is 10–15% mix and private label alone could add ~10–20 bps of margin per year, with additional upside from sourcing and purchasing.

• Question from Nigel Coe (Wolfe Research): Does Q4 SG&A guidance fully embed the $30M run-rate savings?
  Response: Q4 reflects only partial benefit (~$5M impact); the full ~$30M annualized savings run rate will be realized in FY26.

• Question from Nigel Coe (Wolfe Research): Beyond the $30M, what further productivity actions are you exploring?
  Response: Additional productivity is being pursued via technology, automation, and back-office efficiencies to drive further SG&A leverage while protecting growth investments.

• Question from Joe Ritchie (Goldman Sachs): What constrains accelerating private-label penetration and where is it most penetrated?
  Response: Growth is constrained by product development, sourcing/logistics capacity, and customer acceptance; plan targets roughly ~1 percentage point increase in mix per year supported by engineering and distribution investments.

• Question from Joe Ritchie (Goldman Sachs): Do you need additional investment to participate meaningfully in the data-center opportunity?
  Response: Core & Main’s broad geographic footprint and local relationships already position it well; the company will make targeted branch/capability investments where needed and leverage national contractor relationships rather than require extraordinary new spend.

• Question from Anthony Pettinari (Citi): What is driving the mid-single-digit cost inflation and when should it normalize?
  Response: Primary inflation drivers are facilities, fleet, and medical costs; management expects moderation with easier comps beginning around Q2 next year.

• Question from Anthony Pettinari (Citi): What is the visibility and timeline for data-center projects?
  Response: Projects are multi-year with fast execution; the company typically gains ~1-year visibility on work and projects often expand with additional phases over multiple years.

• Question from Patrick Baumann (J.P. Morgan): PVC pricing is down ~15% YOY — does that imply overall pricing is flat and will that persist into 2026?
  Response: Yes — municipal PVC is down ~15% YOY while most other products are up; pricing is expected to be flat for FY25 and management expects pricing to be at least flattish in FY26, with category-level variance.

• Question from Patrick Baumann (J.P. Morgan): What’s the status of the M&A pipeline amid a perceived lull?
  Response: Pipeline remains active with live deals; although market activity has slowed, the company is engaged in transactions and expects announcements, keeping priorities of organic growth, M&A, and buybacks intact.

• Question from Sam Reid (Wells Fargo): Which roles were eliminated in the SG&A cuts and where were reductions concentrated?
  Response: The $30M cost out was mainly personnel (about 4% of roles), broadly across non-sales/back-office and addressing M&A overlaps, with no cuts to sales-facing roles or customer service.

• Question from Sam Reid (Wells Fargo): Can you provide details on the meter business and recent contract wins driving high-single-digit growth?
  Response: Smart-meter growth is driven by large municipal digitization projects and recent sizable contract awards (including their largest metering contract), reflecting strong demand and conversion of legacy systems.

• Question from Matt Johnson (UBS): Color on greenfields — targets for the rest of the year and plans for FY26?
  Response: Five greenfields opened YTD with more expected before year-end; Houston and Denver are priorities, a 12+ market pipeline exists, and new greenfields typically reach breakeven in year one and profitability in years two–three.

• Question from Matt Johnson (UBS): How meaningful is the Texas $20B authorization for Core & Main and how well positioned are you in Texas?
  Response: Texas is a key market with strong company presence; management expects to benefit from the funding over time and will invest (e.g., Houston greenfield) to capture share, including opportunities from product shifts like corrugated HDPE adoption.

Contradiction Point 1

Residential Market Demand and Expectations

It reflects differing views on the expected trajectory of the residential market demand, which directly impacts revenue forecasts and strategic planning.

Can you provide early insights into 2026 trends for residential stabilization and non-residential growth driven by data centers? - Matthew Bouley (Barclays)

2026Q3: We expect municipal to remain strong, with steady growth into 2026. Non-residential sees strength in infrastructure projects like data centers, while residential demand has softened but is expected to improve when housing affordability issues ease. - Mark Witkowski(CEO)

How clear is your outlook for the residential market this year? - Matthew Bouley (Barclays)

2026Q2: We were expecting that market to be flat overall as we got into the first quarter... It's been pretty clear that the market has softened and weakened throughout Q2 and definitely into August... So we do think low double digits is the right way to look at it from here through the end of 2025. - Mark Witkowski(CEO)

Contradiction Point 2

SG&A Cost Reduction and Initiatives

It highlights discrepancies in the company's approach to cost reduction and efficiency improvements, which are crucial for maintaining profitability.

Does Q4 guidance fully incorporate the $3 million SG&A savings? And are there further productivity opportunities being explored despite lean operations? - Nigel Coe (Wolfe Research)

2026Q3: We expect about $5 million of SG&A savings in Q4, with the full run rate hitting FY26. Cost savings will primarily come from personnel, through technology investments to improve efficiency and back-office automation. - Robyn Bradbury(CFO)

Can you clarify the scale of those SG&A optimization initiatives? - Richard Reid (Wells Fargo Securities)

2026Q2: The sizing of it is really inflation related... Several million dollars of cost-out actions have been executed in the first half of the year. - Robyn Bradbury(CFO)

Contradiction Point 3

Residential Construction Market Outlook

It involves differing perspectives on the stability and future outlook of the residential construction market, which impacts revenue expectations and strategic planning.

Can you provide early insights or directional trends for 2026, particularly regarding stabilization in residential markets and performance of non-residential segments like data centers? - Matthew Bouley (Barclays)

2026Q3: We expect municipal to remain strong, with steady growth into 2026. Non-residential sees strength in infrastructure projects like data centers, while residential demand has softened but is expected to improve when housing affordability issues ease. We caution that any additional residential growth may take time to materialize. - Mark Witkowski(CEO)

Can you elaborate on the residential construction market slowdown? - Collin Verron (Deutsche Bank)

2025Q1: Residential lot development was resilient in Q1 but showed signs of softening, with customers reducing footprints. It's a relatively small part of our business, but we're monitoring it. - Mark Witkowski(CEO)

Contradiction Point 4

Residential Demand Softening

It involves differing perspectives on the degree and timeline of residential demand softening, which impacts sales and market positioning.

Is that a more optimistic outlook for residential demand compared to 90 days ago? - David Manthey (Baird)

2026Q3: We started to see residential softening late in Q2 and continued into Q3. The full quarter was soft, with declines in the low double digits to mid-teens. There was no significant movement during the quarter. We will continue to monitor demand and consumer uncertainty. - Robyn Bradbury(CFO)

Was the information not explicitly stated? - [Questioner's Name]([Questioner's Company])

2025Q4: In the third quarter, we saw single-digit growth in most of our end markets. However, the residential market was slightly negative, given the continued moderation in demand. - Robyn Bradbury(CFO)