Watsco Aims for 30% Gross Margin, $10B Revenue with Tech and Margin Initiatives

Watsco's Q2 2025 earnings show healthy results despite soft market conditions. CEO Albert Nahmad notes a significant product transition to next-generation products. The company outlines its path to a 30% gross margin and $10B revenue target while advancing technology and margin initiatives.

Watsco Inc. (NYSE: WSO) reported its second quarter 2025 earnings, showing mixed results despite soft market conditions. The HVAC distributor's shares declined slightly in pre-market trading following the announcement [1].

The company posted earnings per share of $4.52, missing the analyst consensus of $4.80. Revenue declined 4% year-over-year (YoY) to $2.06 billion, falling short of the $2.23 billion analysts had expected. However, Watsco achieved record gross profit margins of 29.3%, expanding 220 basis points from the previous year, while operating income increased 1% to $272 million [1].

The sales decline primarily stemmed from lower unit volumes due to more temperate weather conditions, reduced homebuilding activity, and disruptions related to the transition to next-generation A2L refrigerants. HVAC equipment sales, which represent 68% of total sales, decreased 6% during the quarter [1].

CEO Albert H. Nahmad highlighted the company's resilience and entrepreneurial culture, stating, "Despite the challenging environment, I am proud that we improved gross margins and generated a measure of earnings growth, which highlights our entrepreneurial culture and the resilience of our business model" [1].

Watsco maintains a strong financial position with $293 million in cash, no debt, and $3 billion in shareholders’ equity. In April, the company raised its annual dividend by 11% to $12.00 per share, marking its 51st consecutive year of dividends [1].

The company's digital initiatives continue to gain traction, with e-commerce sales reaching $2.5 billion for the twelve-month period ended June 30, 2025, representing 34% of overall sales. Watsco has invested more than $250 million in technology over the past five years [1].

The A2L product transition is accelerating, with these new environmentally-friendly systems representing 60% of domestic sales in the second quarter, up from 25% in the first quarter. This transition will ultimately convert nearly $1 billion of inventory across more than 650 locations in the U.S. [1].

During the earnings call, management outlined their path to achieving a 30% gross margin and $10 billion in revenue, with a focus on technology-driven margin expansion, national customer initiatives, and AI deployment. Management noted that the transition to A2L refrigerants is a multi-year catalyst, with the company expecting to see a simpler business environment in 2026 [2].

Management acknowledged persistent market softness in residential new construction and international markets, particularly Mexico. Inventory levels remained elevated due to the product transition, though active efforts to reduce them are underway. Tariff-related cost inflation was mentioned as a factor in both equipment and parts pricing [2].

Analysts maintained a neutral to slightly negative tone, probing on volume softness, inventory, and the sustainability of margin gains. Management's prepared remarks were confident, emphasizing technology, margin achievements, and forward targets, but responses in Q&A reflected caution regarding market volatility and volume trends [2].

Watsco's management highlighted record gross margins and continued technology-led initiatives in a challenging market shaped by regulatory-driven product transitions and soft demand. With a clear focus on margin improvement, inventory management, and digital expansion, the company remains committed to its "Dream plan 2" goals of $10 billion in revenue, 30% gross profit margin, and 5x inventory turns, positioning itself for stronger performance as market conditions normalize and new initiatives come online [2].

References:
[1] https://in.investing.com/news/earnings/watsco-misses-estimates-as-a2l-refrigerant-transition-impacts-sales-93CH-4934276
[2] https://seekingalpha.com/news/4474706-watsco-outlines-path-to-30-percent-gross-margin-and-10b-revenue-target-while-advancing