Lennox’s third quarter results were met with a significant negative market reaction, as revenue declined more than expected due to persistent softness in both residential and commercial markets. Management attributed these challenges primarily to ongoing inventory destocking among distributors and dealers, compounded by subdued end-market demand and cautious contractor behavior following regulatory changes. CEO Alok Maskara acknowledged that the scale of channel inventory destocking was larger than anticipated, noting, “contractors and distributors actively reduced inventory levels,” and that weak consumer confidence and a tepid summer season further dampened sales. Additionally, a shift toward repairs over replacements became evident as parts and supplies experienced growth, reflecting homeowners’ hesitancy to commit to full system replacements in the current environment.
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Lennox (LII) Q3 CY2025 Highlights:
- Revenue: $1.43 billion vs analyst estimates of $1.49 billion (4.8% year-on-year decline, 4.3% miss)
- Adjusted EPS: $6.98 vs analyst estimates of $6.84 (2% beat)
- Adjusted EBITDA: $337.2 million vs analyst estimates of $325.9 million (23.6% margin, 3.5% beat)
- Management lowered its full-year Adjusted EPS guidance to $23 at the midpoint, a 3.2% decrease
- Operating Margin: 21.7%, up from 20.2% in the same quarter last year
- Organic Revenue fell 5.2% year on year vs analyst estimates of flat growth (462 basis point miss)
- Market Capitalization: $17.58 billion
While we enjoy listening to the management's commentary, our favorite part of earnings calls are the analyst questions. Those are unscripted and can often highlight topics that management teams would rather avoid or topics where the answer is complicated. Here is what has caught our attention.
Our Top 5 Analyst Questions From Lennox’s Q3 Earnings Call
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Ryan Merkel (William Blair) asked about the drivers behind the residential volume declines and whether destocking or weak consumer demand played a bigger role. CEO Alok Maskara clarified that both factors contributed, with contractors reducing inventory and end-user demand impacted by higher interest rates and a subdued summer season.
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Damian Karas (UBS) sought insight into when channel inventory levels would normalize. Maskara responded that destocking should largely conclude by the second quarter of next year, attributing the trend to improved supply chain reliability and reduced need for excess dealer inventory.
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Nigel Coe (Wolfe Research) questioned the shift toward repair over replacement and whether changes in consumer confidence or product transitions were the main drivers. Maskara emphasized that the refrigerant transition was the primary cause but noted that weak consumer confidence and price sensitivity also played a role.
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Joseph John O’Dea (Wells Fargo) inquired about management’s expectations for industry volume normalization and pricing discipline in the coming year. Maskara indicated that the industry should return closer to historical norms, with pricing actions continuing to offset inflation.
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Thomas Allen Moll (Stephens) asked for details on expected margin trends and the impact of recent acquisitions. CFO Michael P. Quenzer explained that acquisition-related amortization would be a near-term headwind, but accretion is anticipated in 2026 as integration progresses and cost synergies are realized.
Catalysts in Upcoming Quarters
Looking ahead, the StockStory team will be monitoring (1) the pace of inventory normalization among distributors and contractors, (2) early signs of demand recovery in both residential and commercial segments, and (3) the integration progress and initial financial contributions from recent acquisitions. Additional markers of success will include the rollout and market acceptance of new product lines, as well as the impact of ongoing cost discipline on margin sustainability.
Lennox currently trades at $500.20, down from $549.34 just before the earnings. In the wake of this quarter, is it a buy or sell? See for yourself in our full research report (it’s free for active Edge members).
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