WSO Q2 Deep Dive: Product Transition and Pricing Initiatives Dominate Results

August 12, 2025 at 23:10 PM EDT

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Equipment distributor Watsco (NYSE: WSO) missed Wall Street’s revenue expectations in Q2 CY2025, with sales falling 3.6% year on year to $2.06 billion. Its non-GAAP profit of $4.52 per share was 6.3% below analysts’ consensus estimates.

Is now the time to buy WSO? Find out in our full research report (it’s free).

Watsco (WSO) Q2 CY2025 Highlights:

Revenue: $2.06 billion vs analyst estimates of $2.22 billion (3.6% year-on-year decline, 7.2% miss)
Adjusted EPS: $4.52 vs analyst expectations of $4.83 (6.3% miss)
Adjusted EBITDA: $282.8 million vs analyst estimates of $304.1 million (13.7% margin, 7% miss)
Operating Margin: 13.2%, in line with the same quarter last year
Same-Store Sales fell 4% year on year (4% in the same quarter last year)
Market Capitalization: $16.09 billion

StockStory’s Take

Watsco faced a challenging Q2, as soft market demand and ongoing regulatory-driven product transitions weighed on performance, prompting a negative reaction from investors. Management attributed the revenue decline primarily to lower volumes in residential new construction and subdued international sales, particularly in Mexico, which CEO Albert Nahmad described as “probably the most volatile market” impacting margins. Despite these pressures, the company achieved elevated gross profit margins through a combination of equipment price increases and ongoing enhancements to its pricing technology platform. Temporary inefficiencies tied to the refrigerant transition and higher SG&A expenses also played a role, as the company navigated one of its most complex product cycles in years.

Looking ahead, management believes that Watsco’s investment in technology, product mix shifts toward higher-margin parts and supplies, and the rollout of new digital platforms will shape performance in the coming quarters. President Aaron Nahmad emphasized the long-term potential of the company’s pricing tools and AI initiatives to further boost profitability and operational efficiency, while acknowledging ongoing macroeconomic uncertainty. The team also signaled an ambition to capture more business from large enterprise and national contractors with an upcoming sales platform, aiming to offset market headwinds. As the product transition nears completion, Watsco anticipates a return to more stable operations in 2026.

Key Insights from Management’s Remarks

Watsco’s second quarter was marked by a complex transition to new refrigerant standards and strategic efforts to sustain margins amid persistent demand weakness.

Product transition challenges: The shift to A2L refrigerant-based equipment, affecting over half of Watsco’s product mix, led to inventory build-up and logistical complexities. Management described this regulatory-driven change as historically positive but acknowledged current disruptions to supply chain and staffing.
Gross margin expansion: Elevated margins were attributed to OEM price increases and the company’s Pricefx optimization platform. Management highlighted that pricing technology contributed to roughly 50-60 basis points of margin improvement, with the potential for further gains as digital adoption increases.
Volume declines in key segments: Residential new construction volumes dropped 15–20%, and international sales, notably in Mexico, were soft. Both trends pressured overall sales, though management noted some improvement in July and expected further stabilization.
Digital growth and technology investment: E-commerce accounted for 34% of total sales, and mobile app usage rose 17% year-over-year. The OnCall Air platform saw a 19% increase in annual transaction volume, demonstrating the impact of technology on customer engagement and sales mix.
SG&A and transition costs: Operating expenses rose 6%, partly due to the refrigerant transition and the addition of new locations from recent acquisitions. Management expects process normalization as the inventory transition concludes, coupled with ongoing cost management initiatives.

Drivers of Future Performance

Watsco’s outlook hinges on digital adoption, margin improvement from product mix shifts, and a gradual return to normalized operating conditions post-transition.

Margin focus and product mix: Management targets higher gross profit margins by expanding sales of parts and supplies, which carry structurally higher margins than equipment. CEO Nahmad shared that technology-driven pricing and a shift in sales mix could support margin gains even as volume trends remain uncertain.
Technology and platform initiatives: The upcoming launch of the Watsco 1 sales platform, aimed at large national and enterprise customers, is expected to unlock incremental growth opportunities and diversify revenue sources. Additionally, internal and external AI applications are being developed to boost operational efficiency and data-driven decision-making.
External risks and market normalization: Persistent macroeconomic headwinds—including tariffs, weather variability, and soft homebuilding—remain uncertainties. Management is optimistic that, as the product cycle stabilizes and inventory levels normalize, operational performance will improve, setting the stage for more predictable growth in 2026.

Catalysts in Upcoming Quarters

Looking ahead, our team will be monitoring (1) the pace at which Watsco completes its refrigerant product transition and normalizes inventory levels, (2) adoption and impact of digital and AI-driven sales platforms on customer engagement and margins, and (3) recovery in residential new construction and international sales, especially in Mexico. M&A activity and progress on SG&A efficiency will also be key signposts moving forward.

Watsco currently trades at $419.80, down from $464.53 just before the earnings. Is the company at an inflection point that warrants a buy or sell? The answer lies in our full research report (it’s free).

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