Watsco Earnings: Second-Quarter Revenue Slips, but Impressive Profit Margin Continues

Considering recent outsize demand for HVAC systems (causing a tough prior-year sales comparison) and our view that the U.S. residential HVAC replacement cycle has matured, we’ve been expecting a down year for HVAC shipments in 2023. Nevertheless, Watsco’s second-quarter revenue growth fell short of our expectations, falling 6% year over year. That said, product availability issues (related to the energy efficiency standard changeover) with a key original equipment manufacturer partner were likely to blame for much of the shortfall; management estimates that this supply issue reduced sales by $75 million-$80 million. We don’t believe this will be an ongoing issue.