Detailed narrative
A2L Transition and Market Stability
The first quarter of FY26 marked the full maturity of the A2L product transition, contributing to improved market stability. While unit volumes were initially lower, they showed incremental improvement as the quarter progressed, with March exiting at high single-digit growth on a same-day basis. This momentum continued into April, signaling a less complex operating environment compared to the past five years, which saw extreme demand, supply chain challenges🌐, and regulatory changes impacting almost 100% of equipment sold twice.
Strategic Acquisition of Jackson Supply
Watsco announced an agreement to acquire Jackson Supply, a market-leading Sunbelt distributor with $230 million in annual sales. This acquisition will expand Watsco's Sunbelt presence by 25 locations and diversify its brand and product offerings, particularly in parts and supplies. The entrepreneurial leadership team of Jackson Supply will remain with the company, and the transaction is expected to close in the second quarter of FY26.
Technology and Digital Platform Expansion
The company continues to build and expand its technology platforms, which are seen as immense long-term competitive advantages. E-commerce sales increased 16% during the quarter, outpacing overall growth. OnCall Air, a digital platform assisting contractors, saw customer sales grow 20%, with its gross merchandise value projected to exceed $2 billion in FY26. These tools enhance customer experience, improve operating efficiency, and drive data-driven growth strategies.
Gross Margin and Operating Efficiency Initiatives
Watsco maintained gross margins in Q1 FY26 and is actively pursuing initiatives to achieve a long-term target of 30%. SG&A remained flat due to improved operational efficiency offsetting investments in technology and new locations. The company is accelerating the use of pricing optimization tools and has launched a new initiative to increase sales in the highly fragmented parts and supply segment, which comprises almost 50% of the market share.
Balance Sheet Strength and Capital Allocation
Watsco emphasized its strong, debt-free balance sheet, which provides flexibility for continued investment in innovation, technology, and strategic acquisitions. Management expects to reduce inventory investment and improve inventory turns throughout the year, contributing to cash flow. The supply chain is noted to be more stable, allowing for better inventory management and product availability.