Watsco, Inc. (WSO) Income Statement

The revenue trajectory shows a clear deceleration from the mid-single-digit growth seen in 2024 to consistent year-over-year declines in 2025 and 2026. The 2.1% sequential growth in Q2 2026 suggests stabilization, but the persistent contraction may reflect a cyclical trough rather than structural share loss. Investors should monitor whether the replacement-driven demand, supported by an aging installed base, can reaccelerate growth as regulatory transitions fade.

The gross margin expansion in a period of revenue contraction indicates that Watsco is effectively passing through manufacturer price increases, supported by its fragmented contractor base. However, the margin is still below the 29.3% peak in Q2 2025, suggesting some residual pressure from input costs or mix shifts. The structural support from the Carrier JV and Sunbelt density appears intact, but the sustainability of this margin level warrants monitoring as volume recovers.

The operating leverage is clearly visible in the sequential improvement from Q4 2025 to Q2 2026, where operating income grew 149% on a 31% revenue increase. SG&A expenses have remained relatively flat around $340 million, indicating that the company is managing overhead efficiently despite the revenue downturn. This suggests that as revenue stabilizes, operating margins could expand further, but the lack of formal guidance introduces uncertainty about the pace of recovery.

The increase in COGS ratio reflects the revenue decline, but the absolute COGS of $1.5 billion is consistent with prior quarters, indicating that input costs are not escalating. SG&A has been remarkably stable, suggesting that management is controlling overhead despite the revenue contraction. The LIFO inventory accounting may be suppressing reported margins during inflationary periods, but the current data does not show a significant impact.