Watsco, one of the industry’s largest HVAC distributor’s, serving over 125,000 contractors and installers through over 692 locations in the US, announced 3Q 2026 earnings on October 27. Watsco’s quarter reflected an improving North American HVAC replacement market, healthy residential construction demand, growing digital engagement, and strategic expansion into plumbing distribution.

The company reported record Q3 revenue of $2.22 billion, up approximately 7% year over year, with same-store sales increasing 4% and residential HVAC equipment sales rising 7%. Management argued that many of the industry’s largest disruptions, including pandemic dislocations, supply-chain shortages, refrigerant transitions, and tariff uncertainty, are finally beginning to normalize. Q3 operating income declined 4% to $225 million despite the record gross profit, as operating expenses increased and margins normalized following several years of unusually strong pricing conditions. In addition, shifts in customer and product mix and timing of manufacturer price increases hurt profitability.

Gross profit was a record $586 million, up approximately 3% year-over-year. Gross margin was 26.4%, down from 27.5% in 3Q25, a decline of 110 basis points, the lowest since 2019. Margin pressures prevented profitability from keeping pace with top line growth.

Chairman and CEO Albert Nahmad described Q3 as a period of “improving demand and simpler operating conditions” after years of disruption. October revenue trends were running double-digit, a strong positive.

Watsco Results by Business Segment

Watsco operates primarily through its HVAC distribution segment, which accounts for approximately 98% of revenues. Within distribution, sales trends (excluding acquisitions) in the third quarter were:

• HVAC equipment sales increased 5% (67% of sales, or about $1.5 billion), driven by a 7% growth, with volume contributing 5% and price contributing 2%, in domestic residential equipment and a 5% decline in commercial HVAC equipment sales.
• Other HVAC products (parts, supplies, etc.) sales grew 2% (29% of sales, or about $644 million), reflecting steady repair-and-maintenance activity.
• Commercial refrigeration sales increased 10% (4% of sales, or about $89 million), the fastest growing category, indicating strong activity in food retail, cold storage, and related commercial end markets.

The notable shift versus 2025 was the return to growth in residential HVAC equipment demand, which more than offset weakness in commercial HVAC equipment and helped drive Watsco’s overall revenue growth in the quarter.

Management attributed the quarter’s performance to several key factors:

• Residential HVAC Primary Growth Engine – Higher volumes drove growth, unlike 2024-2025, when the industry relied heavily on price increases to offset weak volumes, Watsco indicated that 2026 growth came more from recovering demand. Management noted that replacement demand improved, residential new construction turned positive, and industry conditions became more normal as disruptions from the A2L refrigerant transition began to fade.
• Acquisitions Added to Growth – Specifically Jackson Supply contributed approximately $78 million of revenue in the quarter and itself grew 16% year over year.
• E-commerce and Digital Momentum – E-commerce sales grew 12% year-to-date, and digital sales represent 37% of total sales. More than 3,000 contractors and technicians were actively using Watsco’s digital platforms. OnCallAir generated approximately $2 billion of gross merchandise value, up 14% year over year.

Digital tools create a competitive advantage by helping contractors buy equipment and parts online, manage inventory and jobs electronically, improve technician productivity and increase customer loyalty to Watsco’s distribution network. The company characterized its digital ecosystem as a major reason it continues to gain share and called it a “durable and widening competitive advantage.”

Acquisitions During The Quarter

The company highlighted two major acquisitions, Jackson Supply of Spring, Texas, acquired June 1, has about $230 million annual revenue in 25 Sunbelt locations (specifically in Texas, Louisiana, Mississippi, Alabama, Tennessee, Oklahoma, and Arizona). Growth is 16%. Jackson Supply is a strong fit with Watsco’s focus on high-growth southern markets.

 The Granite Group of Concord New Hampshire, acquired in October, has $500 million annual revenue and more than 11,000 customers in 82 Northeast locations. The Granite Group is one of the leading HVAC and plumbing distributors in the Northeast, giving Watsco significant expansion in New England and a larger presence in the plumbing distribution market.

Together, Jackson Supply and The Granite Group add roughly $730 million of annualized revenue, equivalent to approximately 10% incremental annual revenue for Watsco. Management emphasized that both acquisitions expand the reach of Watsco’s digital tools, e-commerce platform, pricing systems, and contractor-facing technology ecosystem.

Watsco’s Outlook

Watsco did not provide formal earnings guidance, consistent with its historical practice. However, management’s commentary was notably constructive and highlighted month-by-month improvements in organic growth continues to improve month by month, the conclusion of the A2L transition, the expectation that OEM pricing actions are expected to normalize over the next twelve months, seasonality in 4Q that should drive lower inventory levels, the strong double-digit October sales growth, and recent acquisitions that should provide incremental revenue growth entering 2027.

Management repeatedly characterized industry conditions as becoming “simpler” after several years of extraordinary disruption.

Watsco Challenges Highlighted

Stakeholders focused on several key areas during the Q3 2026 call:

Although replacement demand improved meaningfully during the quarter, analysts questioned whether the recovery is sustainable or simply reflects deferred purchases following the A2L transition. Management responded that demand has steadily improved since the spring and that industry conditions appear healthier than they have been in several years and that growth is becoming more broad-based, supported by improving unit volumes rather than merely pricing.

Investors focused heavily on the decline in gross margin. Management emphasized that margin pressure was largely mix-related and influenced by unusual industry dynamics. Executives reiterated confidence in long-term margin expansion through technology-enabled pricing, operational efficiency, and greater digital penetration.

Another concern was whether manufacturers can continue raising prices. The theme management stressed was that pricing behavior should become more “ordinary and conventional” as inflation moderates and extraordinary supply chain conditions fade. This implies future growth may rely more on volume expansion than aggressive price increases.

The acquisition of The Granite Group generated significant discussion. Management described plumbing as another highly fragmented distribution market where Watsco’s digital tools and operating model could create value. Executives see substantial cross-selling opportunities with contractors that already purchase HVAC products.

Finally, several analysts pressed management on the returns generated from years of technology investments. Executives pointed to increased e-commerce penetration, contractor adoption rates, OnCallAir transaction growth, and operating efficiencies as evidence that technology is becoming a key differentiator versus traditional distributors.

What This Means for the HVAC Distribution Industry

Watsco’s results are widely regarded as a bellwether for the North American HVAC distribution industry. Watsco is the largest distributor in the highly fragmented North American HVAC/R market, with about 700 locations and relationships with major OEMs. Its performance provides a key data point on broader industry trends, including contractor demand, OEM pricing power, and channel dynamics.

The industry’s transition to A2L refrigerants created meaningful inventory, pricing, and purchasing distortions. Watsco’s confidence that the transition will largely conclude by year-end suggests distributors, contractors, and manufacturers may finally return to more normal operating patterns.

The quarter reinforced a trend seen across portions of industrial distribution – residential replacement activity has strengthened, while commercial HVAC remains comparatively softer. Distributors with significant residential exposure appear better positioned than those heavily dependent on commercial new construction.

Watsco’s growing digital penetration suggests that scale distributors increasingly compete on technology rather than just inventory availability and branch density. Smaller independent distributors may find it harder to match the company’s digital capabilities.

The acquisitions of Jackson Supply and The Granite Group underscore that HVAC distribution remains highly fragmented. Strong cash generation and a debt-free balance sheet position Watsco to remain one of the industry’s most active consolidators.

Bottom Line

Watsco’s third-quarter results suggest the North American HVAC industry has entered a healthier phase after several years of disruption. Residential demand is improving, digital investments are gaining traction, and the company remains financially strong with $649 million of cash and no debt. Yet investors remain focused on margin recovery, equipment affordability, inflation-related pricing pressure, and the possibility that future tariff actions could once again disrupt the industry’s progress.

For the broader U.S. HVAC distribution market, the quarter’s most important takeaway is that growth is increasingly being driven by real demand recovery rather than emergency pricing actions and regulatory transitions. That is an encouraging signal not only for Watsco, but also for manufacturers such as Carrier, Trane Technologies, Lennox, and the wider HVAC distribution ecosystem.

Four Take Aways from Watsco’s Q3

1. In most markets, residentially-driven growth will come from replacement, renovation, remodeling. Given mortgage rates, significant new construction is questionable except for certain geographies and price points, unless there are builder incentives.
2. While Watsco didn’t highlight, large distributors do have an advantage in the data center market. The ability to provide credit for very large projects as well as the value-added services is key.
3. Customers are expecting omni-channel offerings. The role of eCommerce is growing. Somewhat for finalizing a transaction; more for self-serve options. This is also becoming more important with the rise of LMMs and supporting “search” / “answer generation.”
4. Diversification is a viable strategy for more and more distributors. Expanding into plumbing, and perhaps electrical, are viable complementary markets captured through acquisition.