Watsco’s first-quarter 2026 results point to early HVAC market stabilization after two years of post-spike turbulence, even as unit volumes remain soft and macro pressures keep the recovery uneven. The largest HVAC distributor in North America reported flat revenue at $1.53 billion, with a 2% gain in the US offset by an 11% decline internationally. Gross margin held at 27.9%, operating margin slipped to 7.2%, and SG&A expenses were flat year over year. The company also announced the acquisition of Jackson Supply Company, a $230 million Sunbelt distributor, deepening its relationship with Daikin and Goodman. This is not a breakout quarter. But the signals beneath the headline numbers say something useful about where the channel is heading.
HVAC Market Stabilization Is Real, but It Is Not a Recovery
Watsco described the quarter as reflecting “stabilizing markets,” not improving ones. Industry analysts following the sector reached a similar conclusion: flat volumes exiting March, modestly better momentum into April, but no clear inflection point yet. Hot weather and easy comparisons did some of the lifting in the late-quarter pickup. That is not a complaint. It is just what the data shows.
For distributors and contractors, this matters because the conversation has shifted. The previous two years were dominated by demand uncertainty, A2L disruption, and inventory whiplash. The current period is something different. Volumes are not collapsing. They are flat. That stability creates room to focus on operational discipline, margin protection, and channel strategy rather than firefighting.
Watsco’s specific data tells the story:
- HVAC equipment sales (65% of total): down 1%
- Other HVAC products (30% of total): up 4%
- Commercial refrigeration (5% of total): up 11%
- Average selling price for HVAC equipment: up 9%, driven by A2L mix and higher-efficiency units
- Unit volumes: down
Translation: pricing held the top line. Volume did not.
What Flat Volumes Mean for Distributors and Contractors
Flat volumes are not a neutral data point. In a channel built around scale economics, flat means margin pressure unless price and mix offset it. Watsco managed that tradeoff in Q1, but it is a fragile balance.
For independent distributors without Watsco’s scale, the same dynamic applies: pricing is doing the heavy lifting, and any slip in price discipline directly hits the bottom line. Contractors are also feeling this. Higher equipment prices combined with affordability pressure on homeowners means contractors are working harder to close jobs at acceptable margins.
The question for the channel is whether HVAC market stabilization eventually translates into volume recovery, or whether 2026 turns into another year of pricing-driven growth on flat units. Watsco management’s tone suggested the latter is the more likely near-term outcome.
The A2L Transition Is Maturing
The A2L refrigerant transition began in early 2025 and impacted roughly 55% of Watsco’s product mix, primarily domestic residential and light-commercial HVAC equipment. Watsco invested heavily in inventory, training, technology, and logistics to absorb the disruption.
Management called the transition “more advanced” but flagged remaining complexity: equipment calibration, dealer training, and installation practice changes. Inventory remains elevated to support A2L-compatible pairings between indoor and outdoor units, and to support the upcoming Jackson Supply integration.
For distributors, the takeaway is that A2L is no longer the lead story but it has not finished reshaping the business either. The companies that built strong A2L training and inventory positions through 2025 are now better positioned. Those that deferred investment are facing it now without the runway.
Jackson Supply and the Sunbelt Consolidation Story
The Jackson Supply acquisition is the strategic headline of the quarter. Jackson is a Goodman (Daikin) distributor with approximately $230 million in annual sales and a strong Sunbelt presence. Combined with East Coast Metals, Watsco’s geographic footprint with Goodman now stretches from Virginia to Arizona.
This deal does several things at once:
- Expands Watsco’s Daikin relationship at a time when Daikin’s residential platform is gaining share
- Adds scale in the Sunbelt, the largest concentration of HVAC demand in the country
- Strengthens Watsco’s negotiating position with OEMs as channel volume consolidates
It continues a 2025 acquisition pattern that included Lashley & Associates (a Houston-based commercial supplies and air-movement distributor), Hawkins HVAC Distributors (Charlotte, NC and Columbia, SC), and Southern Ice Equipment Distributors (foodservice and commercial refrigeration in the Sunbelt). Combined, those three deals added 10 locations and $47 million in annual sales.
For independent Sunbelt distributors, the message is direct. Watsco is consolidating the most attractive geography in the channel. The competitive math gets harder every quarter that consolidation continues. For OEMs, particularly those competing for shelf space against the Daikin/Goodman platform, the Watsco-Jackson combination shifts negotiating leverage further toward the platform.
Section 232 Tariffs and Coming OEM Price Increases
Watsco flagged Section 232 tariffs and broader OEM cost pressure as catalysts for upcoming price increases. Management expects universal OEM price increases in Q2 across product segments.
This matters for the channel in two ways. First, it could provide a margin tailwind in Q2 if distributors pass through the increases cleanly. Industry analysts noted that pricing actions could benefit second-quarter gross margins. Second, it tests contractor price tolerance at a time when residential affordability is already a headwind.
The likely outcome is uneven pass-through. Strong distributors with good contractor relationships will manage it. Weaker players will absorb more of the cost than they should and watch margin slip further.
Technology Adoption: The Quieter Story That Matters Most
Watsco has invested over $250 million in technology over the last five years, around $60 million annually, and now employs nearly 300 technologists. The visible parts of that investment include HVAC Pro+ (the contractor mobile app and ecommerce platform), OnCallAir (in-home digital sales and quoting), CreditForComfort (integrated financing), Alert Labs (IoT remote monitoring), and Pickup Express and Delivery Express (logistics tools).
The metrics behind the investment matter more than the platform names:
- More than 70,000 contractors, installers, and technicians engage digitally with Watsco platforms
- Well over half of equipment sales in key markets are touched by a digital tool
- Ecommerce sales reached $2.6 billion, or 36% of total sales
- Some regions are above 60% ecommerce penetration
This is the part of the story most independent distributors should be paying closest attention to. Watsco’s technology stack is not just operational efficiency. It is a customer retention engine. The more contractors integrate Watsco’s tools into their daily workflow, the harder it becomes for any other distributor to compete for that contractor’s business.
Management acknowledged that adoption is uneven across contractor size and geography, and that converting digital engagement into incremental margin and service revenue takes time. That is honest. It is also a signal that the curve is still early, and the gap between technology-forward distributors and the rest will continue to widen.
HVAC Market Stabilization: What It Means for the Channel Going Forward
Watsco’s Q1 results give the HVAC channel a useful data point. Volumes are flat. Price and mix are holding the top line. A2L is maturing but not finished. Tariffs and OEM increases are coming. Consolidation continues, particularly in the Sunbelt. Technology investment is widening the gap between scaled platforms and traditional distributors.
For independent distributors, the implications are clear. Operational discipline matters more in a flat-volume environment than in a growing one. Price and margin protection cannot rely on a volume bailout. Technology investment, even at a fraction of Watsco’s scale, is no longer optional. Sunbelt-positioned distributors face the steepest competitive curve.
For contractors, the affordability headwind is real and the price increases coming in Q2 will sharpen it. Distributors that help contractors manage that conversation will earn more loyalty than those that just push pricing through.
For OEMs, the consolidation question is becoming structural. As more volume flows through fewer platforms, the negotiating math shifts. Channel diversification strategy is no longer a slogan. It is operational policy.
HVAC market stabilization is not the same as recovery. The channel that internalizes that distinction now will be in a stronger position when the cycle turns.
If this aligns with what you are seeing in your market, I would like to compare notes. CMG works with manufacturers, distributors, and rep firms who want clearer strategy, stronger channel performance, and better alignment across the field. If you are exploring ways to strengthen your commercial approach, reach out and let’s talk through what you are trying to build.
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