Opinion- WATSCO Q2 Results show slowing sales but WATSCO continues to focus on digital programs


WATSCO highlighted their continued commitment to digital enablement in their Q2 Results in August.

In the world of distribution with so many private or PE companies that do not report results – Watsco, Inc. in August  released their YTD numbers and provided commentary on trends, growth opportunities, technology innovation and financial strength in their Q2 results.

In my opinion the storyline is – slowing sales but continues investment and payoff for digital investments.

Second Quarter Results

  • 6% decrease in sales to $2.0 billion
  • 6% decrease in gross profit to $563 million
  • 20 basis-point gross margin improvement to 28.1%
  • 3% decrease in SG&A expenses (15.2% as a percentage of sales)
  • 7% decrease in operating income to $266 million (operating margin of 13.3% versus 13.5% last year)
  • EPS decreased 10% to $4.42

Sales trends

  • 8% decrease in HVAC equipment (69% of sales)
  • 7% decrease in other HVAC products (27% of sales)
  • 1% increase in commercial refrigeration products (4% of sales)

Six-Month Results

  • 3% decrease in sales to $3.55 billion
  • 3% decrease in gross profit to $1.01 billion
  • 20 basis-point decrease in gross margin to 28.4%
  • 1% decrease in SG&A expenses (16.6% as a percentage of sales)
  • 6% decrease in operating income to $430 million (operating margin of 12.1% versus 12.5% last year)
  • EPS decreased 7% to $7.25

Sales trends

  • 4% decrease in HVAC equipment (69% of sales)
  • 5% decrease in other HVAC products (27% of sales)
  • 6% increase in commercial refrigeration products (4% of sales)

Some WATSCO Digital highlights

Some key highlighte – Watsco active technology users group is  growing sales faster than non-user customers and experiences approximately 50% less attrition. Watsco states that they will benefit from continued customer adoption, higher share of wallet, new customer acquisition, reduced attrition and lower costs to serve.

Specific technology-related updates include:

  • Product Information Management (PIM), Watsco’s repository of rich product information, is delivered seamlessly through its mobile apps and e-commerce platform. Watsco’s PIM database contains more than 1.5 million SKUs accessible to more than 350,000 contractors and technicians annually. (These results are relatively unchanged this quarter from Q1)
  • HVAC Pro+ Mobile Apps provide customers with real-time access to critical information that improves speed and productivity. This includes real-time technical support, product details, inventory availability, warranty look-up and processing, certified system matchups, e-commerce, and more. The authenticated user community (users linked to an e-commerce account over the 12-month period ended June 30, 2023) grew 19% to more than 53,000 users compared to the same period a year ago. (Continued Growth from prior year but similar numbers to Q1. Is WATSCO hitting a ceiling of Mobile App Users?)
  • E-commerce sales continue to outpace overall sales growth rates in the second quarter and accounted for 34% of total sales, inclusive of revenues from recently acquired businesses that are now adopting Watsco’s technology platforms. (Continued growth of ecommerce builds strong end customer connections)
  • OnCallAir®, Watsco’s digital sales platform, and CreditForComfort®, its companion consumer financing platform, have both increased penetration among HVAC contractors as digital engagement with homeowners expands. The annualized gross merchandise value (GMV) of products sold by customers through OnCallAir® now exceeds $1 billion. During the first half of 2023, OnCallAir® presented quotes to approximately 136,000 households, a 15% increase over 2022, and generated $586 million GMV, a 26% increase over the same period last year.

A.J. Nahmad, Watsco’s President, added, “Our technology platforms, which are unique to the industry, have transformed nearly every aspect of our business. The contractor-based platforms, like our HVAC Pro+ suite of apps and OnCallAir®, our consumer-facing sales platform, combined with our internal-facing technologies, have helped Watsco build market share, accelerate new customer acquisition, and drive margin expansion. Consistent with our long-term focus, we remain committed to investing more over time as we believe these platforms provide a distinct, long-term competitive advantage.”

The storyline form the Q2 results continues to be simple to see. The more digitally engaged Watsco customers are the more their sales grow, and they also don’t lose ecommerce customers at the same rate as they do traditional customers.

I think anyone in B2B Distribution can see that the digital investment is resulting in building big moats around the end customer for Watsco.

If you are a manufacturer what does this mean to you –

Whether you are a Watsco supplier or not, you need to continue to yourself which distributors you can partner with that can deliver similar digital solutions (or have a plan to become more digital). If your channel partners are not as digitally enabled as you need, what can you develop that helps your channel close that gap?

If you are a competing distributor you need to continue to evaluate what digital strategy you can execute, and which manufacturer partners are advanced digitally that can help in your journey.

Your market position and resources require a solution that fits your business. This is not a you need to be Watsco or sell the business warning, but it is a call to action to do something digitally. Just get started and see where it takes you.

As always, we would love to get your feedback, so please feel free to comment below or reach out to me directly at john.gunderson@dorngroup.com



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