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Watsco (WSO) Q1 Earnings Lag Estimates, On-Line Sales Up Y/Y

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Watsco, Inc. (WSO - Free Report) reported disappointing results in first-quarter 2020. Earnings and revenues missed the respective Zacks Consensus Estimate. Also, its bottom line declined on a year-over-year basis due to softness in international markets.

Given the current market conditions, the company noted that sales trends have decelerated in April and will vary according to geography in the summer selling season. It has been adjusting business per the needs of customers, reducing costs in affected markets and improving efficiency.

The company believes that financial strength, backed by its highly-conservative leverage ratios, access to low-cost capital and ability to generate cash flow, allows it to take advantage of almost any size investment opportunity.

Inside the Numbers

Watsco’s quarterly earnings of 72 cents per share missed the consensus estimate of 88 cents. The reported earnings also declined 18.2% year over year. Lower margins due to higher costs and expenses affected the results.

Watsco, Inc. Price, Consensus and EPS Surprise

Total revenues of $1.01 billion lagged the consensus mark of $1.02 billion by 0.6% but increased 8.3% from the year-ago period. Sales grew 2% on a same-store basis. The upside stemmed from strong HVAC equipment business, partially offset by soft demand in a few international markets served. Continued investment in technologies designed to revolutionize customer experience added to the positives. Notably, on-line sales in quarter grew 12% year over year on 13% increased e-commerce transactions.

Sales of HVAC equipment (heating, ventilating and air conditioning; comprising 67% of sales) were up 2% year over year, including 5% growth in U.S. residential markets. Sales of other HVAC products (29% of sales) increased 2% from the prior-year quarter. Sales from commercial refrigeration products (4% of sales) were flat year over year.

Operating Highlights

Gross margin contracted 50 basis points (bps) to 24.6%. SG&A expenses increased 13% year over year due to the addition of 35 new or acquired locations. In fact, SG&A expenses — as a percentage of sales — surged 90 bps year over year. Operating margin contracted 140 bps year over year to 4.5%.

Financial Operations

As of Mar 31, 2020, cash and cash equivalents were $51.2 million compared with $74.5 million at 2018-end. Cash from operations came in at $41.9 million in the first three months of 2020 compared with $52.9 million in the comparable year-ago period.

Zacks Rank

Watsco — which shares space with AAON, Inc. (AAON - Free Report) , Comfort Systems USA, Inc. (FIX - Free Report) and Lennox International Inc. (LII - Free Report) in the same industry — currently carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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