Ferguson Earnings: End Markets Have Softened; Full-Year Guidance Unchanged

Ferguson's fiscal first-quarter results (ended Oct. 31) were in line with our expectations. Management is executing well in a softer demand environment across residential new construction and repair and remodel, while commercial markets have been more resilient. Revenue declined 2.8% year over year to $7.7 billion. Organic revenue fell 4.9% and foreign exchange was a 10-basis-point headwind, but acquisitions added 220 basis points of revenue growth. Gross margin decreased 30 basis points to 30.2%, primarily due to price deflation for commodity products, such as copper tubing and PVC pipe. Nevertheless, management sees neutral pricing for the year, and we believe Ferguson can maintain at least a 30% gross margin over our five-year outlook. Adjusted operating margin of 10% was 90 basis points lower than the prior-year period, but that's still a strong level of profitability, in our view.