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    Ferguson Enterprises Inc. /DE/ (FERG)

    FERG Q1 2025: Guides Op Margins at 9-9.5% Amid Cost Headwinds

    Reported on Jul 8, 2025 (Before Market Open)
    Pre-Earnings Price$217.74Last close (Dec 9, 2024)
    Post-Earnings Price$195.74Open (Dec 10, 2024)
    Price Change
    $-22.00(-10.10%)
    • HVAC Expansion and Growth: The company’s HVAC segment grew by 10% (on a 4% comparable), and the expansion of HVAC counters from over 400 to a target of 500+ by year-end supports continued revenue and margin expansion.
    • Investments to Enhance Gross Margins: Initiatives such as increasing the private label (own brand) share—currently around 10% of sales—along with advanced pricing analytics and value-added offerings are expected to improve gross margins over time, offsetting commodity deflation pressures.
    • Robust M&A and Market Consolidation Pipeline: Maintaining an active and healthy acquisition pipeline in a fragmented market supports long-term revenue growth and market share gains through incremental revenue contributions.
    • Margin compression risk: Despite 3% volume growth, the cost base grew by 5% due to wage inflation and ongoing investments. This differential may continue to pressure operating margins if revenue growth does not accelerate.
    • Persistent commodity deflation: The company continues to experience about 2% overall price deflation in commodity-based products, with specific categories like steel pipe and PVC under pressure. This trend could further erode gross margins despite expectations of future pricing improvements.
    • Upfront investment uncertainty: Significant asset investments—such as the expansion of HVAC counters (over 400 counters already, aiming for more) and large trainee programs—are being front-loaded. If market recovery or revenue growth lags, these heavy upfront costs may delay or dampen the expected margin benefits.
    1. Margin Pressure
      Q: Why are margins compressed?
      A: Management explained that despite solid gross margins, commodity deflation and a lower-margin mix have pressured overall margins, even with some resilience in the commodity business.

    2. Op Margin Guidance
      Q: What is the op margin outlook?
      A: They expect full-year operating margins to remain in the 9% to 9.5% range, with near-term pressure easing in the back half as volumes grow and pricing improves.

    3. SG&A Deleverage
      Q: How will SG&A deleverage evolve?
      A: Management noted that while SG&A costs grew about 5% against 3% volume growth in Q1, cost efficiency is being pursued through controlled headcount and productivity investments.

    4. OpEx Growth
      Q: What growth rate for operating expenses?
      A: Operating expenses are expected to see mid-single-digit growth, driven by upfront investments like training and HVAC expansion, with improvements anticipated as volume growth picks up.

    5. Pricing Trend
      Q: What is the pricing outlook?
      A: Finished goods pricing is projected to see low single-digit inflation, while commodity deflation—recorded at about 2%—begins to ease, with some categories like copper showing pricing strength.

    6. M&A Pipeline
      Q: How is the M&A pipeline?
      A: The pipeline remains robust with no major shifts in valuation expectations, and management expects acquisitions to add roughly 1% to 3% in incremental revenue over time.

    7. HVAC Expansion
      Q: How is HVAC demand growing?
      A: The HVAC side grew by 10% on a 4% comparable, with over 400 counters in place and plans to expand to over 500 by year-end, positioning the business for future growth.

    8. Organic Trends
      Q: How did organic sales perform?
      A: Organic sales have been stable, showing consistent performance with an overall 2% deflation observed over the last five quarters, including into November.

    9. International Sourcing
      Q: How are international costs managed?
      A: The company sources from over 37,000 suppliers in 30 countries, which helps mitigate China exposure and spreads cost risks effectively.

    10. Private Label Margin
      Q: How does private label aid margins?
      A: Private label products, making up nearly 10% of revenue, combined with pricing analytics and added value services, are expected to gradually enhance gross margins.

    11. Political Impact
      Q: Will politics affect project bidding?
      A: Despite political uncertainties, management remains bullish, noting strong bidding activity—especially in data centers and large capital projects—that is unlikely to be derailed by political changes.

    12. OpEx/Revenue Growth
      Q: Will revenue growth pick up?
      A: There’s an expectation for revenue and volume acceleration in the back half of the fiscal year, which should improve SG&A leverage, even as current investments drive mid-single-digit OpEx growth.

    13. Sales Day Reduction
      Q: Impact of one less sales day?
      A: The slight reduction due to a leap year effect (one fewer sales day in Q3) is minor and not expected to materially impact overall performance.

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