Ferguson (NYSE: FERG) raises its sales outlook to 7% growth, but gross margin slips

What happened

Ferguson Enterprises Inc. (NYSE: FERG) grew third-quarter sales 9.5% to $9.03 billion and raised 2026 sales growth guidance to 7%. The prior outlook was mid-single digit growth. The company said the new figure reflects its latest performance and the FloWorks acquisition, which closed on Aug. 31.

Adjusted operating margin guidance now runs 9.6% to 9.8%, up from 9.5% to 9.8%. The company announced the results on Nov. 9.

Costs moved the other way. Interest expense guidance rose to $235 million from $200 million. Capital expenditures guidance is now $425 million, versus $375 million to $425 million before. The adjusted tax rate stays at 26%.

Key numbers

Metric	Latest	Change	Source
Third-quarter net sales	$9.03 billion	from $8.25 billion, +9.5%	SEC 8-K Exhibit 99.1
Third-quarter gross margin	30.9%	from 31.3%, -40 bps	SEC 8-K Exhibit 99.1
Third-quarter adjusted operating profit	$962 million	from $883 million, +8.9%	SEC 8-K Exhibit 99.1
Third-quarter adjusted diluted EPS	$3.43	from $3.18, +7.9%	SEC 8-K Exhibit 99.1
Net debt to adjusted EBITDA	1.7x	from 1.0x, +0.7x	SEC 8-K Exhibit 99.1
Nine-month net cash from operating activities	$1.47 billion	from $1.88 billion, -21.9%	Calculated from SEC 8-K Exhibit 99.1

Read more: Ferguson Enterprises (FERG) company research

Where the growth came from

Organic growth of 7.0% did most of the work. Acquisitions added 2.7%, and divestments in Canada took away 0.2%. The company put price inflation at low to mid single digits.

In the US, sales rose 10.2%, with 7.4% from organic growth and 2.8% from acquisitions. Non-residential sales grew 15%. The company credited its scale, expertise and value-added solutions in a mixed market. Residential, about half of sales, grew 6% despite weak new construction and soft repair, maintenance and improvement work.

Canada went the other way. Sales fell 4.5%. Organic growth of 0.6% was offset by a 3.2% hit from non-core divestments and a 1.9% foreign exchange headwind. The company called Canadian markets challenging, particularly in residential.

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Eleven deals this year

Ferguson has completed eleven acquisitions this year with aggregate annualized revenue of approximately $1.5 billion. Three closed in the quarter, including FloWorks, which has over 60 locations and 25 service centers across the US and Canada. One more closed after quarter end: Canyon Systems, Inc., which establishes a process solutions platform for water and wastewater treatment across six Western states.

The company also described Brax Company, Inc., a pump repair business with three locations in Southern California, and Rogers Supply Company, Inc., with twelve locations across Illinois and Indiana.

Why it matters

OptimistFi has argued that Ferguson works if share gains and acquisitions come without giving up gross margin or cash conversion. This quarter supports the growth half of that argument and dents the margin half.

Gross margin was 30.9% versus 31.3% a year earlier. The company said the prior-year figure was temporarily high because of the timing and extent of supplier price increases. It said it kept cutting operating costs relative to sales.

Reported operating profit was $885 million, up 4.9%, on a 9.8% margin versus 10.2%. Adjusted operating profit was $962 million, up 8.9%, and the adjusted margin held flat at 10.7%. The gap between the two includes $25 million of FloWorks acquisition and integration costs and $50 million of amortization of acquired intangibles.

Diluted earnings per share were $3.08, down 4.9%. The company mainly blamed the timing and size of tax benefits in the prior-year period. Adjusted EPS of $3.43 rose 7.9%, mostly on higher adjusted operating profit.

The CEO said markets remain mixed. Non-residential sales carry the strength. Residential, Canada and gross margin are softer.

How FloWorks was funded

Cash conversion is where the nine-month figures are weaker. Net cash from operating activities was $1.47 billion versus $1.88 billion a year earlier, a 21.9% drop by OptimistFi's calculation. Net income rose to $1.68 billion from $1.62 billion. Changes in receivables and other assets used $1.14 billion of cash, versus $718 million.

Debt paid for FloWorks. The company priced $1.2 billion of senior unsecured notes and entered a $900 million unsecured term loan that matures in 2029. It used the proceeds to finance FloWorks and kept the rest for general corporate purposes. It invested $1.7 billion in acquisitions in the quarter.

Net debt to adjusted EBITDA stood at 1.7x versus 1.0x a year earlier, inside the company's one to two times target. Net debt was $5.70 billion versus $3.30 billion at Sept. 30, 2025. The company paused share repurchases for FloWorks. It expects to resume them as leverage trends back toward the lower end of that range.

What's next

Ferguson reports results for the period ending Dec. 31, 2026 on Feb. 16, 2027, with a call at 8:30 a.m. ET. That report will give full-year gross margin and adjusted operating margin to set against the updated guidance range.

Three things would support the case: gross margin that holds near this quarter's level, operating cash flow that recovers and leverage that moves toward the low end of the target range. A further gross margin decline or a longer buyback pause would weaken it. The $0.89 dividend is payable Jan. 8, 2027 to holders of record Nov. 20.

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