As you know, our cash flow has performed very well to date. Any commentary from the team?Aaron Nahmad This is AJ. I’ll just add that while year-over-year inventory looks up in dollars, there are inflation. There is inflation in those numbers. And if you look at units, they’re actually down. So there are supply chain issues that keep us, if you will, at a higher inventory position than ideal. But it certainly weighs on those numbers. But I agree with what was just said is that here comes a season and we should be in pretty good shape to sell through what we got.Nigel Coe Yes. Okay. That’s helpful. And then maybe Barry, could I just go back to your comments on the gross margin. Obviously, the price increase came through later in the quarter than normal.
So as we then trip into 2Q, does that mean that 2Q gross margin should be maybe a little bit higher than we would expect to see normally? Any color on how we should expect gross margin to kind of, I guess, trend through the balance of the year will be helpful. Thanks.Barry Logan Yes. Again, we’re speaking in basis points here, not percentages, so don’t get carried away with it.But, yes, there is a benefit that will flow into the end of the second quarter that can benefit gross profit because of the timing of the price increases. But it’s in basis points. I wouldn’t get carried away with the analysis.Nigel Coe Please go ahead.Aaron Nahmad Sorry, I was just going to add that, yes, it’s true. The price increase came later than usual. It’s also more moderate than usual, or at least than last year.
And it’s only on our equipment business, right?The price increases on all the other thousands of SKUs that we sell have tampered relative to the last two years.Nigel Coe That’s fair. Sorry, just one more clarification. Do you think 20% plus is a good number to use for second quarter and beyond?Albert Nahmad You mean gross margin?Nigel Coe Yes.Albert Nahmad Oh, my goodness. It’s, of course, we think. Hear a question, go ahead, Barry.Barry Logan I didn’t hear.Albert Nahmad I think you said, do you think we’ll do 20% or better in the second quarter in gross margin? I think you said that.Barry Logan 28%.Albert Nahmad Oh, 28%, I’m sorry. I didn’t hear that right. I want to speculate on that. Barry? I mean –Barry Logan Yes. I’m going to stick to what we’ve said now, about a year ago.
What are you looking at for gross margin? We said 27% as a target, as a baseline. Obviously, we’ve been exceeding that the last six months especially. But, Nigel, I’m going to stick to that just until we can see the real seasonal impact of everything. We’re 30%, 40% larger business 90 days from now just out of first seasonality. So let’s be conservative and thoughtful, and we’ll change our mind when we have more data.Aaron Nahmad Thanks, Barry. Last time, you set us up for 27 last time, Barry, and we did pretty well against that goal, so maybe you should raise the bar.Operator Our next question will come from Josh Pokrzywinski with Morgan Stanley.Joshua Pokrzywinski Good morning, Al. Just want to follow up on the gross margin commentary. Obviously, when you see numbers that big, everyone’s trying to figure out where that looks like going forward.
But, Barry, you mentioned that the 150 -200 basis points, I think any other factors that we should keep in mind in there? You mentioned selling price, but anything on the freight side? And then I guess maybe just specifically on selling price. Do you think of that as more doing better on the buying side or doing better on kind of the customer selling side? Obviously, both have the impact.Albert Nahmad You brought a good point on trade. Barry, you go ahead and answer that.Barry Logan Yes, well, first the parts of cost of sales that don’t relate to the cost of the product. Like freight in shrinkage, inner branch freight, things that are costs within cost of sales over the last six months again, no great variation as a basis point impact. We would hope at some point actually freight would be a contributor to gross profit, as it’s been a higher cost over the last couple of years.
But as a trend, those line items have had no impact on what you’ve seen. And the results the last months, result comes from again, taking 100,000 -200,000 SKUs and going through a pricing margin optimization program. It also goes to the branch level leadership incentivizing them or culturally giving them tools they didn’t have two years ago. And it is also, as I said, more generically working with OEMs over the last two or three years. So I think, Josh, that there’s not much to report or volatility or one big impact items. It’s all been pretty consistent, I think, for the last several quarters now, the only variable that changes has been the level of pricing actions like we’re articulating carefully today. And yes, it had a cost, but the other things had a benefit.
And to the extent that levels out the OEM pricing actions levels out, the benefits will be there and that’s how we look at it. Hope that makes sense.Joshua Pokrzywinski Got it, certainly does. And then I know 2025 is kind of a long way off, especially with a little more macro uncertainty. But just trying to put in context that higher cost of repair that I think you guys mentioned earlier, I mean did we see sort of a step function change, I guess, entering COVID? I know with the higher replacement rates and just the market strength over the past two, three years, a lot of kind of Monday morning quarterbacking on, or was it supply chain, was it people operating units more which probably doesn’t make a ton of sense, but all sorts of factors that people are trying to figure out as to why replacement has been better.
But is repair just getting a lot more expensive even today before we get to 2025 that this is just kind of the new normal on that front.Paul Johnston If I can take a cut at that. And it’s not scientific and we don’t have any data yet on being able to answer or that quantifiably. But yes, repair probably is going up. The cost of labor has gone up. And as you know, labor is not included in a warranty calculation. So consumers are being hit with a higher price to do warranty than they were in the past. And then the other side of it is obviously things like refrigerant and some of the commodities that aren’t covered by a warranty also are adding to the cost of being able to do a warranty. Warranty is not free in our world. Warranty has a definite cost to it and it also has a timing to it that it takes longer to do a repair or replacement of a compressor than it does to replace the entire system.
