Guide · Markets
Gross Margin Explained: When Sales Rise but Profits Fall
Gross margin is the share of revenue a company keeps after the direct cost of what it sells. Hims & Hers' gross margin fell to 57% from 74% in Q3 2026, and its shares fell 16.6%.
Hims & Hers Health reported after the close on Monday, November 9, 2026, that third-quarter revenue rose 49% to $890.4 million. In most quarters that kind of growth would lift a stock. This time the shares fell 16.61% the next day. The company swung to a net loss of $33 million and cut its 2026 profit outlook, and the line that explained both was gross margin, which fell to 57% from 74% a year earlier. Sales were growing quickly, but each dollar of them was earning less.
Gross margin is gross profit divided by revenue. Gross profit is revenue minus the cost of goods sold, also called cost of revenue: the direct costs of making or delivering what the company sells, such as materials, manufacturing, shipping, hosting or pharmacy fulfilment. A company with $100 of sales and $43 of direct costs has $57 of gross profit and a gross margin of 57%. Everything else, including research, marketing, salaries at headquarters and interest, comes out of that $57 further down the income statement.
The level of gross margin depends on the business. Software companies often keep 70% to 80% or more because one more copy costs almost nothing to deliver. Chip designers that outsource manufacturing can sit in the 50s or higher. Supermarkets and warehouse clubs work on margins in the low teens or below and make money on volume and fast inventory turnover. Comparing gross margin across industries tells you little; comparing a company with its own history and its closest rivals tells you a lot.
What moves gross margin? Mix is the usual answer: selling more of a lower-margin product, as Hims did when branded treatments grew faster than its own compounded products. Input costs, such as memory chips or fuel, can squeeze it. So can pricing, when a company cuts prices to win share, and expansion, when new markets start with higher delivery costs and fewer customers to spread them across, which Hims cited for its international business, where revenue jumped 321%. Accounting choices matter too, since companies decide which costs sit in cost of revenue and which in operating expenses.
Markets care about the direction more than the level. A falling gross margin tells investors that growth is costing more, and because analysts build profit forecasts on top of it, a few points of margin can move earnings estimates far more than a revenue beat or miss. On revenue of $890 million, the 17-point drop at Hims was worth about $150 million of gross profit in a single quarter. Rising gross margin, by contrast, is often the first sign of operating leverage, where profits grow faster than sales.
When a company reports, read three numbers together: revenue growth, gross margin against the same quarter a year earlier, and management's explanation for any change. Ask whether the cause is temporary, such as a one-off cost or a launch, or structural, such as a permanent shift in product mix or pricing power lost to competitors. Then check the guidance: Hims' new full-year adjusted profit range of $257 million to $277 million told investors that management did not expect the margin to recover quickly, which is why the shares fell further than the quarter alone would suggest.