KB HOME (KBH)·Q1 2025 Earnings Summary

Executive Summary

• Q1 2025 revenue of $1.39B and diluted EPS of $1.49 both missed Wall Street consensus; management cut FY2025 guidance as demand started the spring selling season more muted and deliveries lagged plan due to fewer inventory home sales and wildfire-related utility delays in Southern California .
• Consensus vs actual: Revenue $1.50B* vs $1.39B; EPS $1.58* vs $1.49 — both misses; net orders fell 17% YoY to 2,772 and monthly absorption dropped to 3.6 per community .
• Housing gross margin compressed to 20.2% (20.3% adjusted), driven by higher relative land costs, buyer concessions, and reduced operating leverage; SG&A increased to 11.0% of housing revenues .
• FY2025 guidance lowered: housing revenues to $6.60–$7.00B (from $7.00–$7.50B), ASP $480k–$495k (from $488k–$498k), homebuilding operating margin ~9.4% (from ~10.7%), and gross margin 19.2%–20.0% (from 20.0%–21.0%) .
• Near-term catalyst: guidance reset and pricing strategy shift to transparent base-price reductions over incentives; management reports improving weekly sales post mid-February actions (last five weeks averaging ~5.1 orders per community per month) .

What Went Well and What Went Wrong

What Went Well

• Transparent pricing actions in mid-February drove a meaningful improvement in weekly net orders; last five weeks averaged ~300 net sales (~5.1/month/community) as buyers responded to compelling value positioning .
• ASP rose 4% YoY to $500,700 despite volume shortfall, with West Coast ASP up to $708,700 and Southwest up to $461,500 .
• Build times improved to 147 days company-wide (139 days for built-to-order), enabling higher backlog conversion and supporting year-end delivery visibility; management is targeting 120 days over time .

What Went Wrong

• Deliveries missed internal plan by ~225 homes (≈150 fewer inventory home sales than projected and ~75 Southern California closings delayed due to wildfire-related utility sign-offs), pressuring revenue and margins .
• Net orders fell 17% YoY to 2,772; absorption pace slowed to 3.6/month/community and cancellation rate rose to 16% amid weaker consumer confidence and elevated mortgage rates .
• Housing gross margin declined to 20.2% (20.3% adjusted) on higher relative land costs, concessions, and reduced operating leverage; homebuilding operating margin fell to 9.2% and SG&A deleveraged to 11.0% .

Financial Results

Values marked with * retrieved from S&P Global.

Guidance Changes

Earnings Call Themes & Trends

Management Commentary

• “Consumers are continuing to cope with affordability concerns and uncertainties around macroeconomic and geopolitical events... demand at the start of the spring selling season has been more muted... As a result... we are lowering our revenue guidance for fiscal 2025.” — Jeffrey Mezger, CEO .
• “We decided let's get rid of all that... pocket incentive... and just take it to price... roughly half of our communities... lowered base price... average decrease ~$15k–$16k (~3% ASP); net margin impact ~75 bps.” — Jeffrey Mezger & Rob McGibney .
• “Our build times... improved... 147 days... 139 days for built-to-order... benefits include better turns and lower loan lock costs; goal of 120 days company-wide.” — Rob McGibney .
• “We invested $920 million in land... including two large parcels in Las Vegas... our Las Vegas business... consistently generated the highest gross margins and profitability in the company.” — Jeffrey Mezger .

Q&A Highlights

• Price elasticity and strategy: Base-price cuts of $5k–$30k in ~50% of communities; removal of “pocket” incentives; buyers responded; net margin impact ~75 bps .
• Margin cadence: Second-half margin improvement driven primarily by operating leverage from higher deliveries rather than pricing uplift .
• Regional color: Florida weakest (higher resale supply); West/Southwest stronger; surgical actions in Texas; opportunities to lift price in Las Vegas and parts of California .
• Backlog conversion and spec/BTO mix: Targeting higher backlog turnover aided by faster cycles; aiming to shift back toward ~70–80% built-to-order over time (higher margins) from ~60/40 BTO/spec currently .
• Lumber and input costs: Extending locks (90–120 days) amid tariff risk; direct costs down ~1% sequentially and ~3% YoY; divisions holding off anticipated tariff-related increases .

Estimates Context

• Q1 2025 actual vs consensus: Revenue $1.39B vs $1.50B*; EPS $1.49 vs $1.58* — both misses. Street likely to reduce FY25 margin and revenue expectations in line with management’s lowered guidance .
• Forward quarters (for context): Consensus for Q3 2025 Revenue $1.586B* and EPS $1.49*; Q4 2025 Revenue $1.663B* and EPS $1.79* — guidance reset and ongoing pricing pressure may cap upside until absorption normalizes.
  Values marked with * retrieved from S&P Global.

Key Takeaways for Investors

• The quarter missed on both revenue and EPS and management lowered full-year guidance; margin pressures stem from higher land cost, concessions, and fixed-cost deleverage — expect estimate cuts and near-term volatility .
• Transparent base-price strategy is gaining traction; improved weekly sales post-actions suggest absorption normalizing, which can restore operating leverage in 2H if sustained .
• Execution on build times is a clear positive; faster cycles support backlog conversion and reduce lock costs, aiding margins over time .
• Regional dispersion matters: Florida remains toughest; Las Vegas and parts of CA/TX performing better — monitor mix as it will affect corporate margins .
• Capital allocation remains shareholder-friendly (buybacks and dividend), with liquidity of $1.25B and debt-to-capital ~30.5% providing flexibility .
• Watch Q2 delivery cadence and margin progression (guided HGPM 19.1%–19.5%, operating margin ~8.5%); sustained order pace is critical to achieving 2H leverage .
• Narrative to move the stock: guidance reset and pricing pivot near-term; evidence of absorption rebound and cycle-time improvements medium-term underpinning thesis of margin stabilization and ROE expansion .