TOL Q2 2025: 200-Home Delivery Beat, 27.5% Gross Margin
- Robust Spec Inventory: The company has built a strong pipeline with 1,028 completed spec homes, around 2,400 units in progress, and additional permits in hand. This broad spec base supports near-term delivery and provides resilience amid softer market conditions.
- Margin Resilience and Operational Discipline: Despite a challenging market, management highlighted that the build-to-order segment achieves several hundred basis points higher margins than spec sales, with added accretive benefits from design selections. This balanced mix supports overall strong margin performance.
- Affluent Buyer Base & Geographic Diversification: With over 70% of transactions coming from move-up and empty-nester segments, a significant share of cash buyers, and strong performance in key markets (e.g., Eastern Seaboard, select Western markets), the company is well-positioned to sustain demand and weather broader market volatility.
- Soft market conditions and margin pressure: Management highlighted a softer housing market with lower sales per month (e.g., February at 1.7 homes and March/April around 2.3-2.4 homes) coupled with increased incentive spending on spec homes. This exposes the company to further margin compression if incentive levels need to be raised to stimulate demand.
- Increased reliance on spec inventory with inherent risks: The current shift from a predominantly build-to-order model to a 50-55% spec business means that meeting delivery targets now depends heavily on selling spec inventory. Given that spec sales involve additional incentives and lower margins compared to build-to-order homes, this strategy increases the risk of margin erosion if sales do not perform as expected.
- Weakening backlog and uncertain future deliveries: The Q&A noted that despite maintaining delivery guidance, the backlog decreased by 15% in units and 7% in dollars compared to last year. This declining backlog raises concerns about the sufficiency of future sales volumes, particularly if the soft market persists and spec sales underperform.
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | Down about 3.5% (from $2,837.5M to $2,739.1M) | The drop in total revenue is primarily driven by a moderation in the core driver—home sales—which accounts for nearly 99% of total revenue. This follows previous periods when strong home sales growth (via increased units and prices) helped buoy revenues; in Q2 2025, lower delivered units or price adjustments have led to approximately $98.4M less revenue. |
Operating Income | Down approximately 28% (from $623.5M to $449.7M) | Operating income fell sharply due to a mix of lower revenue and increased cost pressures. In previous periods, improved margins contributed to higher operating income; however, in Q2 2025, rising operating costs (including higher SG&A expenses) and potential shifts in the product mix have significantly compressed margins. |
Net Income | Down roughly 27% (from $481.6M to $352.4M) | The decline in net income mirrors the operating income trend and is linked to lower core profitability. This reduction can be traced back to both the revenue drop and higher expenses, factors that were already beginning to show in prior quarter performances and have now fully materialized in Q2 2025. |
Basic EPS | Decrease of about 23.5% (from $4.60 to $3.53) | Basic EPS declined significantly primarily because of the lower net income, with any potential benefit from share repurchases or a lower share count being insufficient to offset the earnings drop. Previous periods’ EPS gains driven by robust net income were reversed in Q2 2025. |
Net Cash Provided by Operating Activities | Down nearly 21% (from $459.0M to $362.8M) | The operating cash flow reduction is mainly due to increased uses of cash, such as higher investments in inventory and working capital adjustments, a trend that intensified from prior periods. These changes negatively impacted cash generation despite partial offsets from improved liability management. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Deliveries [Homes] | Q3 2025 | 2,500 to 2,700 | 2,800 - 3,000 | raised |
Average Delivered Price | Q3 2025 | $940,000 to $960,000 | $965,000 - $985,000 | raised |
SG&A as a Percentage of Home Sales Revenue | Q3 2025 | Approximately 10.3% | 9.2% | lowered |
Tax Rate | Q3 2025 | Approximately 26% | 26% | no change |
Community Count | Q3 2025 | 415 by quarter-end | 430 | raised |
Weighted Average Share Count | Q3 2025 | Approximately 101 million | 99 | lowered |
Deliveries [Homes] | FY 2025 | 11,200 to 11,600 | 11,200 - 11,600 | no change |
Average Delivered Price | FY 2025 | 945,000 to 965,000 | 945,000 - 965,000 | no change |
Adjusted Gross Margin | FY 2025 | 27.25% | 27.25% | no change |
SG&A as a Percentage of Home Sales Revenue | FY 2025 | 9.4% to 9.5% | 9.4% - 9.5% | no change |
Tax Rate | FY 2025 | Approximately 25.5% | 25.5% | no change |
Community Count | FY 2025 | 440 to 450 by fiscal year-end | 440 - 450 | no change |
Weighted Average Share Count | FY 2025 | Approximately 105 million, assuming $500 million in share repurchases | 100 | lowered |
Other Income, Income from Unconsolidated Entities, and Land Sales Gross Profit | FY 2025 | $110 million, including stabilized apartment sales in H2 | $110 | no change |
Home Sales Revenue ($USD Billion) | FY 2025 | no prior guidance | $10.9 (midpoint) | no prior guidance |
Earnings Per Diluted Share ($USD) | FY 2025 | no prior guidance | $14 | no prior guidance |
Return on Beginning Equity (%) | FY 2025 | no prior guidance | 18% | no prior guidance |
Year-End Book Value Per Share ($USD) | FY 2025 | no prior guidance | $90 | no prior guidance |
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
SG&A as a % of Home Sales | Q2 2025 | ~10.3% | 9.45% (derived from 255,760÷ 2,706,453) | Beat |
Tax Rate | Q2 2025 | ~26% | 26.2% (125,056 ÷ 477,503) | Met |
Other Income, Income from Unconsolidated Entities, and Land Sales | Q2 2025 | Expected to break even | 12.7M (11,489+ (32,624 – 31,421)) | Beat |
Weighted Average Share Count | Q2 2025 | ~101 million | 100,585 | Met |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Spec Inventory and Production Risks | Q1 2025, Q4 2024, and Q3 2024 discussions detailed completed spec units, various stages of construction, and contracted build costs (e.g., spec units, risk from unsold specs) | Q2 2025 emphasized a robust spec inventory with 1,028 completed units, active management of 2,400 homes in progress and cautious new spec starts, with an eye on minimizing selling price risk | Consistent focus on managing spec risks, with a subtle shift noting a slight buyer preference toward build‐to‐order in some areas |
Margin Dynamics and Incentive Impact | Q1 2025, Q4 2024, and Q3 2024 addressed the spec margin spread (200 bps lower than build‐to‐order), evolving incentive levels, and guidance adjustments impacting gross margins | Q2 2025 reported an adjusted gross margin of 27.5% (exceeding guidance by 25 bps) and noted modestly increased incentives (7% vs. a historical 5–6%), maintaining full‐year guidance | Stable but evolving: Margins remain robust while incentive adjustments are slightly moderated over time |
Business Model Shift: Build-to-Order vs. Spec Sales | In Q1 2025, Q4 2024, and Q3 2024, Toll Brothers discussed shifting from a 90% build‐to‐order model to roughly a 50–55% spec mix, highlighting balanced sales and operational efficiency | Q2 2025 reaffirmed the strategic mix with significant spec sales, yet noted a modest emerging trend in buyer preference toward build‐to‐order for customization and higher margins | Consistent strategic shift maintained over time with minor emerging buyer modifications |
Affluent Buyer Base and Financial Strength | Q1 2025, Q4 2024, and Q3 2024 consistently highlighted a strong, affluent buyer base—with high cash purchase percentages (26–28%), low LTV ratios, and generational wealth transfer bolstering performance | Q2 2025 emphasized continued financial strength, noting that 24% of buyers paid all cash (above the long‐term average) and strong balance sheet metrics supported growth | Continued emphasis: The focus remains robust with slight improvements in buyer quality and financial metrics |
Geographic Market Diversification and Regional Demand Variability | Q1 2025, Q4 2024, and Q3 2024 outlined a diversified geographic footprint with strong performance in markets like the Northeast/Mid‐Atlantic and variable performance in Texas, Florida, and California | Q2 2025 detailed strong demand in the Eastern Seaboard and western markets (Las Vegas, Denver, Boise, California) while noting softer performance in the Pacific Northwest and parts of Florida and Texas | Consistent focus with more granular regional distinctions emerging over time |
Backlog and Delivery Pipeline Trends | Q1 2025, Q4 2024, and Q3 2024 provided detailed backlog figures, delivery counts, and low cancellation rates that supported robust full‐year guidance (e.g., nearly 6,000 homes in backlog, healthy spec/build mixes) | Q2 2025 reported a backlog of $6.84 billion (6,063 homes) and forecast strong delivery targets (11,200–11,600 homes for the year), underscoring a balanced pipeline between spec and build‐to‐order | Stable and robust: The focus on backlog and delivery remains strong with consistently healthy figures and projections |
Inventory Management and Cautious Spec Starts | Q1 2025, Q4 2024, and Q3 2024 emphasized careful management of spec inventory—balancing inventory stages, using community‐by‐community decisions, and maintaining a cautious approach to new spec starts | Q2 2025 reaffirmed a cautious strategy with 1,028 completed spec units, deliberate slowing of new spec starts, and controlled inventory management to safeguard margins | Cautious and consistent: Ongoing adjustments based on market conditions with a steady emphasis on managing spec starts prudently |
Macroeconomic Factors and Mortgage Rate Effects | Q1 2025 and Q4 2024 discussed affordability constraints, mixed market results, and the influence of mortgage rates (6–8%) on buyer behavior; Q3 2024 noted benefits from lower-rate periods and the importance of demographics | Q2 2025 highlighted macroeconomic volatility affecting consumer confidence while noting that affluent buyers are largely insensitive to mortgage rates, which remain stable, underscoring a resilient market | Evolving sentiment: While macro factors still matter, stabilized rates and the resilience of the affluent buyer base temper the impact |
Increased SG&A Expenses and Operational Cost Pressures | Q1 2025 and Q3 2024 mentioned higher SG&A percentages due to lower fixed cost leverage and increased selling expenses, whereas Q4 2024 showcased improved efficiency (flat G&A spend despite growth) | Q2 2025 reported improved SG&A leverage driven by higher revenue and slight relief from inflationary pressures, contributing to better cost management | Operational efficiency improving: SG&A expense management shows progressive improvement over time |
Diminished Focus on Election Uncertainty | Q1 2025 recalled prior caution linked to election uncertainty, while Q4 2024 highlighted that once the election was behind, buyer demand rebounded | Q2 2025 made no mention of election uncertainty, indicating it has faded as a concern | Decreased emphasis: Election-related uncertainty is no longer a focus as conditions have stabilized |
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Margin Outlook
Q: What sustained Q2 margin performance?
A: Management attributed the 27.5% adjusted gross margin in Q2—and the 27.25% guidance in Q3—to a favorable product mix combined with strong cost controls and disciplined pricing, underscoring their focus on premium segments. -
Delivery Beat
Q: Why beat delivery guidance by 200 homes?
A: They outperformed expectations by selling and settling approximately 200 additional spec homes, driven by robust intra‐quarter sell-and-settle activity and a strategic product mix. -
Spec Inventory
Q: What are current spec counts?
A: The team reported 1,028 completed spec units and roughly 2,400 homes in progress, with permits available for an extra 1,000–2,000 units, ensuring a strong ready-to-deliver inventory. -
Spec Sales Mix
Q: How is spec sales divided for year-end?
A: Delivery plans include about 4,500 units coming from backlog and an additional 1,900 from the spec segment—blending both completed and under-construction properties—to meet guidance. -
Spec Margin
Q: What is spec margin dynamic?
A: While built-to-order homes deliver margins several hundred basis points above spec, the overall blended margin remains near guidance at around 27.5%, reflecting a balanced sales mix. -
2026 Outlook
Q: What are delivery expectations for 2026?
A: Although precise numbers weren’t provided, management expects higher average home prices and roughly 10% community count growth, indicating a positive outlook for 2026 performance. -
SG&A Leverage
Q: Why did SG&A leverage improve in Q4?
A: Improved SG&A leverage was driven by an expected revenue increase of about $235 million in Q4 and reduced variable sales costs, even as certain expense pressures persisted. -
Backlog Dynamics
Q: How does backlog relate to deliveries?
A: The lower backlog reflects a deliberate shift toward increased spec production, with ample completed specs ensuring delivery targets are met despite reduced peak backlog levels. -
Backlog Trend
Q: When will backlog bottom out?
A: Management anticipates a gradual rebound by year-end as spec starts slow and local market conditions stabilize, setting the stage for future buildup. -
Demand Trends
Q: How has sales demand evolved in May?
A: Following a weak February, May’s sales aligned with March and April’s performance, and seasonal trends suggest further improvement in June and July. -
Land Spend
Q: Why was land spending high in Q2?
A: Q2 land spend was around $362 million, reflecting consistent deal closures; management noted that future spending might moderate as market conditions warrant a more cautious approach. -
Geographic Trends
Q: Which regions outperformed?
A: Eastern markets like New Jersey, Pennsylvania, and New York, along with Western areas such as Las Vegas, Denver, and California, outperformed, while Pacific Northwest, Florida, Texas, and Phoenix underperformed. -
Buyer Demographics
Q: What percent are H1B buyers?
A: Only less than 5% of buyers are H1B visa holders, and their share has remained stable year-to-date.
Research analysts covering Toll Brothers.