KB Home (NYSE: KBH) Q2 2025 Earnings | 6/23/2025

KB Home Q2 2025 Earnings Call Summary

KB Home reported solid financial results for the second quarter of fiscal 2025, meeting or exceeding guidance across key metrics, despite a "subdued demand" during the spring selling season due to affordability challenges, fluctuating mortgage rates, and general consumer uncertainty. The company emphasized its strong balance sheet and financial flexibility, along with a continued focus on optimizing assets and returning capital to shareholders.

Q2 2025 Financial Highlights:

• Revenues: $1.5 billion

• Diluted Earnings Per Share (EPS): $1.50

• Deliveries: Exceeded expectations, driven by improved build times (now at pre-pandemic levels of 140 days, a sequential improvement of seven days).

• Gross Margin: 19.7% (excluding inventory-related charges), above guidance.

• SG&A as % of Revenues: 10.7% (low end of guidance).

• Operating Income Margin: 9%.

• Book Value Per Share: Nearly $59 (10% year-over-year increase).

• Net Orders: 3,460 in Q2. March saw strong orders due to base pricing adjustments, but April and May declined, resulting in a monthly absorption pace of 4.5 net orders per community (compared to 5.5 in Q2 2024).

• Customer Deposits: At an all-time high, up over $250 million year-over-year.

Operational and Strategic Initiatives:

• Build-to-Order Strategy: KB Home is steering its business back to a 70-75% built-to-order mix, which is a core competency and differentiator, offering buyers customization options and contributing to higher gross margins and customer satisfaction. The goal is to reach a 120-day build time company-wide.

• Pricing Philosophy: The company is focusing on adjusting base pricing for compelling value and improved affordability rather than relying heavily on incentives. This approach led to strong orders in March but weakened demand in April and May, partly due to broader macroeconomic factors and municipal delays in community openings.

• Cost Management: Direct costs were 3.2% lower year-over-year on homes started in Q2, primarily due to value engineering, studio simplification, and enhanced cost focus.

• Buyer Profile (KBHS Home Loans): Maintained an 88% capture rate for buyers using KBHS. The average cash down payment was 16% (over $78,000), with an average household income of $136,000 and a FICO score of 743, indicating strong credit profiles.

• Land Strategy: Owns or controls nearly 75,000 lots (47% controlled). Scaling back land-related investment spend due to current market conditions, with over $513 million invested in Q2 (75% on development). Canceled contracts to purchase approximately 9,700 lots that no longer met underwriting criteria.

Revised Fiscal 2025 Guidance:

• Housing Revenues: Between $6.3 billion and $6.5 billion (revised from previous outlook).

• Deliveries: Approximately 13,200 homes.

• Average Selling Price: Between $480,000 and $490,000.

• Housing Gross Profit Margin (Adjusted): Between 19.0% and 19.4% (lower than previous outlook due to anticipated pricing pressure, mix variation, partially offset by lower construction costs).

• SG&A Ratio: Between 10.2% and 10.6%.

• Homebuilding Operating Income Margin: Between 8.6% and 9%.

Capital Allocation and Shareholder Returns:

• Liquidity: $1.2 billion ($309 million cash, $882 million revolving credit facility).

• Debt: Total debt to capital ratio of 32.2%, targeting around 30%. No debt maturity until 2026.

• Share Repurchases: Repurchased $200 million of shares in Q2 at an average price of $53.55 (below current book value). Returned almost $290 million to shareholders in H1 2025. Expects to repurchase $100 million to $200 million in Q3.

• Dividends: Healthy dividend with an approximate 2% yield.

• Shareholder Value: Emphasizing share repurchases as a way to enhance future EPS, return on equity, and increase book value per share.

Outlook and Management Commentary:

• Management acknowledged the continued volatility in consumer confidence and mortgage rates, leading to a revised outlook.

• Despite challenges, they believe KB Home is well-positioned with a strong balance sheet and an experienced team.

• The company aims to optimize profitability and improve cash flows and returns by adjusting to market conditions on a community-by-community basis.

• They anticipate a slight uptick in Q4 gross margins due to operating leverage from higher expected deliveries.

• Regarding the new loyalty program, while there's an initial deferral of revenue, it's expected to be accretive after approximately two years, similar to airline loyalty programs.