Here's our initial take on KB Home's (KBH +0.35%) fiscal 2025 second-quarter financial report.
Key Metrics
| Metric | Q2 FY 2024 | Q2 FY 2025 | Change | vs. Expectations |
|---|---|---|---|---|
| Total revenue | $1.71 billion | $1.53 billion | -11% | Beat |
| Adjusted earnings per share | $2.15 | $1.50 | -30% | Beat |
| Homes delivered | 3,523 | 3,120 | -11% | n/a |
| Average selling price | $483,000 | $488,700 | +1% | n/a |
KB Home Wrestles With a Soft Housing Market
KB Home's management described the homebuilder's financial performance for the fiscal second quarter (ending May 31) as "solid," but there's no doubt that things are tough in the housing market. Revenue was down 11% year over year as the number of homes that KB Home delivered during the quarter fell by the same percentage. Net income plunged 36% as the homebuilder dealt with lower profit margins and higher overhead costs, and it took sizable repurchases of stock to cut the decline in earnings on a per-share basis to 30%. The company also had to offer larger concessions in order to get homebuyers to move forward with purchases.
CEO Jeff Mezger tried to find good things about the challenges KB Home faces. The CEO pointed to shorter build times and lower construction costs as having been valuable in keeping KB Home operations going. At the same time, though, the company is cutting back on land acquisition and development investments as it waits for market conditions to improve. That, in turn, is freeing up more money for share buybacks. KB Home spent $200 million to repurchase stock at an average cost of about $54 per share. At that price, purchases boost book value, which is another positive.
It's not apparent when conditions in housing will improve. KB Home's guidance for fiscal 2025 includes revenue of between $6.3 billion and $6.5 billion, with average selling prices remaining in the $480,000-to-$490,000 range. That implies some level of bounceback in the second half of the fiscal year, but that seems far from certain at this point, given macroeconomic pressures and continued high interest rates.
NYSE: KBH
Key Data Points
Immediate Market Reaction
KB Home shares responded negatively to the report despite the company posting quarterly results that topped expectations. The stock fell about 2% in the first hour of trading in the after-hours market late Monday following the release. At this point, investors seem to be comfortable with the declines in key metrics that KB Home has already suffered, but they want to see clearer signs that an end is in sight.
What to Watch
Even once housing market conditions improve, it could take a while for KB Home to get back up to speed. Backlogs have fallen precipitously, going from 6,270 homes 12 months ago to just 4,776 currently. The value of that backlog is down 27% to $2.29 billion. Cancellation rates have grown as well, rising to 16% from 13% a year ago. Inventories have also risen, indicating weak demand.
None of these factors affect the long-term thesis for KB Home, with structural shortages in available housing having a sizable impact across the U.S. in many fast-growing markets. In the meantime, KB Home hopes that now will prove to be an astute time to make major stock repurchases to add shareholder value even when its core business is going through short-term challenges.
