With the 2011 spring selling season shaping up to be softer than many in the industry had hoped, Wall Street analysts aren't expecting KB Home's fiscal 1Q2011 results, due out Tuesday, to look much like its positive fourth quarter results. Analyst consensus is the company will lose $0.27 per share, compared with a gain of $0.23 per share, or $17.4 million, last quarter.
Most of the uncertainty over the company's performance stems from weak demand in the market, compounded by tighter mortgage underwriting standards. Despite turning a profit for its fiscal first quarter, public builder peer Lennar's operation metrics all showed declines, reflecting a difficult sales environment even in markets like Houston, which have been less affected by housing's overall troubles. New orders fell 12% year over year to 2,267 homes during the quarter while units in backlog slid 12%. Deliveries also declined 4% from the same quarter in 2010.
Order growth was also an issue for KB Home last quarter. New orders fell 25% during its fiscal fourth quarter to 1,085 from 1,446 during fiscal 4Q2009. Backlog, both in terms of units and value, also suffered, falling 37% and 38%, respectively, compared with the same period the previous year. Moreover, the company's cancellation rate, as a percentage of gross sales, shot up to 37% during its fourth quarter.
However, during last quarter's earnings call, KB CEO Jeffrey Mezger noted that the company had made some operational adjustments that he believed would help stem the company's negative order trends.
First, he confirmed the company was still on track to grow its community count by 25% in 2011. He estimated that roughly 70 new communities, the bulk of which are in California and Texas, will come online in the next six months. With more new communities open, Mezger said he believed the company would gain order traction.
Second, management implemented a so-called "bridge" strategy last quarter to help boost sales and closings. The strategy moved the company away from its built-to-order business model in favor of increasing its spec levels to convert sales to deliveries quickly, a move that management credited with preserving revenue.
However, the question will be how well these strategies helped the company during the quarter. The company, like its competitors, is up against difficult comparisons from the 2010 spring selling season, when order numbers benefited from the federal home buyer tax credit. Moreover, as credit tightening continues to eliminate buyers from the available pool, there's question as to whether the company's first-time buyer focus, which has served them well during the early stages of the downturn, will prove to be a weakness as housing's slump drags on.