In Don Tomnitz's book, coming close doesn't count for much. That's what the D.R. Horton president and CEO told analysts today during an earnings call following the release of the company's fiscal first quarter results. With a singular focus on achieving profitability, losing $0.06 a share, or $20.4 million, during the quarter, which matched up to yet another of housing's low points, just "is not good enough," he said. Tomnitz concluded the call, saying, "We need to work a little harder."
Much of the heavy lifting for the year will have to be done during the spring selling season, which unofficially kicks off following the conclusion of the Super Bowl on Feb. 6. Although Tomnitz said he expects 2011 to be yet another tough year for housing in general, he said the Texas-based company was poised to make the most of it.
"We are locked and loaded, as they say," Tomnitz said. "We are definitely ready for the spring selling season."
Already, traffic at the company's communities has been encouraging. So encouraging, in fact, that Tomnitz said that after touring several divisions and conducting spot traffic checks, company founder and chairman Donald R. Horton was the happiest Tomnitz had heard him in a long time. Through the housing downturn, there have been times when company executives have toured communities on weekends, when traffic typically should be up, and seen little activity, he explained.
"What D.R. is clearly saying is he's seeing traffic during the week, and that bodes well," said Tomnitz.
With traffic indicators pointing in the right direction, Tomnitz said the company had a solid game plan to capture as many sales as possible as it strives to return to profitability.
First, the company still maintains a healthy level of spec inventory, despite a 400-unit reduction. At quarter end, the company had 5,000 specs on its books, 3,000 of which were completed specs. Having ample quick-to-close inventory is a strategic decision to help the company attract first-time buyers, relocations, and Realtor sales, Tomnitz said.
Second, the company has been rolling out new communities, increasing its actively selling community count 3% sequentially for the quarter. Community count was up 18% for the year. These new communities, which are on land purchased in fiscal 2009 or later, accounted for roughly 50% of sales and closings during the quarter; executives anticipated that share to grow during the company's fiscal second quarter.
Tomnitz said the company would continue to pursue opportunities to open new communities. "We're trying to do every lot option deal that makes sense to us," he said. Increasingly, the finished lot deals that fit Horton's sweet spot are farther and farther away from the company's core markets. Tomnitz said the strategy was to drive buyers to these farther out locations by offering them homes at lower prices.
This strategy to pursue more tertiary properties prompted one analyst to ask executives if the company's goal had shifted slightly, from wanting to be the Walmart of home building to the Dollar General of home building, a move that could result in further margin compression. Tomnitz responded by saying currently less than 10% of the company's closings were coming from those farther-flung communities and the company does not change its underwriting standards on land based on geography.
And third, the company was remaining hyper-focused on sales. On the community level, sales associates are under direction to convert shoppers to sales contracts as quickly as possible, leaving the whole pre-qualifying process by the wayside.
"Just having a unit of traffic show up is a good thing--whether they qualify or not," he said.
The company can run comfortably with a cancellation rate in the ballpark of the 28% it had during the quarter, so the qualifying is best left to the mortgage company, which can sort out any issues related to the ever tightening mortgage lending standards, he said. Moreover, buyers who fail to qualify for financing can always join the company's Home Buyers Club, which helps wanna-be buyers fix many of the credit issues preventing them from obtaining mortgages. It may delay closings three or six months, Tomnitz said, but about 80% of the people who go through the credit repair program end up buying a Horton home.