The spring selling season's tepid results led Meritage Homes CEO Steve Hilton to scale back his performance expectations for the company in 2011. Rather than making promises of improving upon last year's profit, he ratcheted down investor expectations, referring to a "reasonable opportunity to be profitable in 2011." ( Click here to read full earnings results.)
"We didn't expect to lose $6 million during the quarter," he said. "We thought the spring selling season was going to be stronger than it was."
New orders came in weak at 21% below last year's order count. The company's community count was partially to blame, as the company closed out 23 communities while adding back 17. Many of the closeouts were in the company's Texas markets, where executives said it's been difficult to reload community count because the deals haven't been all that attractive until recently. CFO Larry Seay said the community count should "bounce back in the second quarter to at least 150 actively selling communities by the end of June."
And what the company did sell, it made even less money on than last year, as gross margins shrunk to 17.1% from 18.9% a year ago. Hilton said larger incentives ate away at margins. But when pressed for more detail on what kind of incentives seemed to be working best, he said, "I can't think of one incentive that's a silver bullet."
However, with a number of new communities in the pipeline--the company bought 1,000 lots across 17 new communities during the quarter--Meritage executives said they expected to see some pickup by the third quarter.
"We have at least 20 [communities] scheduled to open this quarter. We'll at least be able to drive gross margins back up to where they were last quarter," said Hilton.
The one real bright spot was a 5% increase in average sales price, which reflected a greater mix of units in higher-priced areas, as well as more move-up product moving. Hilton said the biggest jump in prices were in Arizona, Colorado, and Florida, where ASPs climbed 25%, 11%, and 6%, respectively.
"The best opportunity we're seeing today is in the move-up market," Hilton said. "It's very compelling. There's opportunity to get luxury lots for move-up prices."
Currently two-thirds of the company's business is in the move-up segment, with the remaining third going to entry-level, active-adult, and some luxury segments.
While Hilton didn't give specific guidance for the company's second quarter, it seemed as though he was expecting another sideways quarter. He said April sales were in line with what the company experienced in March, so things "were not really much better but not worse." He said he hoped with the company's backlog, it could make a little money for the quarter.