After a devastating fiscal first quarter, Wall Street analysts appear more optimistic about KB Home's second quarter performance, estimating that losses per share will improve to around ($0.30) from ($1.49) last quarter. The company is scheduled to release its full quarter earnings Wednesday before the market opens, followed by a conference call at 11:30 a.m. Eastern.
At the close of last quarter, KB executives had been hopeful about a better second quarter performance, as traffic trends in March had been encouraging; more shoppers suggested more orders could be on the way. Also expected to give a boost to orders, as well as margins, was the company's accelerated rollout of new communities. After opening 33 new communities last quarter, executives said the company was on track to have 70 new communities open by the end of this quarter.
However, with the company's focus on to-be-built homes, even if orders show meaningful improvement during 2Q2011 there could be some lag before those orders convert to deliveries and hit the company's top line. Last quarter, revenues were down 25% year over year to $196.9 million as deliveries decreased 28% to 949 units. Moreover, the company's cancellation rate, as a percentage of beginning backlog, was an uncomfortable 39%.
But even if operations remain challenged, there are a few other factors that could give the company's fiscal second quarter performance a lift. First, the company will enjoy favorable year-over-year comparisons on operational metrics since volume nose-dived in 2010 following the expiration of the federal home buyer tax credit in April.
Second, the company is likely to have considerably less baggage related to its Inspirada joint venture burdening its balance sheet. Last quarter, the company wrote down the last of its investment in the venture to the tune of $76.5 million, a move that could show up as significant margin and earnings improvement this quarter.
However, in early June, the company announced that it had struck a deal with the venture's lenders and a number of partners to reorganize the failed venture, known as South Edge. Although two members of the venture currently are opposed to the plan, if the plan is put in place by the bankruptcy court, the company estimated it will cost the company between $216 million and $240 million to effectively acquire its share of the land owned by South Edge, approximately 65% of the land assets.
Ticonderoga Securities analyst Stephen East wrote in an earnings preview, "Subsequent to reporting 3 quarters of improvement, the company took a meaningful step back in its first quarter. Consequently, we believe it is imperative KBH resume improvement this quarter while recognizing the operating margins turned in have remained unacceptable to investors. Management pinned much of last quarter's problems on negative operating leverage. Unfortunately, this quarter presents many of the same challenges."