D.R. Horton executives further validated a number of other builders' senses that the move-up market is gaining strength in home sales environment, telling analysts during a conference call Friday that going forward move-up homes will make up a greater percentage of the company's business. This decision is a strategic development, as the company has long been a heavy hitter in the entry-level home buyer market. In its most recent quarter, closings to first-time home buyers represented 55% of the company's business. (Click here to access full quarterly financial results.)
However, company president and CEO Don Tomnitz argued that the move toward the move-up market was less a change in the company's core business and more a strategy to harvest what opportunities are available in today's low-volume market. And by opportunities, he meant not only demand but also a chance to leverage the company's size to outmuscle the competition.
Tomnitz called the move-up market "fragmented," as the landscape is populated with builders of all shapes and sizes, many of whom are smaller, private builders. Given Horton's volume levels--it's the largest builder in the country--access to capital to tie up lots, and pricing advantage, Tomnitz was confident the company could take share in that tranche of the market.
"From a cost perspective, we believe we can deliver a move-up home more cost effectively and at a more competitive price [than the competition]," he said.
But when asked if executives might consider an acquisition to help the company gain traction in the move-up market, Tomnitz's answer was a resounding no. "We're happy with managing our own business and have no interest in M&A activity," he said.
He added that, given the market conditions, it was possible to obtain control of smaller private builders' land positions through option contracts, which was a more conservative way to control desirable land positions than taking on some of the baggage that comes with acquiring a company. "We certainly don't need any additional employees or land on our books," he said.
Overhead was a concern during the quarter, as dollars attributed to SG&A increased during the quarter by roughly $4 million. SG&A as a percent of revenues was 16.8%. Tomnitz called the increase "disappointing" and blamed senior leadership, saying the team continued to support their divisions in their volume goals, which ultimately were not met during the quarter. However, it was a mistake that Tomnitz said would not be made twice. He said SG&A will be below $475 million going forward and that recently the company's four regional presidents were given "specific SG&A caps they had to hit" by the end of April.
In terms of finding new land opportunities to be able to bring more move-up product to market, Tomnitz said management was looking "anywhere we can to make a 20% gross margin." More specifically, he said there was good opportunity in the Carolinas, Florida, Las Vegas, and Texas. However, he stressed that management was still sticking to its land-light strategy, trying to use options as often as possible to keep land costs of its books, while also pursuing only opportunities that offered quick returns.
"We need a return of 12 to 18 months," he said. "We're no longer interested in five-year projects."
As move-up homes become a bigger piece of the company's business, analysts asked how the company's product would change. Tomnitz responded by saying, "It's pretty much the same product, just a little bit bigger, with a few more amenities." Consequently, he said he expected margins on the company's move-up homes to be similar to its entry-level homes, only with some potential upside from the sale of more options and upgrades.
Given the steps the company took in the quarter to set itself up to take advantage of what opportunities exist in today's anemic market, Tomnitz said he was confident that both profitability and closing levels would increase in the second half of its fiscal 2011.