KB Home's focus on building homes to order rather than quick-to-close speculative homes hampered its ability to net sales to beat the April 30 tax refund deadline and contributed to its second quarter order slump, CEO Jeff Mezger told analysts Friday morning.
While KB did build a modest number of extra unsold homes in an attempt to capture some of the in-a-hurry market, those sold quickly, and when more buyers came looking, the pickings were slim for those looking for houses they could move into by June 30.
"We were definitely at a disadvantage in that period of time," said Mezger.
But that disadvantage is gone now, he said as he defended the company's build-to-order strategy during the call, adding it's the right long-term strategy because it nets bigger margins. Plus, Mezger said the company has been able to drastically shorten its build time to a point where it can compete with 40- to 60-day closing times for existing home sales, which he considers the company's real competition.
"We will be selling homes in late August that will close in November," Mezger said. "Would you wait an extra 30 days to get your own custom home?"
The call came after KB announced earnings that were worse than analysts expected. The company lost $30.7 million in its fiscal quarter that ended May 31, $0.40 per diluted share. That compared with a loss of $78.4 million or $1.03 per diluted share the same quarter last year. Analysts were expecting a loss of $0.30 per share.
KB's net sales orders fell 23% to 2,244 in its second quarter compared with 2,910 in 2009's second quarter. However, orders were up 17% from the quarter before.
The company's home deliveries were up 1% year over year to 1,782 compared with 1,761, marking the first time in 14 quarters that KB had an increase in deliveries. Backlog was down to 3,175 from 3,804 last year.
A lower community count was blamed for some of the slump as executives said the number of homes sold per community is among the highest in the nation.
KB is out buying land for new communities. It added more than 2,000 new lots, making its total lot count near 40,000, but it has been closing communities at about the same pace that it has been opening them.
Community count was down 7% in the second quarter and is expected to be down in the third quarter as well. It is expected to be up 25% in 2011, however, as the new land buys filter out onto the market.
"In many cases we are able to go from closing on the lots to delivering the homes in approximately six months," said Mezger.
Most of the land buys were in Texas, California, and Las Vegas. Mezger offered details about some of the most recent company buys.
* KB bought some new land in Northwest Houston near one of its successful communities that is close to build-out. The company plans to build the same product in the new community that sold well in the one that is closing.
* He mentioned the deal in Southern California with the Lewis Group to buy 664 home sites in "two prime master-planned communities" in the Inland Empire. That land will turn into eight new communities to serve first-time and move-up buyers. The communities are expected to open in late 2010 and begin delivering houses in early 2011.
* It also bought finished lots in seven Las Vegas communities.