D.R. Horton is three-fourths of the way through its goal for a profitable fiscal year, but even CEO Don Tomnitz thinks pulling in positive earnings for the fourth time will be difficult.
"We've got a decent shot at being profitable in Q4, but it's going to be a real challenge," he told analysts during the company's third quarter earnings call Tuesday.
Earlier Tuesday, Horton reported a $50.5 million profit, or $0.16 per share, for its third quarter ended June 30. Last year, the company lost $143.8 million in its third quarter.
Closings, too, were a strong positive for the quarter, up 60% to 6,805 homes. And gross margins improved by 590 basis points to 17.2% Orders, however, decreased 3% to 4,921.
With its emphasis on targeting first-time buyers (60% of the company's sales for the quarter) and ramping up its spec home construction to satisfy the need for quick-delivery homes to beat the sunset of the federal home buyer tax credit, perhaps no other large home builder experienced as extreme a boom and bust from its expiration than Horton did.
Executives said the credit created wild swings in sales from an extreme high in April to an extreme low in May and then increases by 20% in June and 10% in July.
"I will clearly say our July sales are not where our goal is so, as a result, we are going to be aggressively marketing homes in all our divisions and regions," Tomnitz said.
Tomnitz reiterated that the wild sales gyrations were expected and said that he won't be sad when the credits are gone.
"Frankly I don't want the tax credits," he said. "It's a lot easier to run a business and design a business on current demand" rather than to have to guess about stimulus impact.
An increased cancellation rate of 28% for the quarter also was expected, with Tomnitz saying he was surprised it wasn't higher given the pressure to write as many sales contracts as possible before the tax credit deadline.
"We wrote every deal we could write by April 30," he said. "If they had a pulse and they were warm, we wrote them."
Tomnitz isn't expecting much improvement in the home sales market until there's an improvement in the general economy, specifically job growth and consumer confidence. "We believe the next 12 to 14 months will be challenging," he said.
But Tomnitz has a goal for those difficult months if there are fewer sales in the market; he wants Horton to make up for it by selling a greater percentage of them.
"Frankly, I think we are taking market share at the expense of small, medium, and large builders," he said, adding that he thinks Horton is outselling every other builder, accounting for as much as 25% of market sales.
Tomnitz said he has faith in the company's business model, adding that the company's results "beyond a doubt" prove it is superior.
Horton's strategy focuses on optioning finished lots versus buying them, targeting first-time buyers, and capturing that market by having a good supply of ready-to-move-in homes on hand.
Another focus of the model is on the quick return of capital. "Our challenge right now is if we invest a dollar in a land, we want it returned to us in 12 months."
Stephen East, home building analyst at Ticonderoga Capital who was on the call, wrote afterwards in a research note, "In many ways, this quarter's results (and attitude) was vintage D.R. Horton. The company turned in one of the better income statements while being very aggressive on the Orders front by attempting to move product--walking a fine line between volume pick up and gross margin sacrifice. At the same time, there is little doubt in our mind that during the conference call, management was attempting to reset the expectations bar much lower. We believe that is a prudent move as the next three quarters are going to be very challenging with only modest profitability."
Citigroup's Josh Levin followed up the conference call with a call of his own. In a research note that went out Tuesday evening, he wrote, "We spoke with DHI after the call and conclude that the message DHI intended to telegraph was not nearly as bearish as the message it did in fact telegraph. We think that (1) gross margins should remain relatively stable unless demand and/or prices drop materially from current levels and that (2) during the Q&A, when the CEO said that "profitability" was not sustainable without job growth, he meant to say "sales growth" was not sustainable without job growth but that DHI would work assiduously to maintain profitability even in a low sales growth environment."