KB Home's impressive 40% year-over-year order growth during its fiscal third quarter had industry analysts during a related earnings call Friday asking what the company was doing right to achieve those gains even as its profitability slipped. (Click here for full quarter results.)

Part of it clearly was easier comps from last year, as 3Q2010 was slow following the expiration of the federal first-time home buyer tax credit. Part of it also was the launch of a number of new communities--33 in the third quarter alone--to grow community count 10% year over year. But the other part of the secret sauce was management's new strategy to focus less on a specific buyer profile and more on a price point range.

CEO Jeffrey Mezger said, "We don't strategically target a consumer; we target a price band."

Increasingly that price range is inching up into what many in the industry would consider move-up buyer territory. KB historically has catered to mostly first-time buyers with some first-time move-up in the mix. CFO Jeff Kaminski said roughly two-thirds of the company's buyers during the quarter were first-time buyers, which represented a decline from 2010 and 2009 levels, which were in the 70% to 80% range.

However, Mezger said the strategy was less about focusing simply on the move-up market and more about making "rifle shot investment in new communities." In contrast to what he likened to a "food court" approach, where many high-volume production builders cluster in many of the same communities, Mezger said management was zeroing in on select markets and submarkets, where pricing trends were favorable and a new home offered exceptional value against the stock of resale homes. Executives said they were particularly hot on coastal California and Texas markets such as Austin and San Antonio.

The strategy strongly benefitted sales through the quarter, as the company's sales pace accelerated month to month through the quarter. The company's California region, for example, logged 70% more sales than 3Q2010 while Las Vegas saw an 80% increase in sales from last year.

While the uptick in pricing--average sales price for the quarter was up 6% from last year to $277,400--should help the company's top line as the sales convert to closings going forward, similar year-over-year improvement to the company's gross margin lagged. Excluding land-related charges, it fell 100 basis points to 17.2% from last year; however, it improved sequentially from 14.9% last quarter.

Despite the increases in average selling price, orders, backlog, and community count during the quarter, executives connected the margin pressure to shifts in mix, reduced leverage from lower volumes, and 27 community closeouts.

"We expect sequential improvement [on gross margins] as we see more deliveries coming through our new communities in the fourth quarter," said Kaminski. He added that less than 20% of the quarter's deliveries traced back to 2011 vintage communities. Moreover, new communities have been posting 200 to 300 basis point improvement in margins over legacy communities, he said.

However, in the near term, executives said management would likely be throttling back on its land expenditures into 2012. The company spent $106 million during its third quarter, following a roughly $300 million collective land spend during its first and second quarters. This brings the company's land investment over the past two years to the $1.1 billion market.

Mezger said management felt comfortable with the company's current lot pipeline. He said that while the company's lot count was down, its dollars in inventory was up, reflecting the decision to move into higher-priced markets. Moreover, some of the company's previous acquisitions, such as the 1,900 lots in 11 communities that it bought from Fieldstone Homes in San Antonio, were continuing to contribute to its community count and sales capacity. Mezger said several new communities from that particular acquisition will have models open in the fourth quarter, which should contribute 300 to 400 deliveries during fiscal 2012.

"The land market has softened," Mezger said. "We saw a little bit of a feeding frenzy in the spring of 2010, but the markets have rationalized nicely since then."