Going into 2015, analysts knew margins were going to be an issue for home builders as rising dirt, materials, and labor costs potentially sapped profits. Today’s earnings report from Hovnanian showed exactly how problematic margins can be.
As the company continued expanding (its community count was up 4%), its margins fell steeper than expected and its stock dropped 5% in early trading.
“Gross margins of 13.5% fell 220 basis points sequentially and 400 basis points year over year, below our 14.6% estimates as well as the company’s expectations, driven by a greater than anticipated impact from incentives on spec homes,” says J.P. Morgan’s Michael Rehaut in an analyst note.
For the quarter, Hovnanian reported a net loss of $19.6 million versus $7.9 million a year ago. The builder’s revenues of $468.9 million were up 4.2% and its consolidated deliveries of 1,233 homes down were down 1%. On the bright side, the dollar value of consolidated net contracts of $700.7 million was up 4.7%, while the number of contracts slipped 0.7% to 1,796.
Hovnanian’s orders fell 10% in the Northeast, 9% in the Southwest, 6% in the Mid-Atlantic, and 5% in the West. But there were some hopeful pockets of activity: Orders in the Midwest and Southeast rose 36% and 12%, respectively. Additionally, community count rose 4%.
“Looking forward, the company expects gross margins to improve sequentially in 3Q and 4Q based on the current gross margin in backlog,” Rehaut said.