KB Home’s focus on building homes to order rather than quick-to-close spec homes hampered its ability to serve buyers seeking to beat the April 30 tax credit 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 those in-a-hurry customers, those sold quickly, and when more buyers came looking, the pickings were slim. “We were definitely at a disadvantage in that period of time,” Mezger said.
But that disadvantage is gone now, the CEO said, defending KB's build-to-order strategy during the call, saying it’s the right long-term decision 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 a 40- to 60-day closing time frame 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 below what analysts expected. The company lost $30.7 million in its fiscal quarter that ended May 31, or 40 cents per diluted share. That compared with a loss of $78.4 million, or $1.03 per diluted share, for the same quarter last year. Analysts were expecting a loss of 30 cents per share.
KB’s net sales orders fell 23% to 2,244 in its second quarter compared with the same quarter one year ago. However, orders were up 17% from previous quarter.
The company’s home deliveries were up 1% year-over-year to 1,782, 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 added the numbers of homes sold per community are among the highest in the nation. 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 new land buys emerge into the market.

To address that challenge, KB has been out buying land for new communities. It added more than 2,000 new lots in the last quarter, making its total lot count near 40,000, but the builder has been closing out communities at about the same pace that it has been opening them. 
Most of the land buys were in Texas, California, and Las Vegas; Mezger offered some details about some of the most recent purchases.

  • It bought some new land in Northwest Houston near one of its successful communities that is close to build-out. KB 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.

Teresa Burney is a senior editor for BUILDER and BIG BUILDER magazines. 

Learn more about markets featured in this article: Houston, TX, Riverside, CA, Las Vegas, NV.