KB Home may have lost more money by far than analysts expected in its first 2010 quarter, but by this time next year executives expect the California-based builder to be profitable again, CEO Jeffrey Mezger told analysts Tuesday, March 23.
According to Mezger, all the pieces are in place for profitability: Improved margins, compressed cycle times, even-flow production, a land-light position, and transformed product offerings in the form of its Open Series houses.
“We are not declaring that the housing industry is robust,” said Mezger. However, “we remain bullish on our company’s ability to compete.”
KB Home lost $54.7 million in its first fiscal quarter ending February 28, which translates into $0.71 cents a share. Analysts’ consensus was $0.42 a share. The company lost $ 58.1 million or $0.75 a share in 2009.
On the other hand, new orders were up 5%, to 1,913 in the quarter. And KB's backlog at 2,713 homes had its first year-over-year increase in more than four years.
The company’s quarter didn’t start so well. December orders were down even when compared to a miserable December 2009. Mezger credited that to the end of the first $8,000 home buyer tax credit last fall, which was initially scheduled to expire Nov. 30, 2009, but was extended by Congress in early November.
However, KB's sales took off in early 2010, growing steadily for the rest of the quarter “and we were able to make up for this shortfall,” Mezger said, adding that the tax credit seems to be spurring some purchases.
The company’s popular Open Series line of plans is also helping sales, according to executives. Last year, Open Series homes accounted for 50% of all sales, even though they hadn’t yet been integrated in all the company’s communities.
To make sure the company has enough quick-delivery homes to meet demand within the credits’ time frame, KB is starting more spec homes. “The general guideline is one month’s (worth of) sales in entry-level communities that have demonstrated predictable and consistent absorption rates,” Mezger said.
That doesn’t mean KB has abandoned its fierce belief that building homes to order is a best practice, he added. It’s just that Mezger thinks the company lost sales last fall because it didn’t have homes ready to meet demand spurred by the tax credit.
KB’s big mission for 2010 is to bring on new communities with affordable land prices. The market is beginning to stabilize and “we think the time is right once again to reinvest in our future growth,” Mezger said. “We have the ability and resources to ramp up our community count through the year.”
The company has earmarked $600 million for land and land development through the year. It still expects to end the year with more than $1 billion in cash.
One operating margin that analysts concentrated on during the call was the company’s sales, general, and administrative costs, which were $72.2 million in its first quarter, up nearly 18% year-over-year.
Management told analysts the increase was outside of the company’s control. About $6 million in charges were related to the company’s price increase. The company was required to mark to market the increased value of stock appreciation rights and phantom shares. Last year the company was able to lower its SG&A costs after the stock fell in value.
The other increased line item outside the company’s control was for higher legal expenses related to paying the defense costs of Bruce Karatz, the company’s former CEO. He is on trial for allegations for backdating stock options he received and then lying about it to the home builder’s lawyers.
Karatz’ name wasn’t mentioned during the conference call. He was referred to as the company’s “former chairman and CEO.”
Apparently, under the laws of Delaware where KB is incorporated, the company is required to pay legal defense costs in this matter, company officials said.
Teresa Burney is a senior editor for BUILDER and BIG BUILDER magazines.