For most home builders, the outlook for 2011 is uncertain at best at this point in the year. D.R. Horton CEO Don Tomnitz, for one, told analysts today during an earnings call that it's likely to be a bigger struggle to be profitable in 2011 than it was in 2010. However, others, like Ryland Homes CEO Larry Nicholson believe there are reasons to be optimistic about the year ahead.
Despite posting a loss of $19.1 million, or $0.43 per diluted share, during its fourth quarter, Nicholson told analysts during an earnings call Thursday that Ryland was a "leaner, more efficient organization," one that could ultimately be profitable under current economic conditions.
Several factors contributed to Nicholson's brighter outlook. Despite sales being "particularly slow" at roughly 1.3 sales per month per community, Nicholson said the divisions were seeing traffic pick up week after week. Even more encouraging was the fact that sales associates in the field felt that the quality of the traffic also was improving.
With positive traffic trends abounding, Ryland may be perfectly timing the rollout of its new communities to capture sales in the upcoming quarter. The company opened 82 new communities in 2010, bringing its community count to 207 at the end of the fourth quarter and representing a 14% increase from 4Q2009. Moreover, the company has 39 more new communities in its pipeline and continues to look for new land opportunities. During the fourth quarter, 13% of the company's closings were coming from its new communities; however, Nicholson said he expected that number to swell to between 20% and 25% in the next quarter, as the spring selling season opens.
Also a plus for the outlook was that pricing had been holding steady. In fact, the company's average closing price increased 2.5% to $243,000 from the prior year, as sales incentives fell year over year to 11.6% in the quarter. CFO Gordon Milne said stable pricing trends were helping the company maintain its 14% gross margin, even as some divisions were overhead heavy relative to their volumes. "There's a negative drag on margins with those divisions open but not doing an optimal number of units," he said.
Margins in the quarters ahead also could get a boost from some recent restructuring announced during the earnings call. Nicholson said management was able to cut additional overhead costs during the quarter with a restructuring that eliminated the company's Northwest region and consolidated management of the company's divisions. Under the new organizational structure, all division presidents will report to Ryland alum Pete Skelly, as president of the company's home builder operations. The move is expected to yield roughly $8 million in annual savings, the vast majority of that coming out of SG&A.
So, while Nicholson acknowledged the company "fell short of our goal to be profitable," he emphasized that management has taken the appropriate steps to right-size the organization to meet current economic conditions. If the company can continue to maintain control over its costs, it doesn't take much improvement in demand given today's low-volume environment to move the needle significantly on profitability.