Beazer Homes had a weak start to its fiscal 2011, posting a greater than expected loss of $48.8 million, or $0.66 per share. However, CEO Ian McCarthy told analysts during a related earnings call that, unlike 2010, which was front-loaded due to the federal home buyer tax credit incentive, he expected 2011 to improve through the back half of the year.
McCarthy said the disappointing quarter, which was driven by a 24% drop in orders, a 44% falloff in closings, and an average selling price slide of 6%, was characterized by low traffic levels, despite more stable pricing and concessions. Even rising interest rates were unsuccessful at pulling would-be buyers off the fence, he said.
However, looking ahead, McCarthy said he expected "a modestly improving transition year for us and the entire home building industry. ... 2011 is shaping up to be more back-end loaded."
Already the first part of the company's fiscal second quarter showed some encouraging signs. Like many of his executive peers, McCarthy said traffic in communities was up significantly in January, leading to a 50% sequential improvement in orders over December. Other factors buoying his "guardedly optimistic" outlook were four months of job growth, low expectations that sales would fall off a cliff in the spring like they did in 2010 following the expiration of the federal home buyer tax credit, and the fact that the company will have a greater number of new communities open for sale in its fiscal third and fourth quarters.
Although McCarthy failed to give a total community count, he said in the first quarter that total was down about 10% year over year. However, he said the company had acquired lots in 69 new communities since the beginning of 2010, 44 of which were open during the quarter. The new communities contributed 21% of new orders and 11% of closings. By the end of fiscal 2011, McCarthy said the new communities should account for 25% of closings. Margins on the new communities are expected to be up 200 basis points compared with legacy communities while average selling price should be about 5% lower than existing communities.
If the housing market holds the line with McCarthy's expectations for 2011-annual starts of roughly 525,000 and new-home prices flat to down 3%--he said he believed Beazer would post positive earnings before taxes and interest (EBIT) on a pre-impairment basis. When asked by USB housing analyst David Goldberg what kind of pickup the company would need to achieve positive EBIT, McCarthy said:
"If you look back at 2009, we expect it [2011] to be more like that. ... Even though 2009 was a bad year, we accelerated through it. ... We hope to do slightly better than those numbers, but we don't need to be considerably ahead of those numbers to get to that positive EBIT at an operating level. We're bouncing along the bottom right now, but we're poised, ready, and positioned for the upturn, but if we have to go along at about this level, we think we can get to an EBIT operating positive position this year."
In fiscal 2009, the company's order trends were weak in the first quarter but improved through the end of the year, whereas in 2010, where order volumes were at similar levels to 2009, new order activity declined significantly during the company's third and fourth quarters on a year-over-year basis.
Given his expectations for the spring selling season and beyond, McCarthy said management's expectation is that the company would pick up its sales pace from the first quarter, which came in at roughly 1.5 sales per community per month. However, he said despite the positive traffic trends in January, management would not be accelerating its spec production to try to capture more sales.
"We control specs very carefully," he said. "We're very comfortable with the level we're at. Where sales are increasing, we'll put more specs out. But that will be done community by community."
