Improving demand conditions that began in February continued throughout the fiscal second quarter for KB Home and helped the home builder deliver financial results exceeding the high end of its guidance ranges.
KB Home reported revenue increased 3% year over year to $1.8 billion in the quarter, and its profits per share of $1.94 in the quarter significantly outperformed analyst expectations.
“We delivered strong results in our second quarter, including a significant sequential improvement in our net orders,” president and CEO Jeff Mezger said on the builder’s second quarter earnings call. “Our divisions executed well, improved their cycle times, reduced build costs further on new starts, and opened new communities, all of which will benefit us in the quarters ahead.”
Strong demand conditions improved net orders 1% on a year-over-year basis to 3,936 in the second quarter, ended May 31. The pace of net orders represents an 84% sequential improvement from the fiscal first quarter, when orders were down 49% on a year-over-year basis. Gross orders increased 7% year over year to 5,032, representing a 50% sequential increase from the first quarter.
The cancellation rate as a percentage of gross for KB Home was 22% in the quarter, a significant sequential improvement from the 36% cancellation rate in the first quarter. Mezger said demand conditions have carried through into the first three weeks of June.
“With respect to demand, buyers are adjusting to the higher mortgage rates, and the continuation of a more stable rate environment is a positive factor,” Mezger said. “In addition, with the lack of resell inventory and market price starting to increase, buyers are demonstrating a higher sense of urgency than we saw earlier this year.”
The average selling price decreased 3% to $479,500 in the second quarter, but executive vice president and chief operating officer Rob McGibney said KB Home regained pricing power in the quarter and was able to raise prices in many communities.
“In late 2022 and early 2023, as we converted more of our large community backlogs to deliveries, we were in a position to adjust pricing to stimulate sales, and we took steps in most locations to lower pricing based on current market conditions,” McGibney said. “That trend reversed in our second quarter as demand improved and markets began to normalize, and we were able to raise prices in about two-thirds of our communities.”
KB Home’s ending backlog value in the second quarter was $3.46 billion with a backlog of 7,286 homes, compared with a backlog value of $6.12 billion on 12,331 homes in the second quarter of 2022.
Cycle Time Improvement
McGibney said KB Home’s construction time of roughly seven months remains above the company’s historical level of between four to five months. However, the builder is “making solid progress” in returning cycle time levels to historical levels.
“The construction time improvement was driven by a normalizing supply chain and better trade labor availability, as well as our ongoing initiatives to simplify our product offerings,” McGibney said. “We have reduced our SKUs by 43% over the past 18 months, retaining the studio options that are most frequently selected by our customers and those most readily available in the supply chain. These changes have created efficiencies for our teams, our trade partners, and our customers while helping to lower our cost and time to build.”
McGibney said direct costs on homes started in the second quarter were down approximately $23,000 from the peak in August 2022.
Land Strategy
Mezger said KB Home maintained its “cautious approach” to land investment in the second quarter, spending $81 million to acquire new land.
“While our divisions are diligently looking for land deals, we’re being disciplined in our underwriting with respect to achieving our required returns,” Mezger said. “We have the flexibility to remain selective given our current lot position and healthy balance sheet. With demand improving, we expect our land acquisition activity to accelerate during the second half of 2023.”
During the quarter, KB Home invested $316 million in development of land it already owns. The company’s lots owned or under contract totaled 57,932 for the six months ended May 31, compared with 68,795 in 2022. The decrease was attributed to homes delivered, reduced land investments, and the abandonment of previously controlled lots. Of KB Home’s total lots, approximately 43,477—or 75%—were owned, representing a supply of approximately 3.1 years.
