A weak quarter with one turning point
KB Home reported revenues of $1.30 billion for its third quarter ended August 31, down from $1.62 billion a year earlier, with net income of $65.3 million and diluted earnings of $1.05 per share against $109.8 million and $1.61, in results published September 22.
Deliveries fell 19% to 2,732 homes. Adjusted housing gross margin was 16.8%, below the 18.9% reported a year earlier but improved from 15.7% in the preceding quarter.
Ending backlog rose 2% to 4,398 homes and 3% in value to $2.05 billion — the company's first backlog increase in four years, and the single most forward-looking figure in the release.
The shift back to built-to-order
Built-to-order homes accounted for roughly 74% of deliveries in the quarter, up from 60% in the second quarter. That is a large shift in a single quarter and reflects a deliberate change in how the company is selling.
Built-to-order means the buyer commits before construction, choosing options and finishes; the alternative is speculative inventory started without a buyer and sold when complete or nearly so. Spec homes sell faster but are the ones that attract the deepest discounts when they sit.
Analysis: raising the built-to-order share while deliveries fall 19% is consistent with a builder trading volume for price discipline. The sequential gross margin improvement, from 15.7% to 16.8%, is what that trade looks like on the income statement one quarter in.
Community count and the volume question
Average community count rose 8% year over year to 279, with 277 communities open at quarter end. Deliveries per community therefore fell considerably more than the headline 19% decline indicates: the company sold from more locations and delivered fewer homes from each.
That ratio is the clearest measure of demand per store in homebuilding, and its deterioration is the harder fact in this release. Opening communities requires land and capital committed years earlier; absorption per community is set by current market conditions.
The company maintained full-year delivery guidance of 10,500 to 11,000 homes and narrowed revenue guidance to $4.9 billion to $5.1 billion at a gross margin of 16.0% to 16.2% — implying a fourth quarter roughly in line with the third.
Where this sits in the year
KB Home's quarter ended August 31, later than most peers, which makes it the most current large-builder read available as of this edition. It captures the period through the late-summer rise in mortgage rates that took the Freddie Mac 30-year average to 6.95% in the week ending September 17.
Its margin sits well below the 25.0% PulteGroup reported for its June quarter and the 23.9% Toll Brothers reported for July, a spread that reflects price point and geography as much as execution. Builders concentrated in entry-level and first move-up product face buyers most sensitive to financing costs.
The backlog turn is the item to test next quarter. One quarter of growth after four years of decline establishes a change in direction, not a trend, and the company's own guidance does not assume it accelerates.