MW D.R. Horton is building smaller homes and offering incentives to keep prices down

By Tomi Kilgore

With a limited supply of homes at affordable prices, home builder sees the percentage of unsold homes in its inventory rise

Shares of D.R. Horton Inc. turned lower Tuesday after the home builder beat fiscal first-quarter earnings expectations but missed on orders and said the need to provide mortgage-rate incentives to spur demand will keep weighing on profitability.

Chief Executive Paul Romanowski said on the post-earnings call with analysts that while overall population demographics remain favorable for supporting housing demand, there aren't enough homes at affordable price points and inventories of unsold homes have increased.

"To help spur demand and address affordability, we are continuing to use incentives such as mortgage-rate buydowns, and we have continued to start and sell more of our smaller floor plans," said Romanowski said, according to an AlphaSense transcript.

Because of the higher incentive costs, gross profit margin, which is a measure of the profitability of homes sold, fell to 22.7% in the quarter ending Dec. 31 from 23.6% in the previous quarter. Incentives include mortgage-rate buydowns.

"Our incentive costs are expected to increase further on homes closed over the next few months, so we expect our home sales gross margin to be lower in the second quarter compared to the first quarter," said Jessica Hansen, the company's head of investor relations.

The stock $(DHI)$ fell 1.3% in afternoon trading to reverse an earlier intraday gain of as much as 4.4%. That put it on track to snap a five-day winning streak, during which the stock had climbed 8.2% off a six-month low.

Regarding the size of homes being built, D.R. Horton said the shift to smaller homes will take time, as current residential lots approved by municipalities have certain parameters and guidelines that limit the company's ability to be flexible.

It's about incremental changes, "neighborhood by neighborhood," the company said.

In terms of data, the average square footage of homes closed on was down 1% from a year ago, while the number of townhouses or duplexes sold increased, to roughly 17% of total sales from 15% in the previous quarter.

For the quarter to Dec. 31, orders for homes declined to 17,837 from 18,069 a year ago, as declines in the South Central, Southeast and Northwest regions of the U.S. offset increases in the Southwest, East and North regions.

The FactSet consensus was for orders to rise to 18,389 homes. That marked the third straight quarter that orders missed Wall Street projections.

The value of orders fell 2% to $6.7 billion, missing the FactSet consensus of $6.89 billion.

The company had 36,200 homes in its inventory as of Dec. 31. While that was down 15% from 42,600 homes a year ago, the percentage of unsold homes in inventory rose to 71% from 67.6%.

And of the 25,700 unsold homes in the latest quarter, 10,400, or 40.5%, were completed. Of that number, 1,300 homes, or 12.5%, were completed more than six months ago. A year ago, 31.3% of unsold homes were already completed, and only 8.1% of those homes had been completed for more than six months.

Meanwhile, total revenue for the latest quarter fell 1.5% from a year ago to $7.61 billion, well above the FactSet consensus of $7.01 billion.

Net income declined to $844.9 million, or $2.61 a share, from $947.4 million, or $2.82 a share. That beat the FactSet consensus for earnings per share of $2.35.

Looking ahead, the company affirmed its fiscal 2025 guidance for revenue of $36 billion to $37.5 billion.

The stock has dropped 21.7% over the past three months, while the iShares U.S. Home Construction exchange-traded fund ITB has lost 12.2% and the S&P 500 index SPX has gained 3.2%.

-Tomi Kilgore

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January 21, 2025 15:16 ET (20:16 GMT)

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