KB Home (KBH): What did and did not work for the homebuilder in the third quarter

Shares of KB Home (NYSE: KBH) were up slightly on Friday. The stock has dropped 40% year-to-date and 35% over the past 12 months. The company delivered mixed results for its third quarter of 2022 this week. This, along with a downbeat guidance and signs of a slowdown in the housing market, has raised concerns over the homebuilder’s growth prospects. Here’s a look at what did and did not work for KB Home in its just-ended quarter:

The bright side

In Q3 2022, KB Home’s revenues grew 26% year-over-year to $1.84 billion while EPS grew 79% to $2.86, with the latter surpassing expectations. Homebuilding operating income rose 91% to $325.1 million while operating income margin improved 610 basis points to 17.7%. Pricing and a favorable supply/demand environment for housing drove an improvement in gross profit margin to 27% from 22% last year.

Homes delivered increased 6% to 3,615 while average selling price rose 19% to $508,700. The company remains optimistic about the long-term outlook for the housing market. It sees several factors such as favorable demographics, population, job growth and high rents supporting the demand for homeownership. There is also a limited supply of homes as the industry produces lesser number of new homes and the levels of existing home inventory remain low and at affordable price points.

KB Home believes it is well-positioned in terms of deliveries for the fourth quarter of 2022 and into the first half of 2023 with a backlog of 10,700 homes valued at approx. $5.3 billion. For the fourth quarter of 2022, average selling price is expected to be approx. $503,000, which would represent a YoY increase of 12%.

The flip side

Although KB Home’s revenues grew during the quarter, they fell short of market expectations. Home deliveries were impacted by extended build times and supply chain constraints and came below the company’s expectations.  

The rise in mortgage interest rates, the ongoing inflation and other macroeconomic concerns have led many prospective buyers to put their homebuying plans on hold. KB Home saw its net orders drop by 50% YoY to 2,040 in Q3 while net order value decreased by 51% to $979 million.

In light of the current market conditions, the company decided to reduce its land investments and during the third quarter, it cut its land acquisition and development spend by almost 30% versus last year. As there is limited near-term visibility with regards to economic conditions and their effect on homebuyers, KBH plans to keep its land spend low for the foreseeable future. In Q3, the company canceled contracts to purchase nearly 8,800 lots.

KB Home expects supply chain constraints and extended build times to continue in the fourth quarter and has therefore moderated its revenue outlook for the period. The company expects housing revenues to range between $1.95-2.05 billion in Q4 2022. This guidance was lower than what analysts had been estimating, which put a damper on Street sentiment.

Click here to read the full transcript of KB Home’s Q3 2022 earnings conference call