Lennar Corp. (LEN): What is the homebuilder’s strategy in the current environment?

Shares of Lennar Corporation (NYSE: LEN) were down on Friday. The stock has gained 14% year-to-date and 12% over the past 12 months. The company delivered better-than-expected results for its first quarter of 2023 amid a challenging environment. Here’s a look at some of the key points from the earnings report:

Quarterly numbers

In Q1 2023, Lennar’s total revenues increased 5% year-over-year to $6.5 billion, beating estimates. GAAP EPS increased 22% to $2.06 and although adjusted EPS declined 21% YoY to $2.12, it surpassed projections.

Strategy and trends

On its quarterly conference call, Lennar stated that the overall housing market has been impacted by higher mortgage rates, which in turn has affected affordability and homebuyer confidence. The company has had to adjust its base prices, increase incentives, and/or provide mortgage rates buydowns to maintain or regain its targeted sales pace in most of its markets. This strategy to generate sales has come at the cost of gross margins.

In Q1, Lennar saw strong performances in markets like Florida, New Jersey and San Diego, which continue to benefit from low inventory, strong local economies, and employment growth. In markets like Orlando, Atlanta, Chicago, Virginia and Minnesota, the company had to make some significant price adjustments in order to regain sales momentum.        

Although Lennar’s new sales orders declined 10% year-over-year in Q1, they were up on a sequential basis from the fourth quarter of 2022 as well as through each month of the first quarter. The cancellation rate also declined from 26% in Q4 to 21% in Q1.

The company continued to make progress on its land-light strategy during the first quarter. At the end of Q1, its years supply of owned home sites improved to 1.9 years from 2.7 years and its controlled home site percentage increased to 68% from 63% last year. At the end of Q1, Lennar had 1,217 communities, which was up 1% from the year-ago period. It expects to increase its community count in the high single digits by the end of the fiscal year.

Outlook

Lennar expects new orders to range between 16,000 and 17,000 for the second quarter of 2023 and deliveries to range between 15,000 and 16,000. Average sales price is estimated to be $435,000-445,000. Gross margins are expected to be 21-21.5% while EPS is expected to be $2.10-2.55 in Q2. For the full year of 2023, the company expects deliveries to range between 62,000 and 66,000.

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