KB Home 2026 Q3 Earnings Call

Thank you, John. Good afternoon, everyone, and thank you for joining us today to review our results for the third quarter of fiscal 2026. On the call are Jeff Mezger, Executive Chairman, Rob McGibney, President and Chief Executive Officer, Bill Hollinger, Senior Vice President and Chief Accounting Officer, and Thad Johnson, Senior Vice President and Treasurer. During this call, items will be discussed that are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future results, and the company does not undertake any obligation to update them. Due to various factors, including those detailed in today's press release and in our filings with the Securities and Exchange Commission, actual results could be materially different from those stated or implied in the forward-looking statements.

In addition, an explanation and/or reconciliation of the non-GAAP measure of adjusted housing gross profit margin, as well as any other non-GAAP measure referenced during today's discussion to its most directly comparable GAAP measure can be found in today's press release and/or on the investor relations page of our website at kbhome.com. Finally, please note all figures are based on our quarter ended August 31, and all comparisons are on a year-over-year basis, unless otherwise stated. With that, here is Jeff Mezger.

Thank you, Jill. Good afternoon, everyone. The housing market remains challenging, with conditions having weakened since our last earnings call in June. Affordability is under further pressure due to rising mortgage rates. Inflation remains persistently high, driven in part by fuel prices, which prompted the Federal Reserve to raise interest rates last week. These factors, as well as geopolitical uncertainty and broader economic headwinds, have resulted in consumers becoming more cautious about buying a home. In addition, resale inventory, which is our largest competitor, has increased to its highest levels in a decade, and we're seeing pricing starting to decline in more of our markets, adding to the tension in this environment. Against this backdrop, our third-quarter financial results reflected solid sequential improvement, meeting or exceeding our guidance. At a high level, our third-quarter results included total revenues of $1.3 billion and diluted earnings per share of $1.05.

We remain balanced in our capital allocation, investing nearly $725 million in land acquisition and development for future growth while also returning capital to our shareholders. We repurchased about 890,000 shares of our common stock, or roughly 1.5% of our shares outstanding, at an average price below our current book value per share. We believe this is an excellent use of our cash, accretive to both our earnings and book value per share, and contributing to improving our return on equity over time. Inclusive of dividends, we returned over $65 million in capital to our shareholders in the third quarter. The impact of our share repurchase program over the past five years has been meaningful, as we have returned more than $2.1 billion in total capital to shareholders from repurchases, plus our quarterly dividend, and reduced our share count by more than one-third.

During the third quarter, we expanded our book value per share to over $62. Our results in the third quarter support our expectations for full-year deliveries, housing revenues, and margins to be within the ranges that we provided in June, despite moderation in our outlook for the fourth quarter as we continue to navigate current market conditions. At this time, let me turn the call over to Rob for more details on the quarter's results and our outlook.

Rob. Thank you, Jeff. A market like this one tests what a business model is built on.

Our built-to-order model was designed to perform in exactly these conditions. While we are not immune to the pressures in the operating environment, our approach did what it was supposed to do in the third quarter. It enabled us to sell before we build, know our costs before we commit capital to vertical construction, and keep our inventory risk low as demand softened. Our return to a predominantly built-to-order business is now firmly established. BTO homes represent nearly three-quarters of our deliveries in the third quarter, which contributed to a sequential improvement in our housing gross profit margin. The sales alignment with our BTO strategy across our divisions has been strong, which positions our delivery mix in the quarters ahead to be solidly within our targeted and historical range.

During the quarter, buyers continued to demonstrate both a desire for homeownership and the ability to qualify. However, declining consumer confidence and lower affordability in most of our markets weighed on traffic in our communities, which, while still solid, was down year-over-year. We saw more caution among prospective buyers, with many moving to the sidelines. As a result, while sales in June were resilient and slightly ahead of May, sales softened sequentially in July and August, resulting in a year-over-year decline in net orders. In this environment, the value of what we offer becomes even clearer. We build the home the buyer wants with the features, finishes, and ultimately a sales price that reflect the buyer's preferences for what they value and want to pay for.

Those choices are key differentiators relative to an inventory home and also give our buyers a real tool to manage affordability, which is one reason our homes do not require heavy incentives to sell. We have remained disciplined in providing transparent pricing, adjusting price as needed to meet the market community by community, while optimizing each asset for the best possible return. The same model that serves our buyers also protects our business, and it shows in our results. Our total unsold inventory is 26% of production, down from 41% a year ago, and finished unsold homes are just 9%, down from 16%. We also have roughly 1,100 homes sold but not yet started. That illustrates our BTO approach at work, building homes for buyers who have already committed, not for buyers we hope to find.

Our direct costs on started homes in the third quarter were lower, both sequentially and year-over-year. That result reflects our deep supplier relationships that help limit cost increases and fuel surcharges, active rebidding of our local and national contracts, value engineering of our products, and a simplified studio offering that drives improved efficiency. While our overall average for direct costs was lower in the third quarter, we experienced some increasing cost pressure from fuel, general inflation, and tariffs as the quarter progressed. We believe this will result in slightly higher sequential direct costs for our fourth quarter deliveries. As to our sold but unstarted homes, with starts volume declining across the industry, this backlog gives us real leverage with our trade partners, which we are utilizing to offset as much of the cost pressures as we can.

I want to take a moment on build times because they speak directly to one of the most common questions about built to order, how long a buyer has to wait. Our BTO homes averaged 99 days from start to completion in the third quarter, a slight improvement sequentially and 23 days, or 19%, faster than a year ago. At just over three months, our buyers are not waiting long for a home built the way they want it, and they can more cost-effectively lock in their interest rate than they could when build times were longer. Faster build times also increase our inventory turns and make us a more efficient company. We are working toward a target of 90 days, with improvement from here expected to be more gradual, given how much progress we have already made.

This is a real accomplishment, and I want to recognize our construction teams and trade partners who made it happen. The strength of our business also shows in the quality of our buyers. Our mortgage joint venture, KBHS Home Loans, remains an important part of how we serve our customers and run our business, and its metrics have been consistent and favorable over the past year. In the third quarter, our capture rate increased to 85%, up slightly from the second quarter. Higher capture rates help us manage our backlog more effectively and provide more certainty in closing dates, and we consistently see higher customer satisfaction among buyers who use our joint venture. The average cash down payment was steady at 16%, or about $76,000. On average, KBHS customers had household income of about $134,000 and a FICO score of 742.

Even with half of our customers purchasing their first home, we continue to attract buyers with strong credit profiles who can qualify for their mortgage and make a significant down payment or pay cash. About 8% of our third quarter deliveries went to all-cash buyers. As Jeff mentioned, we are maintaining our fiscal 2026 guidance for deliveries, housing revenue, and margins within the ranges we last provided. However, we are moderating our expectations for the fourth quarter with respect to ASP and gross margin. With over 80% of our fourth quarter deliveries already in backlog, we have solid visibility into the quarter. Starting with average sales price, the midpoint of our current guidance implies a fourth quarter ASP of approximately $480,000, compared to the roughly $500,000 implied by our prior guidance.