Share price of Toll Brothers, Inc. TOL dropped 2.24% on May 27, as the homebuilding company reported disappointing top line results for fiscal second quarter of 2015 and narrowed its guidance for the number of homes delivered and average prices of home delivered in 2015.
Toll Brothers reported adjusted earnings of 37 cents per share in fiscal second quarter 2015, matching the Zacks Consensus Estimate. Adjusted earnings increased 5.7% from 35 cents per share earned in the prior-year quarter. The year-over-year increase was driven by higher gross margins and a lower tax rate
The company reported revenues of $852.6 million in the second quarter of fiscal 2015, missing the Zacks Consensus Estimate of $867 million by 1.7%. Revenues were down 1% year over year due to lower home deliveries and lower-than-expected increase in the average price of homes delivered.
Quarter Detail
The number of consolidated homebuilding deliveries decreased 2% year over year to 1,195 units in the second quarter of fiscal 2015.
The average price of homes delivered was $713,000 in the quarter, up 1% year over year. The average price of homes delivered was lower than the company’s expectation of $720,000 to $740,000. The company ended the quarter with 269 selling communities, up 6.7% from the prior-year quarter.
Toll Brothers offers homes under two segments, Traditional Home Building Product and City Living. Traditional homebuilding revenues during the quarter were $835.9 million, up 1.3% year over year. City Living reported revenues of $16.7 million, down significantly from $34.9 million, owing to lower deliveries during the quarter.
The number of net orders signed was 1,931 units in the second quarter of fiscal 2015, up 10% year over year. Value of net orders signed during the quarter was $1.60 billion, up 25% year over year.
The increase in order numbers and value was driven by an increase in demand in California for high priced City Living products. Second quarter 2015 order cancellation rate was 3.1%, an improvement over 3.7% in the prior-year quarter. However, during the first four weeks of the third quarter of 2015, the company reported flat order numbers, owing to a “lackluster” first week. Nonetheless, the company reported strong demand in California, New York City and Texas.
The company’s backlog totaled 4,387 homes as of Apr 30, 2015, up 1% year over year. Potential housing revenues from backlog grew 9% year over year to $3.48 billion, primarily attributable to an increase in prices of backlog.
The company’s homebuilding gross margin (excluding interest and write-downs) grew 170 basis points (bps) to 25.3%, driven by increased profitability in the California market. The company expects gross margin to remain flat sequentially in the third quarter of 2015 and improve in the fourth quarter of 2015.
As a percentage of revenues, selling, general and administrative (SG&A) expenses increased 50 bps to 12.6%, owing to higher expenses related to an increase in community count, orders and joint ventures. Operating margin declined 10 bps year over year to 7.8% due to higher SG&A ratio.
2015 Outlook
Toll Brothers narrowed its guidance for the number of homes delivered and average prices of home delivered, while maintaining the guidance for community count and gross margin.
Based on the backlog levels and the pace of activity at its communities in the second quarter of 2015, management expects to deliver between 5,300 and 5,900 homes, narrower than the prior expectation of 5,200 and 6,000 homes in fiscal 2015. The company tightened its guidance for average price of homes delivered between $730,000 and $760,000 compared with the prior expectation of $725,000 and $760,000. The company expects community count to continue to range between 270 and 310 in fiscal 2015.
Fiscal 2015 gross margin is expected to be about 26%, flat year over year. SG&A expenses are expected to be up 6% to 7% for full year 2015.
Toll Brothers carries a Zacks Rank #3 (Hold).
Stocks to Consider
Investors interested in the building sector can consider M/I Homes, Inc. MHO, Lennar Corp. LEN and Taylor Morrison Home Corporation TMHC. While M/I Homes sports a Zacks Rank #1 (Strong Buy), Lennar Corp and Taylor Morrison Home hold a Zacks Rank #2 (Buy).
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