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KB Home (KBH) Plummets Due to Declining Gross Margins

The shares of KB Home plummeted more than 16% to $13.82 per share after its management stated that a weaker demand impacted its gross margins during the fourth quarter.

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KB Home predicts significant decline in gross margin

“We areprojecting our first quarter 2015 gross margin will drop significantly from the first quarter of 2014 hitting the low point for the year before improving sequentially for the remaining three quarters,” said KB Home CEO Jeffrey Mezger during the company’s earnings call.

During the fourth quarter, Merzger told analysts and investors that there was a “softening demand’ in some markets. There were also more sales incentives, pressures from construction, labor and material costs.

Fourth quarter financial results

KB Home reported that its total revenues increased 29% to $796 million driven by greater volume of homes delivered and higher average selling prices during the fourth quarter.

KB Home generated a net income of $852.8 million or $8.36 per diluted share. The figure included an income tax benefit of $824.2 million that reflected its $825.2 million deferred tax asset valuation allowance reversal.

The company delivered 2,229 homes, up by 9% from 2,038 homes delivered in the same period a year ago. KB Home said the overall average selling price of homes delivered increased 17% to $351,500 from $301,100.  The company said the average selling prices were higher in all of its homebuilding regions with increases ranging from 1% in the Southwest to 17% in the West Coast.

KB Home said its operating income was $30 million, down from $47 million in the year-ago quarter. Its housing gross profit margin dropped 60 basis points to 17.3% from 17.9% during the quarter.

Its selling, general and administrative expenses rose to 10.3% while its interest expense declined to $4.5 million. KB Home said is financial services operations generated pretax income of $3.4 million during the period

KB Home said its net orders during the quarter rose 10% to 1,706 from 1,556 in the same period last year. Its cancellation rate as a percentage of gross orders was flat at 37%. As a percentage of beginning backlog, its fourth quarter cancellation rate was 29% for both 2014 and 2013.

KB Home said it ended 2014 with 227 communities open for sales, an increase of 19% from 191 communities in 2013. The company has $383.6 million cash, cash equivalents and restricted cash as of November 30, 2014. It has no outstanding borrowings under its $200 million unsecured revolving credit facility at the end of the fourth quarter.

“The commitment and focus of our team throughout 2014 produced significant improvements in our financial and operational results. Through execution on our core strategic initiatives, we also achieved our community count growth objective…,” said Mezger in a statement.