The Briefing:
- KB Home earned $1.05 per diluted share in its fiscal third quarter ended Aug. 31, topping the $0.89 analysts expected, even as revenue fell 20% to $1.30 billion.
- Homes built to order made up 74% of deliveries, shrinking unsold inventory and lifting margins from the second quarter.
- The builder now sees a fourth-quarter average selling price near $480,000, about $20,000 below its June outlook, mainly because fewer high-priced Southern California homes will close, not because of a blanket price cut.
KB Home delivered more profit than Wall Street had penciled in for its fiscal third quarter, but the Los Angeles-based builder also signaled a harder finish to 2026, trimming the average price and margin it expects on homes closing before year-end.
For the three months ended Aug. 31, the company posted diluted earnings of $1.05 per share and net income of $65.3 million, according to its official earnings release. Total revenue slid 20% from a year earlier to $1.30 billion, while deliveries dropped 19% to 2,732 homes.
A Beat Against Modest Expectations
Analysts surveyed by LSEG had projected earnings of $0.89 per share and revenue of roughly $1.294 billion, TheStreet reported. That puts the profit surprise at about 18%, while revenue came in essentially as forecast.
The quarter still trailed last year's pace. A year earlier, KB Home earned $1.61 per share on net income of $109.8 million. Its average selling price barely moved, at $473,000 versus $475,700, while net orders declined 12% to 2,604. One encouraging sign: backlog expanded from a year earlier, the first such gain in four years, reaching 4,398 homes worth $2.05 billion.
Why Management Says the Market Got Harder
Executive Chairman Jeffrey Mezger said in the release that conditions have been "weakening since our June earnings report," pointing to costlier mortgages, geopolitical uncertainty and more hesitant shoppers.
During the conference call with analysts, Mezger added stubborn inflation, fuel costs and the Federal Reserve's rate increase last week to the list of pressures. He also singled out the resale market, which he described as the company's biggest rival: the supply of previously owned homes has climbed to a 10-year high, and prices are beginning to slip across a growing number of KB Home's markets.
Chief Executive Robert McGibney said sales held up in June before cooling in July and August, and that visits to its communities, though still healthy, fell compared with a year ago. For a new-home builder, that shift matters: homeowners ready to negotiate on price become direct competitors for the same buyers.
Built-to-Order Model Cushions the Slowdown
KB Home's main line of defense is its practice of signing a buyer before breaking ground, instead of putting up speculative houses. Homes built to order represented 74% of third-quarter deliveries, compared with 60% in the second quarter, Chief Accounting Officer Bill Hollinger told analysts.
McGibney argued that the approach "was designed to perform in exactly these conditions," and several operating figures back him up:
- Unsold homes make up 26% of production, compared with 41% twelve months earlier.
- The share of completed homes still lacking a buyer dropped to 9% from 16%.
- Built-to-order homes averaged 99 days from groundbreaking to finish, 23 days quicker than a year before, a 19% improvement.
The shift also supported profitability. Stripping out $3 million in inventory-related charges, the adjusted housing gross margin improved to 16.8% from 15.7% in the second quarter, though it stayed below the 18.9% recorded a year earlier. Unadjusted, the margin stood at 16.5%, down from 18.2%.
Behind the $20,000 Drop in the Fourth-Quarter Price Outlook
Investors focused less on the beat than on the outlook. For the fourth quarter, KB Home anticipates 3,000 to 3,500 deliveries and housing revenue between $1.45 billion and $1.65 billion.
At the midpoint, that points to an average selling price of about $480,000, roughly $20,000 lower than the approximately $500,000 implied by the June forecast. McGibney traced most of the change to Southern California, where weaker third-quarter sales will shrink the number of pricier homes closing in the final quarter, and where the group of communities handing over keys has changed. In other words, the figure reflects a different mix of homes rather than a $20,000 discount on every house. Even the lower figure would sit above the $473,000 average of the third quarter.
Margins are expected to ease. KB Home now projects a fourth-quarter housing gross margin of 16.0% to 16.6%, around one percentage point under what its earlier guidance implied. The company blamed pricing pressure, higher direct and land costs, and fuel, inflation and tariff expenses that intensified as the third quarter went on. It also acknowledged price adjustments in Southern California in response to tougher competition and higher rates.
For the full fiscal year, the builder held its target of 10,500 to 11,000 deliveries, narrowed expected housing revenue to $4.90 billion to $5.10 billion and set a gross margin range of 16.0% to 16.2%. The stock, which ended the regular session up about 1.5% at $48.59, fell roughly 2.2% in after-hours trading once the numbers were out.
What It Means for Home Buyers
KB Home's customers remain on solid financial footing. Borrowers who used its mortgage joint venture, KBHS Home Loans, averaged a credit score of 742, put down around 16% in cash, or about $76,000, and reported household income near $134,000. Roughly half of the company's buyers are purchasing a home for the first time.
Still, those shoppers now have more alternatives, especially from resale sellers who are lowering asking prices or offering concessions, which strengthens their hand at the negotiating table. KB Home, for its part, says it does not need large incentives to move its homes and prefers to tailor pricing to each community.
The company continues to invest with a longer horizon. It bought back $50 million of its own shares during the quarter, plans up to another $50 million in buybacks during the final quarter and expects to close the fiscal year with 270 to 275 active communities. Management declined to issue formal guidance for fiscal 2027 but expects to enter the year with a larger backlog than it carried into 2026.
