KB Home (KBH) Tops Q2 EPS by 6c, Revenue Misses

KB Home (NYSE: KBH) reported Q2 EPS of $0.55, $0.06 better than the analyst estimate of $0.49. Revenue for the quarter came in at $914 billion versus the consensus estimate of $1.07 billion.

Company Outlook — COVID-19 Impact

The negative effects of the COVID-19 pandemic and the related extended public health and governmental measures of varying restrictiveness to contain and combat the outbreak significantly impacted the Company’s business during the 2020 second quarter. In response to the pandemic and with the health and well-being of its employees, customers and business partners, and their families, being a high priority, the Company took decisive actions in mid-March, temporarily closing its sales centers, model homes and design studios to the public and shifting to virtual sales tools and an appointment-only personalized home sales process, where permitted. The Company also shifted its corporate and division office functions to work remotely. With the Company’s construction operations being restricted in many jurisdictions, and completely shut down in some of them, together with the reduced availability or capacity of some municipal and private services necessary to build and deliver homes, the Company experienced home delivery delays during most of the quarter. In addition, the Company’s order pace moderated significantly, and home purchase cancellations increased considerably largely reflecting the Company’s proactive efforts to assure a backlog of qualified homebuyers amid a pandemic-induced economic downturn that affected homebuyers’ employment status or created uncertainty for them about that status and their ability to purchase their home, as well as disruptions in the availability of mortgage loans or in the performance of lenders, among other factors. Among the markets with the largest impact to the Company’s second quarter net orders were the Inland Empire and Bay Area in California; Las Vegas, Nevada; Houston, Texas; and Orlando, Florida.

Over the past several weeks, conditions have started to improve in conjunction with state and local governments relaxing “stay-at-home” and similar public health mandates that were implemented in response to the pandemic. With restrictions easing in many of its served markets, the Company, in the latter part of May, began the process of more broadly opening its sales centers, model homes and design studios to the public, while also expanding construction and warranty service activities to the extent permitted by local authorities. The Company also launched significant enhancements to its website, including upgraded home search tools. In June, certain of the Company’s division offices began to reopen to employees. During the reopening process, the Company has instituted several safety protocols, such as distancing and personal protective equipment requirements, enhanced premises cleaning and personal hygiene measures and wellness checks, in accordance with applicable public health orders. The increased ongoing investment in these appropriate steps is intended to help protect the health of customers, employees and business partners. Due to the variation in laws and restrictions, the timing and manner of the Company’s reopening process has varied from market to market.

The Company is encouraged by its ability to effectively resume nearly all of its core operations and the recent improvement in its gross orders, net orders and cancellation rate, which it believes is an indicator of underlying strength in the overall housing market and the resilience of the attractive markets in which it operates. Subsequent to the end of the quarter, the Company’s business continued to rebound measurably, with gross orders and net orders increasing on both a year-over-year and sequential basis. Gross orders for the first three weeks of June 2020 increased 4% year over year while net orders rose 2%, each reflecting the more favorable operating environment. On a sequential basis, gross orders for the first three weeks of June were up 22% and net orders were up 48%, compared to the immediately preceding three weeks. The Company’s cancellation rate for this period also returned closer to a more normalized level of 21%, nearly even with the year-earlier period. As the economy continues to recover from the severe impacts of the pandemic and related public health measures, the Company expects employment, consumer confidence and other fundamental housing factors to also improve. However, the speed, trajectory and strength of any such recovery remains highly uncertain, and it could be slowed or reversed by a number of factors, including a possible widespread resurgence in COVID-19 infections in the second half of 2020 without the availability of generally effective therapeutics or a vaccine for the disease. Given this uncertainty, the Company will continue to proceed in a carefully targeted manner with land acquisition and land development, and to focus on generating cash inflows from its business and preserving cash and liquidity by curtailing overhead expenditures. Company management is reinstating guidance and will provide its outlook for the 2020 third quarter and full year on the Company’s earnings conference call.

For earnings history and earnings-related data on KB Home (KBH) click here.

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