Luxury homebuilder Toll Brothers (TOL, Financial) delivered strong Q3 results, surpassing EPS and revenue expectations. With mortgage rates at their lowest levels this year, the new home construction market is receiving an additional boost. This positive trend has led to solid deposit and traffic activity for TOL in August, prompting the company to raise its FY24 home deliveries and adjusted gross margin on home sales guidance.
- TOL now forecasts FY24 deliveries of 10,650-10,750 homes, up from the prior estimate of 10,400-10,800. The adjusted gross margin on home sales is projected at 28.3%, an increase from the previous outlook of 28.0%. TOL's higher gross margin is attributed to its affluent customer base and higher-end homes, which average around $1.0 million.
- For comparison, D.R. Horton (DHI, Financial) reported a Q3 gross profit on home sales of 24%, while KB Home (KBH, Financial) posted 21.1% last quarter.
- Homebuilders have increased incentives to address affordability issues, including paying down mortgage rates. However, TOL's customers typically make larger down payments and can better handle higher mortgage rates, allowing the company to be less aggressive with promotions.
- Despite higher mortgage rates in Q3, TOL experienced healthy demand. Delivered homes rose by 11% to 2,814, slightly above the midpoint of its guidance of 2,750-2,850 units. The ongoing lack of home inventory continues to create a supply and demand imbalance, driving buyers toward new construction.
- TOL also increased its expected share repurchase total for FY24 to $600 million from $500 million, reflecting confidence in its business prospects and providing another lever to enhance EPS.
The main takeaway is that momentum is building for TOL as mortgage rates decrease and favorable supply/demand dynamics persist in the new construction market.
