Luxury home builder Toll Brothers (TOL 36.68, -1.58 -4.1%) trades to three-month lows this afternoon despite impressive Q3 earnings as revenues and a measured dial back on full year gross margin guidance seem to be giving investors a reality check.
At the end of Q3, earnings per share beat market expectations at $0.87 while revenues were slightly worse than expected at $1.5 billion on home building deliveries of 1,899 units.
Management noted the average price of homes delivered was $791,400, compared to $842,700 one year ago. The drop in average price was due to a change in mix, as was expected. Net signed contracts were $1.81 billion and 2,163 units, rising 25% in dollars and 24% in units, compared to last year. The average price of net signed contracts was $837,300, compared to $830,800 one year ago.
Additionally, Q3 backlog was $5.31 billion and 6,282 units, up 21% in dollars and units compared to a year ago. The average price of homes in the backlog was up slightly to $845,100, compared to $844,300 one year ago. Gross margin were 21.7% of revenues, compared to 21.9% last year. Adjusted gross margin, which excludes interest and inventory write-downs, was 25.0% of revenues, compared to 25.3% last year.
Per the earnings press release, TOL now estimates it will deliver between 7,000 and 7,300 homes in FY 2017, compared to previous guidance of 6,950 to 7,450 units, at an average delivered price for FY 2017’s full year of between $800,000 and $825,000 per home. This translates to projected revenues of between $5.6-6.0 billion in FY 2017, compared to prior guidance of $5.4-6.1 billion. TOL also updated its previous guidance for full FY 2017 Adjusted Gross Margin to between 24.8-25.0% of revenues from 24.8-25.3% prior.
As a caveat, TOL noted that its full FY 2017 and fourth-quarter delivery projections reflect about 150 homes that it had estimated would be delivered in FY 2017 but will instead be delivered in FY 2018 due to the floor joist recall by a major lumber manufacturer. As such, TOL now expects FY 2017 fourth-quarter deliveries of between 2,275-2,575 units with an average price of between $840,000-860,000.
As lower-priced homes took average home selling prices lower this period, investors seem to be taking the revenue miss particularly to heart. Further, a delay of certain home deliveries due to a floor joist recall as well as a trim to the gross margin guidance for the full year pressures shares.