D.R. Horton, Inc. (DHI) Earnings

Management highlights

- Overall Financial and Strategic Position * Delivered diluted EPS of $3.20, consolidated pre-tax income of $1.2 billion on $9.2 billion of total revenues, with a 13.3% pre-tax profit margin. Homes closed came in at the high end of prior guidance. * Trailing 12-month return metrics through June 30: 17% home building pre-tax return on inventory, 12.8% consolidated return on equity, 8.5% consolidated return on assets, ranking in the top 20% of S&P 500 companies over 3, 5, and 10-year periods. * Over the past 12 months, generated $3.4 billion in operating cash flow, all returned to shareholders via dividends and repurchases. * Core strategic focus remains on delivering affordable homes: 65% of mortgage closings were to first-time homebuyers, and the average closing price is ~$155,000 below the U.S. national average new home price. - Inventory and Construction Operations * 23,900 homes started in Q3; total inventory at quarter-end was 38,000 homes, down 1% sequentially and year-over-year, with 23,300 unsold homes. Only 600 completed unsold homes have been finished for more than six months. * Median cycle time from home start to close improved by ~three weeks year-over-year, enabling lower inventory holdings and faster turnover. Q4 starts are expected to be lower than Q3, with inventory levels adjusted based on ongoing market conditions. - Lot Position and Development Strategy * Total home building lot position was ~570,000 lots at quarter-end, 22% owned and 78% controlled via purchase contracts. Total owned lot position is down 13% year-over-year, as the company prioritizes using third-party/developer-finished lots to improve capital efficiency. * 67% of closed homes this quarter were built on third-party/Four Star developed lots, up from 66% year-over-year. Total Q3 investment in lots, land and development was $2.1 billion, with $1.5 billion spent on finished lots. * Four Star has a strong standalone balance sheet and is positioned to gain market share in lot development over the coming years. - Capital Allocation and Balance Sheet * Maintains a strong, low-leverage balance sheet with a long-term target leverage of ~20%, providing substantial flexibility for market changes. * In Q3, paid a $0.45 per share dividend ($127 million total) and repurchased 4.2 million common shares for $616 million, reducing outstanding share count by 6% year-over-year. Book value per share increased 5% year-over-year to $84.85.

Guidance

- Fourth Quarter Fiscal 2026 Guidance: * Consolidated revenues expected between $8.8 billion and $9.3 billion, with home building closings between 22,500 and 23,000 homes. * Home sales gross margin expected between 20.5% and 21%, relatively flat sequentially, with consolidated pre-tax profit margin expected between 12.3% and 12.8%. - Full Year Fiscal 2026 Guidance (revised downward from prior outlook): * Consolidated revenues expected between $32.5 billion and $33 billion, with home building closings between 83,800 and 84,300 homes. * Effective income tax rate expected to be ~25%. * Maintains prior guidance for operating cash flow of at least $3 billion, common stock repurchases of ~$2.5 billion, and total dividend payments of ~$500 million. - Long-Term Guidance: * Community count growth is expected to trend down to a mid-single-digit rate over the long term, down from the 9% year-over-year growth recorded in Q3. * The company targets reaching ~3x inventory turnover, up from the historical 2x average, as efficiency gains from shorter cycle times continue.

Segment performance

1. Home Building: Home sales revenues totaled $8.7 billion (94.57% of total consolidated revenues of $9.2 billion), with 23,983 homes closed. Pre-tax income for the consolidated home building business was $1.12 billion after SG&A expenses, with a 20.7% home sales gross margin. Net sales orders were $8.4 billion for 23,084 homes, flat year-over-year. The average closing price was $362,000, down 2% year-over-year. 2. Rental Operations: Generated $266 million in revenues (2.89% of total consolidated revenues) and $31 million in pre-tax income. 601 single-family rental homes and 339 multifamily rental units were sold this quarter. Total rental inventory at quarter-end was $3 billion. 3. Financial Services: Generated $221 million in revenues (2.40% of total consolidated revenues) and $70 million in pre-tax income, for a 31.9% pre-tax profit margin. 4. Four Star (majority-owned lot development): Reported $407 million in revenues (4.42% of total consolidated revenues) and $49 million in pre-tax income. 3,659 lots were sold this quarter, with a total owned and controlled lot position of 92,000 lots at quarter-end.

Risks & headwinds

- Macroeconomic and demand risks: Affordability constraints from elevated mortgage rates, cautious consumer sentiment, and broader economic volatility continue to impact new home demand, with softening observed through the second half of Q3. - Cost risks: Elevated fuel prices and potential future increases in lumber prices present cost headwinds, though recent Canadian concrete tariff changes are not expected to have a material impact. Lot costs are expected to continue seeing ~5% year-over-year inflation in Q4, matching Q3 levels. - Cancellation risk: The Q3 cancellation rate rose to 20% from 17% year-over-year, with buyer mortgage qualification remaining the top cause of cancellations. Cancellation rates ticked up alongside softening demand mid-quarter, though remained within historical ranges. - SG&A deleveraging: SG&A as a percentage of revenues increased to 8.3% from 7.8% year-over-year due to 9% growth in active community counts paired with flat overall revenue, leading to near-term deleveraging that will reverse only when revenue growth resumes.

Analyst Q&A

• Q: Analyst asks if the housing market is stabilizing and forming a bottom, and why the full year delivery outlook was trimmed despite strong Q3 results. /

  A: D.R. Horton notes sales tracked normal seasonality but softened slightly mid-quarter, and the full year guidance was cut because Q3 sales came in below internal expectations. Management says the company is comfortable with the tradeoff of holding margin at lower sales volumes, and that buyers remain active but lack sufficient confidence in the broader economy to move forward with purchases currently.

• Q: Analyst asks how current returns compare to long-term through-cycle targets, and how scale will drive future efficiencies as the industry consolidates. /

  A: Management confirms current returns are below long-term targets, as top-line growth has been flat for several years leading to SG&A deleveraging. D.R. Horton has expanded into 30 new markets over the past 5 years, which has temporarily pressured SG&A, but this geographic expansion positions the company to gain national share when demand rebounds. Management notes the firm is only the market leader in half of its operating markets, leaving substantial room for local share growth.

• Q: Analyst asks how much more cost reduction can be achieved, and whether recent cost headwinds like higher fuel and Canadian concrete tariffs could reverse recent gains. /

  A: D.R. Horton says meaningful cost improvement has already been achieved year-over-year, and while further incremental gains are possible, additional large reductions are now more challenging. Management notes the Canadian concrete tariff changes will not have a material impact on the company's footprint, and that cost containment remains an ongoing priority even with current fuel headwinds.

• Q: Analyst asks if the current 65% first-time homebuyer revenue mix will stabilize, or continue to rise over time. /

  A: Management says there is some room for the first-time homebuyer share to increase further, and the company will meet that demand if it materializes. However, as the firm penetrates new markets, operators also may move slightly upmarket, so management expects the first-time homebuyer share to remain relatively consistent around current levels going forward.

• Q: Analyst asks why completed spec inventory rose more than expected sequentially, and what that means for future margin. /

  A: Management explains the sequential increase in completed specs is driven by faster construction cycle times and 9% year-over-year growth in active selling communities, and the number of completed specs per community is actually lower. Only 600 completed specs have been unsold for more than six months, which is down sequentially, so the company expects stable gross margins in Q4 and will adjust Q4 starts lower to align with current demand.