Toll Brothers, Inc. (TOL) Earnings

Management highlights

- Overall Q3 Performance • Delivered 2,662 homes for $2.65 billion in home sales revenue, exceeding the midpoint of prior guidance for both units and revenue. • Delivered adjusted gross margin of 25.6%, 35 basis points above guidance, and net earnings of $280.1 million ($2.97 per diluted share), which also beat guidance. • Net signed contracts increased 5% year-over-year (YoY) to 2,508 units, for a total contract value of $2.5 billion (up 4% YoY), with growth driven by expanded community count. • Cancellation rates remained industry-low: 5.4% of signed contracts, down from 7.5% in the prior year quarter. 25% of Q3 buyers paid all cash, and the average loan-to-value for financed buyers was 69%, demonstrating strong customer financial health. - Strategy and Business Model • The company maintains a long-standing priority of price discipline and margin performance over sales volume, particularly in the current challenging market. It remains focused on its core luxury move-up customer base and build-to-order business, leveraging 60 years of brand equity, desirable community locations, distinctive designs, extensive personalization, and strong customer experience to attract financially resilient affluent buyers. • The company continues to target 8-10% annual community count growth, which will be its third consecutive year of this growth range, supported by its existing land position for 2027 and beyond. It maintains a strong balance sheet with ample liquidity, low leverage, and strong operating cash flow to support growth and capital returns to shareholders. - Operational Execution • Finished spec inventory per community decreased to 1.9 units at quarter end, down from 2.0 units at the end of Q2 and 2.8 units at the start of FY2026, aligned with the strategy of selling spec homes earlier in the construction cycle (which yields higher margins due to lower incentives and more personalization opportunities). • Design upgrades, structural options, and lot premiums averaged $207,000 in the quarter, equal to 24% of the average base sales price, and are highly accretive to margins. Average incentives as a percentage of gross sales price fell modestly to 7.5% from 8% over the prior year. • Build-to-order construction cycle time remained stable at 9 months, with spec home cycle time roughly 1 month shorter. Overall building costs remained flat in the quarter despite higher lumber prices. • At quarter end, the company owned or controlled 75,500 total lots, 58% of which were optioned. It spent $452 million on land acquisition in the quarter, maintaining a focus on high-quality land with attractive returns, capital efficiency, and rigorous underwriting. • SG&A as a percentage of revenue was 10.0% in Q3, in line with guidance. The company ended the quarter with $3.3 billion in total liquidity, and a net debt to capital ratio of 15.6%, down from 19.3% YoY.

Guidance

- Full-year FY2026 guidance is reaffirmed for all core metrics, including an adjusted gross margin of 26.1% and SG&A margin of 10.1%. Full-year home sales revenue guidance is increased by approximately $53 million due to a higher average delivered price. - The full-year delivered home range is narrowed to 10,500-10,600 units, with an average delivered price range of $995,000-$1,000,000 (up from prior guidance). - Q4 FY2026 is projected to deliver 3,450-3,550 homes with an average delivered price of $995,000-$1,005,000, an adjusted gross margin of 26.0%, SG&A as a percentage of revenue of 8.1%, and other income of $30 million. Full-year other income is projected at $120 million. - Full-year FY2026 tax rate is projected at 25.2%, and annual community count is expected to reach 480-490 (an 8-10% YoY increase, in line with prior targets). - Full-year share repurchase guidance is increased to $700 million, with $433 million completed through the end of Q3. - Management expects 8-10% community count growth to continue in FY2027 and beyond, supported by existing land positions. Management also expects average delivered ASP to increase in FY2027, driven by a higher mix of luxury move-up communities concentrated in the South and Mountain regions. In a normalized market environment, management expects long-term gross margins to land between 26% and 28%.

Segment performance

Toll Brothers organizes its home sales revenue by buyer segment: 1. Luxury move-up: This segment generated 61% of total home sales revenue in Q3 FY2026, is the highest-margin buyer segment, and has an average sales price of $1.35 million. Higher price points in this segment correspond to lower incentives as a percentage of sales price, supporting stronger margin performance. 2. Luxury first-time: This segment contributed approximately 23% of total Q3 home sales revenue. 3. Move-down: This segment accounted for approximately 16% of total Q3 home sales revenue. Geographically, stronger performing markets in the quarter included Florida, Boston through the Carolinas, Boise (Idaho), Las Vegas/Reno (Nevada), and Denver (Colorado). Weaker performing markets included Atlanta, Seattle, Portland, San Francisco, and Texas. By product type, spec homes represented 52% of Q3 settlements and 44% of Q3 revenue, with the remainder attributed to build-to-order homes, holding close to the company's 50-50 target mix.

Risks & headwinds

- Overall macroeconomic and housing market headwinds: Low consumer confidence and elevated mortgage rates continue to weigh on overall housing demand, and the market environment has remained challenging through the first two and a half weeks of Q4 FY2026. - Uncertainty from geopolitical events and fluctuating mortgage rates have muted expected July sales activity, creating near-term demand volatility. - Purchase accounting related to the recent Buffington acquisition creates a known drag on gross margin, which has already been incorporated into existing guidance. - Potential input cost inflation: There is uncertainty around future lot cost inflation and potential price step-ups when existing multi-year building product contracts roll over, which could create input cost pressure in FY2027. Higher diesel costs could also drive increases in horizontal development costs, though no such increases have been observed to date. - All forward-looking guidance depends on multiple uncertain external factors, including economic conditions, interest rates, labor and material availability, and inflation, all of which are outside of management control and could impact actual results.

Analyst Q&A

• Q: What level of conservatism is baked into the Q4 margin guidance, and what would derail the planned 8-10% community count growth even if the market stays soft? /

  A: Of the 3,500 projected Q4 deliveries at the midpoint, 2,700 are already in backlog and scheduled for closing, with the remainder coming from existing finished and under-construction spec inventory, so the delivery target is well-supported. The projected Q4 margin increase comes from positive regional and buyer segment mix, plus more Q4 spec deliveries sold early in construction (which carry higher margins). Management plans to maintain the 8-10% community count growth target even if the market softens, as most new communities are already well underway, including model home construction, and the company remains committed to opening them. (398 chars)

• Q: Can you discuss recent trends in luxury move-up demand, and how the company handles contingent sales from buyers who need to sell an existing home? /

  A: Management has not seen any material softening in luxury move-up demand recently. 25% of buyers still pay cash, average loan-to-value remains low, and the company has been able to raise prices in 30% of its communities in Q3, with the brand's differentiated positioning supporting stable demand. Toll Brothers does not offer traditional home sale contingencies. For pending closings of finished spec homes with non-refundable deposits, the contract is not counted in backlog until closing. (401 chars)

• Q: How is the company approaching M&A, and what is your long-term outlook for margins as market conditions improve? /

  A: The recent Buffington acquisition fits the company's long-standing M&A playbook of small, bolt-on acquisitions that complement the luxury brand and add exposure to new attractive markets (in this case, Northwest Arkansas). Management expects industry consolidation to continue, and will maintain this careful, bolt-on strategy going forward. Current 26% gross margins are achieved in a challenging market with elevated incentives and below-average sales per community. When market conditions improve and incentives return to historical norms, margins and returns will expand significantly from current levels. (412 chars)

• Q: How does the company think about capital allocation for fiscal 2027, and how does it compete with peer builders that are also expanding into higher-priced build-to-order? /

  A: Capital allocation priorities are led by smart, profitable growth (aligned with the ongoing 8-10% community count growth plan), followed by share repurchases, then the growing annual dividend. Management notes that peers that move up-market during downturns typically retreat to their entry-level core when conditions change. Toll Brothers has 60 years of brand, design studio infrastructure, and expertise acquiring high-quality desirable land that creates an unmatchable differentiated position in the luxury move-up segment, and the company has no concerns about increased competition. (396 chars)