KB Home Hits Q3 Targets but Trims Q4 Margin and Price Outlook

KB Home met or exceeded its third-quarter fiscal 2026 guidance, posting $1.3 billion in housing revenue, $65 million in net income and $1.05 in diluted EPS — but it lowered its fourth-quarter average selling price and gross margin expectations on weaker Southern California sales.

Revenue fell 20% year over year as deliveries declined 19% to 2,732 homes for the quarter ended Aug. 31. The average selling price was $473,000, against roughly $476,000 a year earlier.

Executive Chairman Jeff Mezger said the market had weakened since the company's June earnings call. He cited persistent inflation, higher fuel prices, the Federal Reserve's recent rate increase, geopolitical uncertainty and growing competition from resale homes. Resale inventory has reached its highest level in a decade, and prices are beginning to decline in more markets, he said.

The built-to-order cushion

President and CEO Rob McGibney credited KB Home's built-to-order model with helping the company manage soft demand by selling homes before vertical construction begins. Built-to-order homes accounted for 74% of third-quarter deliveries, up from 60% in the second quarter and above the company's target for returning to a predominantly built-to-order business.

The shift delivered sequential margin improvement. Housing gross profit margin came in at 16.5%, versus 18.2% a year earlier. Excluding inventory-related charges, adjusted housing gross margin rose to 16.8% from 15.7% in Q2, though it remained below the prior year's 18.9% amid pricing, cost and mix pressures.

Inventory discipline improved sharply. Unsold inventory fell to 26% of production from 41% a year earlier, and finished unsold homes dropped to 9% from 16%. The company ended the quarter with roughly 1,100 homes sold but not yet started.

Construction cycle times tightened as well. Built-to-order homes averaged 99 days from start to completion, an improvement of 23 days, or 19%, year over year. McGibney said the company is working toward a 90-day target.

KBHS Home Loans, the builder's mortgage joint venture, captured 85% of third-quarter buyers. The average customer put 16% down — about $76,000 in cash — with household income of approximately $134,000 and an average FICO score of 742. About 8% of deliveries were cash purchases.

A softer fourth quarter

KB Home kept its full-year outlook broadly intact: deliveries of 10,500 to 11,000 homes and housing revenue narrowed to $4.9 billion to $5.1 billion. Fourth-quarter guidance calls for 3,000 to 3,500 deliveries and $1.45 billion to $1.65 billion in housing revenue.

But the midpoint of that revenue range implies an average selling price of roughly $480,000, down from about $500,000 in prior guidance. McGibney said the revision was principally tied to Southern California, where slower third-quarter sales reduced the number of higher-priced homes expected to close in Q4 and shifted the delivery mix. Northern California continued to perform as anticipated, with its projected fourth-quarter average selling price up modestly since June.

The company now expects a fourth-quarter housing gross margin of 16% to 16.6%, excluding inventory charges, and a full-year margin of 16% to 16.2%. Chief Accounting Officer Bill Hollinger said the outlook reflects pricing pressure, somewhat higher direct and land costs, and product and geographic mix, including a smaller-than-anticipated contribution from higher-margin West Coast communities.

Direct costs on homes started in Q3 were lower both sequentially and year over year, but costs rose late in the quarter on fuel, inflation and tariffs — increases that will hit fourth-quarter deliveries. Labor availability has generally not been a major issue, McGibney said, because housing starts have declined across most markets.

Land spending and buybacks

KB Home invested nearly $725 million in land acquisition and development during the quarter while returning more than $65 million to shareholders through buybacks and dividends. It repurchased about 890,000 shares — roughly 1.5% of shares outstanding — at an average price below book value per share. Book value per share exceeded $62 at quarter-end, Mezger said. Over five years, the company has returned more than $2.1 billion to shareholders and cut its share count by more than one-third.

Inventory rose 5% from the start of the fiscal year to $6 billion, with more than 61,000 owned or controlled lots. Cash totaled $159 million and total liquidity reached $942 million, including $783 million available under the unsecured credit facility. The debt-to-capital ratio stood at 35.7%, versus 33.2% a year earlier. Up to $50 million in additional buybacks is planned for the fourth quarter.

The company expects to finish fiscal 2026 with 270 to 275 communities, including about 115 new openings. Looking to fiscal 2027, McGibney said KB Home expects to start the year with a higher backlog than it had entering fiscal 2026, though management declined to give formal 2027 guidance, citing volatile conditions and its focus on closing out the current year.