D.R. HortonDHI

Key highlights

• Home sales gross margin pressure: The company's home sales gross margin fell to 20.7% this quarter compared to 22.8% in the previous period. This drop shows that management is using more sales incentives, which are discounts or financial helps used to attract buyers during a time when high mortgage rates make homes less affordable.
• New sales orders stalling: Net sales orders were flat at 23,084 homes compared to the same quarter last year, missing the goal of 8% to 12% growth. At the same time, the rate of buyers cancelling their contracts rose to 20% from 17% a year ago, showing that cautious consumer sentiment is making it harder to turn interest into final sales.
• Finished home inventory rising: The number of unsold homes that are completely finished jumped to 7,600 units, up from 5,500 units just three months ago. Carrying more completed but unsold inventory can be a risk because it ties up cash and may lead to deeper price cuts later to move the houses off the books.
• Shareholder returns continue: Management spent $615.7 million to buy back 4.2 million shares this quarter, which has helped reduce the total number of shares by 6% over the last year. This aggressive buyback program is a way for the company to return value to long-term owners even while overall net income dropped 12% in the quarter.
• Full year revenue outlook: Management now expects total revenue for the full year to be between $32.5 billion and $33.0 billion. They also expect to close between 83,800 and 84,300 homes by the end of the year, while warning that they will likely keep using high levels of sales incentives to combat high interest rates.

Our take: A soft quarter that shows the reality of high interest rates hitting home. While the company is still making a profit, the spike in unsold finished homes to 7,600 and the flat sales orders suggest a tougher road ahead. It does not break the long-term case, but the reliance on incentives is clearly eating into the margins we rely on.