D.R. Horton Sees `Challenging' Year as Home Sales May Decline

D.R. Horton Inc., the second-largest U.S. homebuilder by revenue, expects 2011 to be “challenging” for the industry as consumer confidence and employment remain weak, Chief Executive Officer Donald Tomnitz said.

The company’s home sales and closing volume probably will fall from this year, Tomnitz said on an earnings conference call today. The spring selling season, the strongest for builders, may fail to bring the traditional boost in demand, he said.

“To be quite candid, I don’t see much on the horizon that would give anybody a great degree of comfort on the financial condition of the country,” Tomnitz said. “I just don’t see a lot of hope for a great spring market.”

D.R. Horton, based in Fort Worth, Texas, fell 5.4 percent to $11.51 at 4:04 p.m. in New York Stock Exchange composite trading, the biggest drop in three months. The stock led declines in the 12-company Standard & Poor’s Supercomposite Homebuilding Index, which lost 3 percent.

U.S. homebuilders are struggling to boost sales amid weak consumer confidence, competition from low-priced foreclosed properties and unemployment near a 26-year high. New-home sales in September were at an annual rate of 307,000, close to the record low 282,000 reached in May after the expiration of a tax credit for homebuyers, according to the Commerce Department.

‘Very Weak’

“We expect another very challenging year for the homebuilding industry as the fundamental drivers of demand --the overall economy, job growth and consumer confidence -- are still very weak,” Tomnitz said. “In addition, we do not expect any stimulus in fiscal 2011 similar to the federal tax credits that were in effect last year.”

D.R. Horton and other homebuilders may also be hurt next year by fewer first-time home buyers and “political talk shifting toward rental rather than homebuying subsidies,” Michael Widner, an analyst with Stifel Nicolaus & Co. in Baltimore, wrote in a note to investors today.

“We expect Horton to continue doing well within the segment, but we actually see the headwinds as tougher in 2011 than 2010,” wrote Widner, who rates D.R. Horton a “hold.”

D.R. Horton’s orders in the fourth quarter ended Sept. 30 fell 21 percent from a year earlier to 3,979, the company said today in a statement reporting its results for the period. Closings dropped 11 percent to 4,281, while the cancellation rate rose to 31 percent from 27 percent.

Homebuilding revenue for the quarter declined to $925.7 million from $1.01 billion a year earlier.

Narrower Loss

The company’s net loss shrank to $8.9 million, or 3 cents a share, from $234.9 million, or 74 cents, a year earlier. The results included $30.8 million in pretax charges to cover inventory impairments and write-offs of deposits, compared with $192.6 million a year earlier.

Gross margin on home sales, a measure of profitability, rose to 17.3 percent. That was up 420 basis points, or 4.2 percentage points, from a year earlier as more homes were sold on lots purchased since 2009, when prices were cheaper.

For the year, D.R. Horton’s net income was $245.1 million, or 77 cents a share, compared with a loss of $549.8 million, or $1.73, in fiscal 2009. It was the first annual profit for the company since 2006.

D.R. Horton expects to stay profitable in fiscal 2011, Tomnitz said.

Margin ‘Pressure’

“It’s going to be a greater challenge than 2010,” he said. “We will not be surprised to see some pressure on margins in a downward fashion in the coming quarters.”

D.R. Horton plans to offer upgrades or free options to lure buyers rather than reduce the price of homes, Tomnitz said. The average price per home in the fourth quarter was $215,200, up 2 percent from a year earlier.

The company will use its leverage as the largest builder in markets such as Florida and Texas to get price concessions from suppliers and preserve margins, Tomnitz said. That may lower profits in the construction products industry, said Michael Kim, an analyst with CRT Capital Group LLC in Stamford, Connecticut.

“If DHI anticipates more headwinds on cost, suppliers could get squeezed,” Kim wrote in an e-mail, referring to D.R. Horton by its New York Stock Exchange ticker symbol.

To contact the reporter on this story: John Gittelsohn in New York at johngitt@bloomberg.net.

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net.

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