Why KB Home Stock Jumped Today
The home construction leader is adopting a more lucrative business model.
By Joe Tenebruso
Shares of KB Home (KBH +16.65%) rallied on Wednesday after the homebuilder touted the benefits of its new built-to-order operating model.
Tepid home sales
KB Home's Q2 financial results displayed the signs of a housing market under pressure.
Home deliveries fell 23% year over year to 2,395. Average selling price decreased 5.5% to $461,900. Net orders declined 4% to 3,317.
All told, KB Home's revenue plunged 27% to $1.11 billion in its fiscal second quarter, which ended on May 31.
The homebuilder's net income, in turn, fell to $27.3 million, or $0.43 per share, from $107.9 million, or $1.50 per share, in the prior-year period.
From speculation to specification
Yet better times are ahead. During a conference call with analysts, CEO Rob McGibney highlighted the advantages of the company's shift to a built-to-order model:
We enter our construction cycle with certainty about the key variables, the buyer, the price, our cost to build, and the expected close date. When a buyer commits and we lock in the purchase price, our direct costs are established before a shovel hits the ground. We are not exposed to material or labor cost increases for that home after construction begins. Crucially, we know the margin we will achieve at delivery before we start.
Enabling customers to personalize their homes should help to reduce the need to offer sizable incentives and significantly improve cancellation rates. The added predictability of the built-to-order system should also bolster KB Home's profitability over time.
For its part, management sees KB Home's full-year housing gross margin rising to between 16.1% and 16.5%, up from 15.2% in the second quarter.
"The progress in our second quarter sets the foundation for the remainder of fiscal 2026, with sequentially higher delivery volumes and gross margins projected for each of the final two quarters," executive chairman Jeffrey Mezger said.