KB Home (KBH) Q2 FY26 earnings call: guidance and Q&A

Is the expected sequential operating leverage in gross margin (30bps Q2-Q3, 60bps Q3-Q4) a normal trend, or is there anything unusual about it?

Management confirmed that the expected operating leverage is a normal trend, as the second half of the year typically sees more deliveries. They also noted that the current overhead structure is capable of handling increased scale into FY27.

“Yes, John, I think it's a pretty normal trend. We always deliver more in the second half than we do the first half.”

asked by John Lovallo · answered by Jeffrey Mezger

Can you quantify the specific contributions of the BTO shift versus Bay Area deliveries to the expected ~$30,000 sequential increase in Q4 average selling price?

Management identified scale leverage, the BTO shift, and a favorable mix change (including Bay Area deliveries) as the key drivers for the Q4 ASP increase. However, they did not provide a specific breakdown of the individual contributions from BTO versus Bay Area deliveries.

“I think you've really got them all 3 there, John, between the leverage from the scale, the BTO shift and then what we're expecting is a mix change that's favorable for both the ASP and margin and revenue in Q4.”

asked by John Lovallo · answered by Rob McGibney

Will the Q4 gross margin midpoint of 17.3% reflect the targeted BTO run rate for 2027, and will the benefits from the California mix extend into 2027?

Management stated that the BTO mix in Q4 will be around 70% of deliveries, with potential for further upside beyond that. They clarified that the Bay Area business improvement is a "structural change" and not just a Q4 event, with strong margins and a good book of business expected to continue into 2027.

“As far as the BTO mix, I wouldn't say we'll be fully there. We expected the BTO on deliveries is probably going to be plus or minus in the 70% range when we get to Q4. I think there's some potential upside beyond that...”

asked by Matthew Bouley · answered by Rob McGibney

What were the specific market conditions in April and May, and how are June trends looking? Are these factors fully incorporated into the 2026 guidance, or could they impact 2027?

Management confirmed that all market factors and pricing adjustments are fully incorporated into the H2 2026 guidance. They noted that March was soft, April rebounded, and May was resilient. June trends are currently aligned with typical seasonal patterns, with a steady order pace supporting the full-year plan.

“As far as June goes, I would say we're not really seeing any surprising changes from how things trended in the second quarter. We're seeing the typical seasonality trends coming out of the spring selling season, but our order pace has been steady and it's tracking right in line with our expectations.”

asked by Matthew Bouley · answered by Rob McGibney

Is there a sustainable pipeline of high-ASP, high-margin communities in the Bay Area beyond the current ones, and what caused the previous decline in that market's performance?

Management confirmed a pipeline of larger lot counts and more communities coming in the Bay Area. They explained that the business had shrunk due to past management changes but has now been rebuilt and is returning to its historical strength, with current performance being a "normalization" and expected to continue growing.

“So there was a time when the core South Bay was one of our most profitable divisions for a long time, and it had really shrunk down to a pretty small business and we've been growing that back and we're just now getting to the point where we're seeing the results of that flow through to the delivery.”

asked by Stephen Kim · answered by Rob McGibney

Given the recent decline in lot count, what is the company's optimal long-term level of land owned and optioned, and what drove the decision to walk away from some options?

Management targets a 3- to 5-year supply of lots. They explained that they walk away from deals (mostly options with deposits) that no longer meet their financial underwriting hurdles, especially when market conditions change and renegotiations for better terms or prices are unsuccessful.

“So we try to target a 3- to 5-year supply of lots. And there are ins and outs and puts and takes with that.”

asked by Stephen Kim · answered by Rob McGibney

How will the decline in lot count over the past five quarters impact community count in 2027/2028, and is the company seeing any relief or correction in land prices?

Management stated they intend to grow and have growth targets for 2027/2028, actively seeking deals, including finished lot opportunities as markets reset. They observed that land sellers are becoming more rational, with some price reductions and better terms, though it varies by market.

“I would say that we're beginning to see more than what we've seen over the past couple of years as far as the sellers starting to come to terms with the reality of the current market.”

asked by Alan Ratner · answered by Rob McGibney

Does the historical 300-500 basis point gross margin premium for built-to-order (BTO) homes still hold, or has it shrunk to achieve increased BTO mix?

Management confirmed that the gross margin premium for BTO homes has remained consistent for the past two years, stating it is "right around 4 points of spread" (400 basis points) between BTO and spec sales, even within the same community and product.

“No, we actually haven't seen that change in probably the better part of 2 years. It's been within that range and really the midpoint is about right. I mean, we could probably even tighten that some. It's right around 4 points of spread is what we typically see between BTO and spec sales even within the same community, same product.”

asked by Paul Przybylski · answered by Rob McGibney