Shares of luxury home builder Toll Brothers fell out of bed today. Toll reported higher net income and higher revenue on a 12 percent increase in home closings for the quarter, but the market sniffed out what some people like myself were anticipating with Toll’s latest quarter… a big drop in demand for expensive luxury homes. Toll was clearing out inventory with juicy incentives during the fourth quarter, but net signed contract value plunged 15 percent while net contract units (homes) fell 13 percent. Toll’s orders for California nosedived 39 percent. Oops!
“In November, we saw the market soften further, which we attribute to the cumulative impact of rising interest rates and the effect on buyer sentiment of well-publicized reports of a housing slowdown.” Douglas Yearley – Toll CEO
If Toll saw the demand soften after the modest October swoon in the markets, I can only assume their first quarter sales are going to be a disappointment as well. So much for that “pent-up demand” narrative. As I have been saying for some time, the U.S. housing market is now the bastard stepchild of destructive Federal Reserve policy.
Toll’s fiscal fourth-quarter gross margin declined from 22.3% last year to 21.4%, while income from operations also declined slightly. Toll’s cancellation rate jumped 17 percent from the same time last year, rising from 7.9% of contracts to 9.3% of contracts. While this might sound like a small number, it’s actually quite significant because Toll is VERY stingy with customer deposits. Those contract cancellations with Toll can end up costing would-be buyers some serious cash.
While Toll Brothers’ stock price has been sliding lower for most of the year. the company has continued to burn money on padding the C-suites. Toll apparently repurchased 12.1 million shares of their own stock at an average price of $41.56. There’s nothing like maximizing that shareholder “value”. In this regard Toll has some good company, because GM and General Electric also have some recent experience with throwing money down the drain on share buybacks. The ramp back up this morning after the initial plunge to a 30 handle looks like they may have been at it again. They say the definition of insanity is doing the same thing over and over again and expecting a different result.
Of course Toll was happy to reassure buyers that all is well in the land of milk and honey, so you needn’t worry about going out to buy that million dollar home of your dreams.
“Toll Brothers is well-positioned to take advantage of this strong economy, improving demographics and the financial health of our affluent customer base.”
Something tells me Mr. Yearly hasn’t looked at corporate bond spreads lately. His “affluent” customer base may not be feeling so affluent come this time next year, particularly if the Federal Reserve attempts to “normalize” policy any further into an entirely new mix of asset bubbles.