D.R. Horton, Inc. (DHI) Earnings

Management highlights

Paul Romanowski mentioned D.R. Horton team provided home ownership to nearly 85,000 individuals and families in fiscal 2025, including ~43,000 first-time homebuyers, total 91,200 households. New home demand impacted by affordability and cautious sentiment. Teams drove 5% increase in net sales orders in fourth quarter. Consolidated pre-tax income in fourth quarter $1.2 billion on revenues $9.7 billion, pre-tax profit margin 12.4%; full year pre-tax income $4.7 billion, margin 13.8%. Started 14,600 homes in September quarter, ended year with 29,600 homes in inventory, down 21% from year ago. Median cycle time from home start to close decreased in fourth quarter. Home building lot position at year end ~592,000 lots, 25% owned, 75% controlled through purchase contracts. Investments in team and platform, SG&A expenses increased 3% due to platform expansion.

Guidance

For fiscal 2026, expect consolidated revenues ~$33.5 to $35 billion, homes closed by home building operations 86,000 to 88,000. Forecast income tax rate ~24.5%. Expect to generate at least $3 billion cash flow from operations. Plan to purchase ~$2.5 billion common stock and pay dividends ~$500 million. First fiscal quarter ending December 31st, expect consolidated revenues $6.3 to $6.8 billion, homes closed 17,100 to 17,600, home sales gross margin 20 to 20.5%, consolidated pre-tax profit margin 11.3 to 11.8%, income tax rate ~24.5%.

Segment performance

Home building: Fourth quarter net sales orders increased 5% to 20,078 homes, order value increased 3% to $7.3 billion; cancellation rate was 20%; average sales price of net sales orders was $364,900, flat sequentially and down 3% year-over-year. Home sales revenues in fourth quarter were $8.5 billion on 23,368 homes closed, average closing sales price $365,600, down 1% sequentially, 3% year-over-year, 9% from peak in 2022. Gross profit margin on home sales revenues in fourth quarter was 20%, down 180 basis points sequentially. Home building pre-tax return on inventory for the year was 20.1%, return on equity 14.6%, return on assets 10%. Rental operations: Fourth quarter generated $81 million pre-tax income on $805 million revenues from sale of 1,565 single-family rental homes and 1,815 multifamily rental units; full year generated $170 million pre-tax income on $1.6 billion revenues. Financial services: Fourth quarter earned $76 million pre-tax income on $218 million revenues, pre-tax profit margin 34.7%; full year earned $279 million pre-tax income on $841 million revenues, pre-tax profit margin 33.1%. Four Star: Fourth quarter reported revenues $671 million on 4,891 lots sold, pre-tax income $113 million; full year delivered 14,240 lots, $1.7 billion revenues, $219 million pre-tax income.

Risks & headwinds

New home demand impacted by affordability constraints and cautious consumer sentiment. Warranty litigation costs could be a factor if not normal. Lot costs and construction costs can be volatile and impact margins. Market conditions and economic volatility can affect demand and sales performance.

Analyst Q&A

• Q: When thinking about the walk from 20% gross margin in fourth quarter to 20 - 20.5% in first quarter, how to think about incentives, land, labor, material costs and warranty litigation costs?

  A: 60 basis points unusual litigation impact not expected to persist, baseline is more normal litigation impact. Guide reflects environment, incentives level and exit gross margin.

• Q: Start pace was down, how quickly can ramp to meet demand?

  A: Starts were lower intentional to align inventory, will increase starts into spring, feel good about ability to respond with labor base, community and lot supply.

• Q: 1Q guide consolidated pre-tax still lighter, any seasonal lightness or other factors?

  A: Rental expected to be softer quarter, less leverage on SG&A from lower closings volume on home building side.

• Q: Free cash flow guide, in line with go-forward?

  A: Expect to be more consistent on cash flow conversion, this year cash flow as percentage of revenues between 10% - 11%, guide in that range.

• Q: Sequential step-up in warranty expense, why expect to normalize?

  A: Large settlements settled this quarter, elements don't expect to repeat.

• Q: Incentive line item, break out price discounting vs rate buy-downs?

  A: Mortgage rate in backlog below 5%, percentage of buyers with rate buy down increased in Q4.

• Q: Order number solid despite start pace down, how demand trended?

  A: Saw decent demand, choppy with rate volatility, leaned into incentives hard, moderated start space to right-size inventory.

• Q: Closing guidance 26 slightly year-on-year, upside/downside risks?

  A: In position to deliver on guide, community count up, solid traffic, depends on spring selling season.

• Q: Gross margin came in below guide excluding unusual litigation, any signal on growth vs margin?

  A: Continuing to respond to market, community count growth provides flexibility, can't run at zero profit margin.

• Q: Lot costs outlook, flattening or improving?

  A: Mix of lot portfolio, development cost flattening, renegotiating terms, stick and brick costs expected to come down.

• Q: Start space and community account cadence?

  A: Starts need to move up, community count up double digit, expect to moderate to mid-high single digit.

• Q: Demand in Texas, South Central orders up 11% year-over-year?

  A: Texas choppy, market-to-market, leaned in with incentives, some bright spots, others with elevated inventory.

• Q: Reduced starts pace, has it brought inventory in alignment?

  A: Reduction in starts has helped balance inventory market by market, industry adjusting inventory to avoid oversupply.

• Q: Repurchase guide $2.5 billion below 2025, reason?

  A: Governed by cash flow, 2025 had unique situation with higher liquidity and leverage, going forward governed by cash flow.

• Q: Net sales order growth by region, southeast performance?

  A: Southeast has markets like Jacksonville and southwest Florida with excess inventory, demand slow to absorb.

• Q: Gross margin guidance, 20% if normalized?

  A: Feel good about margin profile, adjusted to market disruptions, still producing better than old historical norm.

• Q: Incentives increase, 120 basis points, what's the overall percentage?

  A: Still high single digit, gross margin detail shows core lot level and external factors.

• Q: Performance in smaller markets, opportunities?

  A: Seen solid performance in some smaller markets, expanded into secondary markets, teams maturing.

• Q: ASP trend in 2026, fair assumption?

  A: Base assumption of net decline in ASP due to affordability constraints, mix of smaller homes and incentives.

• Q: Starts and inventory dynamic, comfort level on ramping specs?

  A: Preferred to sell homes earlier, will need to increase starts, feel comfortable with spec count managing to market.

• Q: SK Builders acquisition, contribution?

  A: Helps positioning in Greenville, SC, picked up inventory, lots, and sales orders.

• Q: View on interest rates and mortgage buy-downs?

  A: Still solving for monthly payment, combination of lower rates and incentives, buyers prefer lower rates for monthly payment benefit.

• Q: Exit rate on gross margins lower than expected, cause?

  A: Mostly due to incentives, took more than anticipated to get closings for fiscal 2025.

• Q: Lower rates drive traffic but not conversions, why?

  A: Qualification issue for affordable payment, rate volatility makes people wait, existing home sales affect home buying.