D.R. Horton, Inc. Q4 FY2025 earnings call

Management Statement and Operational Highlights

• The D.R. Horton team provided homeownership to nearly 85,000 individuals and families in fiscal 2025, including ~43,000 first-time homebuyers, totaling over 91,200 households.
• Net sales orders in Q4 increased 5% from prior year quarter. Consolidated pretax income was $1.2 billion in Q4 and $4.7 billion for the year.
• Homebuilding pretax return on inventory was 20.1%, return on equity 14.6%, and return on assets 10%.
• Generated $3.4 billion of cash from operations in fiscal 2025, returning $4.8 billion to shareholders. Inventory was down 21% year-over-year, and median cycle time from home start to close improved.
• SG&A expenses increased 3% primarily due to platform expansion, with homebuilding SG&A as a percentage of revenues at 7.9% in Q4 and 8.3% for the year.

Segment Performance

• Homebuilding: Fourth quarter net sales orders increased 5% to 20,078 homes, order value up 3% to $7.3 billion. Fourth quarter home sales revenues were $8.5 billion on 23,368 homes closed. Average closing sales price was $365,600, down from peak. Gross profit margin on home sales revenues in Q4 was 20%, down 180 basis points sequentially. For the year, homebuilding pretax return on inventory was 20.1%.
• Rental: Fourth quarter pretax income was $81 million on $805 million revenues. For the full year, rental operations generated $170 million of pretax income on $1.6 billion of revenues.
• Financial Services: Fourth quarter pretax income was $76 million on $218 million revenues, with a pretax profit margin of 34.7%. For the year, Financial Services earned $279 million of pretax income on $841 million of revenues with a pretax profit margin of 33.1%.
• Forestar: Fourth quarter revenues were $671 million with pretax income of $113 million. For the full year, Forestar delivered $1.7 billion of revenues and $219 million of pretax income.

Guidance

• For fiscal 2026, consolidated revenues are expected to be approximately $33.5 billion to $35 billion, with homes closed by homebuilding operations in the range of 86,000 to 88,000.
• Q1 2026 consolidated revenues are expected to be in the range of $6.3 billion to $6.8 billion, with homes closed in the range of 17,100 to 17,600.
• Home sales gross margin for Q1 expected to be in the range of 20% to 20.5%.
• Expect to generate at least $3 billion of cash flow from operations in fiscal 2026, plan to repurchase approximately $2.5 billion of common stock and pay dividends of around $500 million.

Risks

• New home demand impacted by affordability constraints and cautious consumer sentiment.
• Volatility in mortgage rates and economic conditions affecting consumer confidence and buying decisions.
• Potential impact of litigation costs on gross margins if not managed properly.
• Fluctuations in land and construction costs affecting profitability.

Q: When we think about the walk from the 20% gross margin in the fourth quarter to the 20% to 20.5% in the first quarter. How do we sort of think about incentives, land, labor, material costs? And is the warranty litigation costs expected to remain a 60 basis point headwind?

A: Bill Wheat says the 60 basis points unusual impact from litigation this quarter is not expected to persist into Q1. Our baseline would be a more normal impact from warranty litigation going forward. The guide reflects the environment and incentives.

Q: Looking at your guide on 1Q, the gross margin, and consolidated pretax still seemed a little lighter. Is there something below the homebuilding gross margin line that you might want to call out?

A: Jessica Hansen says rental is expected to be a little softer quarter and there will be less leverage on SG&A from the lower closings volume on the homebuilding side.

Q: A few quick follow-ups on the gross margin. Why do you expect warranty expense to normalize into the first quarter?

A: Bill Wheat says there were several large settlements that settled this quarter, which drove the change in the quarter. Those elements don't expect to repeat going into the next quarter.

Q: Your repurchase guide, $2.5 billion, is significantly below what you'll probably end up doing in '25. Is that just caution early in the year or before the year starts?

A: Bill Wheat says the guide of $2.5 billion is lower as it's governed by cash flow. Consistently, share repurchases and dividends will be governed by cash flow level.

Q: On demand in Texas. Your South Central orders were up 11% year-over-year. Can you talk about what you're seeing there?

A: Paul Romanowski says Texas is choppy, with some bright spots and others with elevated inventory levels that need to be worked through.

Q: I want to discuss the performance of operations in smaller markets where you have a large market share. Can you talk about the opportunities you're seeing there?

A: Paul Romanowski says they've seen solid performance in some smaller markets, with their teams maturing in those areas and the ability to react to market changes.