LGI Homes, Inc. Q1 FY2025 earnings call

• Strong demand for new homes despite affordability challenges and rate volatility.
• Slow start to Q1 due to higher mortgage rates in January, but March saw improvement in lead and order trends.
• 22% increase in communities year-over-year to 146.
• New salespeople entering their second year with the company, and sales leaders received intensive training to enhance sales organization performance.
• Confidence in the long-term housing market outlook due to persistent shortage of entry-level homes and underlying demographic fundamentals.

Revenue in the first quarter was $351.4 million based on 996 homes closed at an average sales price of $352,831. Year-over-year, revenue decreased 10.1% due to an 8% decline in home closings and a 2.2% decline in average sales price. A one-time expense of $8.6 million related to the completion of the forward commitment incentive program impacted revenue and gross margins. The top markets on a closings per community basis were Richmond (5.3), Charlotte (4.6), Raleigh (4.3), Atlanta (3.8), and Nashville (3.6). The company ended the first quarter with 1,040 homes in backlog, representing over $406 million.

• Maintained original closing target of 6,200-7,000 homes, 160-170 active communities by year-end, and average selling price $360,000-$370,000.
• Proactively trimmed full-year gross margin expectations by 150 basis points at the low end and 100 basis points at the high end to account for tariffs and market uncertainty, now expecting gross margin between 21.7% and 23.2% and adjusted gross margin between 24% and 25.5%.

• Rate volatility affecting buyer confidence and ability to purchase homes.
• Affordability challenges for buyers.
• Potential impacts of tariffs on costs and market uncertainty.

Q: Michael Rehaut asked about the gross margin trajectory and cadence, specifically how to think about 2Q, 3Q, 4Q in terms of the pace and the reduction in overall guidance related to tariffs and other drivers of margin.

A: Eric Lipar responded that there are three components to the margin question: tariffs with minimal current impact but uncertainty, general cost increases, and leaning into incentives averaging 5%-6% of ASP which impacts gross margin.

Q: Trevor Allinson asked about the midpoint of the full-year closings guide and the pace and price trade-off, including if the reduction in guidance is a floor and how demand and wholesale business factor in.

A: Eric Lipar said March sales improved, trending towards the needed four closings per month pace, and wholesale business (18% of Q1 closings) can impact gross margin, with demand still strong but hindered by affordability.

Q: Carl Reichardt asked about consumer confidence related to rate volatility and broader concerns like income, cost, savings, and market.

A: Eric Lipar mentioned buyers have strong credit and income but are affected by general market uncertainty, with demand still present but hindered by affordability.

Q: Kenneth Zener asked about gross margin components, year-end inventory units, and land management.

A: Charles Merdian explained that capitalized overhead impacts gross margin, with lower volume leading to higher percentage of revenue allocated to construction costs, and year-end inventory expected to be similar to Q1 levels around 4,200 units.

Q: Jay McCanless asked about the wholesale channel's demand and stock buyback details.

A: Eric Lipar said wholesale demand is market-specific, and Joshua Fattor noted $177 million remaining on the stock buyback authorization.

Q: Alex Barron asked about responding to competitors cutting prices and the interest rate offered through the forward commitment incentive.

A: Eric Lipar said they lean into incentives, buy down rates, and are cautious with steep price discounts, buying down the lowest rate possible for customers.

Q: Michael Rehaut circled back on margins, clarifying the $8.6 million charge and 2Q-4Q margin cadence.

A: Charles Merdian confirmed $6.5 million was in revenue and $2.1 million in SG&A, and Eric Lipar said gross margin will ramp up due to volume component.