D.R. Horton Earnings Call: Growth Amid Margin Pressure

D.R. Horton Inc ((DHI)) has held its Q1 earnings call. Read on for the main highlights of the call.

D.R. Horton Balances Profitability With Margin Pressure in Latest Earnings Call

D.R. Horton’s latest earnings call conveyed a cautiously steady tone, balancing solid operational and financial strengths against clear near‑term headwinds. Management highlighted strong cash generation, disciplined capital returns, robust lot supply and improved cycle times, while acknowledging that earnings, closings and margins are under pressure from elevated buyer incentives and lower average selling prices. The overall message: the platform remains resilient, but near-term profitability will be constrained as the company trades margin for volume and market share.

Strong Profitability and Pretax Margin

Despite softer earnings versus last year, D.R. Horton delivered solid profitability in the quarter, posting consolidated pretax income of $798 million on $6.9 billion in revenue, for an 11.6% pretax margin. Management framed this as evidence of the company’s ability to generate attractive returns even in a more promotional, rate‑sensitive housing market. While not at peak levels, the margin profile remains healthy compared with historical cycles and supports the company’s continued investment in land, community growth and shareholder returns.

Solid Cash Generation and Aggressive Capital Returns

Cash flow remained a core strength. Over the past 12 months, D.R. Horton generated $3.6 billion of cash from operations, including $854 million in Q1 alone. The company has been recycling that cash aggressively back to investors, returning $4.4 billion over the past year through buybacks and dividends. In the quarter, it repurchased 4.4 million shares for $670 million and paid $132 million in dividends. This pace of capital returns underscores management’s confidence in long‑term demand, even as near‑term EPS declines.

Net Sales Orders Show Resilient Demand

Orders provided a key proof point for underlying demand. Net sales orders rose 3% year over year to 18,300 homes, with total order value flat at $6.7 billion. That combination suggests buyers remain engaged, but are increasingly price sensitive, forcing D.R. Horton to carefully manage the balance between pace, price and incentives. Maintaining stable order value with modest unit growth in a higher‑rate environment was positioned as a positive signal for activity heading into the crucial spring selling season.

Improved Operational Efficiency and Faster Cycle Times

Operationally, the builder continues to get more efficient. The median cycle time from home start to closing improved by about two weeks compared with a year ago, reducing how long capital is tied up in inventory. Completed unsold homes declined by roughly 2,000 sequentially, a sign that product is moving more quickly through the pipeline. These efficiency gains help offset some of the margin drag from incentives by improving inventory turns and freeing cash.

Expanding Community Count and Market Footprint

D.R. Horton is leaning into growth despite the choppy margin backdrop. Average active selling communities increased 12% year over year and 2% sequentially, broadening the company’s footprint and giving it more selling outlets. December starts were particularly strong, up 27% sequentially to about 18,500 homes, positioning the company with greater inventory and community exposure as it enters the spring selling season. Management clearly views the current environment as an opportunity to capture share rather than retrench.

Strong Return Metrics Highlight Structural Strength

Key return metrics underscored the structural strength of the model. Over the trailing 12 months, homebuilding pretax return on inventory was 18.6%, signaling efficient use of capital in land and homes. Consolidated return on equity came in at 13.7% and return on assets at 9.4%, with ROA ranking in the top 20% of S&P 500 companies over three-, five- and ten‑year periods. These statistics were emphasized as evidence that, even with some margin pressure, D.R. Horton remains a high‑quality compounding franchise.

Robust Lot Supply and Disciplined Land Strategy

The company continues to prioritize a flexible and capital‑efficient land position. D.R. Horton ended the quarter with approximately 590,500 lots, 25% owned and 75% controlled, providing a long runway for future construction while limiting balance sheet risk. It invested $2.0 billion in lots, land and development in Q1, including $1.3 billion in finished lots, $610 million in development, and $80 million in land acquisition. This mix supports near‑term production, keeps the pipeline full and allows the company to stay responsive to shifts in demand.

Financial Services and Forestar Add Earnings Power

Beyond core homebuilding, D.R. Horton’s financial services and Forestar operations continued to contribute meaningfully. Financial services generated $58 million in pretax income on $185 million of revenue, an attractive 31.4% pretax margin driven largely by mortgage and related services. Forestar, the land development subsidiary, reported $273 million in revenue from 1,944 lots sold, producing $21 million in pretax income. Forestar’s owned and controlled lot position stands at about 101,000, with 62% of its owned lots under contract or subject to rights of first offer with D.R. Horton, reinforcing a vertically integrated land pipeline.

EPS Decline and Net Income Pressure

Despite operational strengths, earnings were under visible pressure. GAAP diluted EPS fell to $2.03 from $2.61 in the prior‑year quarter, a decline of roughly 22%. Net income was $595 million on $6.9 billion in revenue. Management tied the earnings decline to softer volumes, lower average selling prices and heavier use of incentives, all of which pressured margins. The message to investors was that the company is intentionally accepting near‑term earnings pressure to keep communities active and maintain scale.

Lower Home Closings and Revenue Year Over Year

Volume softness was another key headwind. Home sales revenue dropped to $6.5 billion on 17,818 closings, compared with $7.1 billion on 19,059 closings in the prior‑year quarter. That equates to about a 6.5% decline in closings and an 8.5% decline in home sales revenue. The volume pullback reflects both affordability constraints in the market and the company’s need to manage production cadence and inventory as it navigates rate volatility and evolving buyer demand.

Pressure on Average Selling Prices

Pricing trends further illustrate the affordability trade‑off. The average closing price was $365,500, essentially flat sequentially but down 3% compared with a year ago. The average price of net sales orders was $364,000, down about 2% year over year. Management highlighted a shift toward lower price points and more attainable product, which broadens the buyer pool but also limits revenue per unit and contributes to margin pressure. Investors should expect pricing to remain sensitive to mortgage rates and consumer budgets.

Margin Headwinds From Elevated Incentives

Gross margins are feeling the brunt of the promotional environment. Reported home sales gross margin in Q1 was 20.4%, but that figure included a 40 basis‑point one‑time warranty recovery; excluding this, margin was 20.0%. Looking ahead, the company guided to a Q2 home sales gross margin of 19.0%–19.5%, reflecting higher incentives and mix shifts. Management noted that incentives have climbed from a high single‑digit percentage of sales to the low double‑digits by quarter‑end, and they expect incentive levels to remain elevated through fiscal 2026, limiting near‑term margin expansion.

Higher SG&A as a Percentage of Revenue

Overhead efficiency also came under pressure as revenue slipped. Homebuilding SG&A expense as a percentage of revenue rose to 9.7% from 8.9% a year ago. While total SG&A dollars actually declined about 1%, the drop in closings and revenue reduced operating leverage, causing the percentage to tick higher. This dynamic underscores how volume softness can ripple through the income statement, even when management holds the line on absolute costs.

Inventory Mix and Unsold Homes

Inventory remains elevated but is gradually improving in quality. D.R. Horton ended the quarter with 30,400 homes in inventory, of which 20,000 were unsold—about two‑thirds of total inventory. While the number of completed unsold homes declined by roughly 2,000 sequentially, approximately 900 unsold homes have been completed for more than six months, indicating localized pockets of slower demand or misaligned product. The company is using incentives and pricing adjustments to work down these older units while trying to protect brand and long‑term pricing power.

Sensitivity to Incentives and Mortgage Rates

Management emphasized that incentive levels—particularly mortgage rate buy‑downs—were a major cost driver in Q1 and a key source of margin volatility going forward. The company’s guidance does not assume that incentive costs will fall, even if mortgage rates decrease, creating potential upside if financing conditions improve. At the same time, this sensitivity reinforces that profitability is heavily influenced by borrowing costs and the level of support required to keep monthly payments affordable for buyers.

Short-Term Trade-Offs Between EPS and Volume

Strategically, D.R. Horton is clearly prioritizing scale and shareholder returns over near‑term EPS maximization. Management reiterated plans for substantial share repurchases—around $2.5 billion for the year—alongside continued dividends, even as elevated incentives and lower average selling prices compress margins and EPS. The company is effectively trading some short‑term profitability to sustain closings momentum, protect its market position, and take advantage of its strong balance sheet relative to smaller competitors.

Forward Guidance Signals Growth With Constrained Margins

Looking ahead, D.R. Horton guided Q2 consolidated revenue to a range of $7.3–$7.8 billion, with homebuilding closings of 19,700–20,200 homes and a consolidated pretax margin of 10.6%–11.1%. For fiscal 2026 overall, the company reiterated expectations for consolidated revenue of about $33.5–$35.0 billion and homebuilding closings of 86,000–88,000 homes, supported by an anticipated tax rate around 24.5% and operating cash flow of at least $3.0 billion. Management plans roughly $2.5 billion of share repurchases and about $500 million of dividends for the year, while keeping leverage around 20% and addressing $600 million of senior notes maturing within 12 months. They expect housing starts to be higher in Q2 than Q1 and foresee incentives staying elevated, dependent on demand and mortgage rates, signaling that volume growth will likely come with continued margin discipline rather than rapid margin expansion.

In summary, D.R. Horton’s earnings call painted a picture of a structurally strong homebuilder navigating a tricky affordability and rate environment. Demand and orders remain resilient, the land pipeline is deep, cash generation is robust and capital returns are aggressive. At the same time, EPS, closings and margins are under pressure from elevated incentives and lower average selling prices. For investors, the story is one of a market leader willing to sacrifice some near‑term profitability to sustain growth and market share, backed by a strong balance sheet and long‑term return profile.