Why Toll Brothers’ gross margins continue to expand in 1Q14

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Toll Brothers 1Q14 earnings report: Margins keep expanding (Part 3 of 4)

(Continued from Part 2)

Gross margins increase

In the fourth quarter, gross margins (excluding interest and write-downs) increased to 24.4% compared to 23.4% a year ago. The open question for the builders is how long they can continue to increase gross margins. Building material prices are increasing, and skilled labor is getting harder to find. Virtually every builder noted that they’re struggling to find skilled construction workers and that wages are increasing. One of the side effects of the housing bust has been the exodus of skilled construction workers from the sector. After the bust, housing starts fell off a cliff, and they’ve been mired below the previous lows ever since. Many construction workers ended up finding jobs in trucking and the energy sector. Most market participants expect home price appreciation to cool in the upcoming year, and the builders won’t be able to increase margins simply by raising prices.

SG&A and earnings

SG&A (selling, general, and administrative expenses) increased in Q1, largely due to one-time charges related to the Shapell acquisition, but even still, it’s been decreasing as a percentage of revenues. This speaks to some of the operating leverage the builders have. If revenues increase 45%, they don’t need 45% more people in the corporate office. Rising prices have helped them increase operating margins as well. For the first quarter, earnings were $45.6 million (or $0.25 a share) versus net income of $4.4 million (or $0.03 a share) a year ago.

Management comments on the quarter

Douglas C. Yearley, Jr., Toll Brothers’ chief executive officer, had this to say:

“We delivered more homes at higher prices this first quarter than one year ago. This higher delivery volume, coupled with price increases from late 2012 and early 2013, drove our first quarter growth in revenues, earnings, and margins.”

Continue to Part 4

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