TOL Q1 Earnings Call: Margin Discipline and Spec Strategy Offset Softer Demand

Homebuilding company Toll Brothers (NYSE:TOL) fell short of the market’s revenue expectations in Q1 CY2025, with sales falling 3.5% year on year to $2.74 billion. Its non-GAAP EPS of $3.50 per share was 22.4% above analysts’ consensus estimates.

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StockStory’s Take

Toll Brothers’ first quarter results were shaped by a softer demand environment, which management attributed to declining consumer confidence and ongoing macroeconomic volatility. CEO Douglas Yearley noted that the company prioritized price and margin over sales pace, resulting in increased use of buyer incentives and a stronger focus on its affluent customer base. Yearley highlighted that 24% of buyers paid in cash, and that design studio upgrades remained a key profit driver, with average spend per home at $200,000. Management’s remarks emphasized the importance of mix, with luxury and build-to-order homes contributing higher margins despite overall declines in net signed contracts and backlog. The quarter also saw Toll Brothers continue to grow its national footprint, expanding into over 60 markets across 24 states.

Looking ahead, management indicated that soft demand trends have persisted into the current quarter, and they do not anticipate a near-term improvement in market conditions. CFO Marty Connor stated the company will maintain its focus on margin preservation, aided by conservative budgeting of sales incentives and a balanced mix of spec and build-to-order inventory. Yearley cautioned, “We are not anticipating an improvement in this market in any of the guidance we are giving.” Community count growth is expected to help offset market headwinds, and management reaffirmed its guidance for the year, projecting stable margins and increased capital returns to shareholders through higher buybacks. The company also expects only limited impact from potential tariffs in 2025, though it remains cautious about future land investments and closely monitors regional demand shifts.

Key Insights from Management’s Remarks

Management’s commentary focused on operational discipline in a challenging demand environment, with an emphasis on preserving margins, balancing inventory, and leveraging its luxury positioning.

• Spec and build-to-order balance: Management described a deliberate shift to maintain a higher proportion of spec homes (homes built without a buyer in place) to support flexibility in meeting demand, noting that specs now account for about 55% of inventory compared to 90% build-to-order previously.
• Incentive use and pricing: Yearley acknowledged a modest increase in buyer incentives to approximately 7% of average sales price, up from 5-6% in recent quarters, as necessary to move spec inventory while preserving overall margins.
• Affluent buyer resilience: The company emphasized its focus on move-up and empty nester segments, which represent over 70% of sales, and highlighted a low cancellation rate (2.8%) and high percentage of all-cash buyers, reflecting the financial strength of its customer base.
• Community count expansion: Management reiterated its plan to grow community count by 8-10% this year and projected similar growth next year, which is expected to drive future sales opportunities even as current market demand is subdued.
• Regional market divergence: The call highlighted stronger performance in markets such as New Jersey, Pennsylvania, New York, California, and Denver, while softer trends were seen in the Pacific Northwest, Florida, Texas, and Phoenix, pointing to the importance of local market conditions in overall results.

Drivers of Future Performance

Toll Brothers’ outlook centers on disciplined incentive management, community count growth, and ongoing monitoring of regional demand shifts to navigate a subdued housing market.

• Margin-focused strategy: Management plans to continue prioritizing price and margin over sales volume, using conservative assumptions for sales incentives and mix, especially for spec homes, to protect profitability amid soft demand.
• Community count and footprint growth: The company expects an 8-10% increase in community count this year and similar growth next year, aiming to expand its presence in diverse markets and create opportunities for future sales as demand recovers.
• Land investment caution: With market uncertainty and slower demand, Toll Brothers is tightening underwriting standards and reducing land spend on new deals, positioning itself to be selective and flexible in future land acquisitions, which could impact results beyond this year.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will be watching (1) the pace of community count expansion and its impact on new sales, (2) the company’s ability to manage sales incentives without eroding margins, and (3) regional demand trends, particularly in markets showing early signs of improvement or ongoing weakness. Progress on land spend discipline and any changes in buyer behavior due to macroeconomic shifts will also be key areas of focus.

Toll Brothers currently trades at a forward P/E ratio of 7.3×. Should you double down or take your chips? Find out in our full research report (it’s free).

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