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KB Home swings to loss

The builder's surprise second-quarter red ink comes despite a shift to smaller, cheaper houses.

June 29, 2007|Annette Haddad | Times Staff Writer

KB Home has tried to weather the dreary housing market by building smaller, less expensive houses.

But even that's not helping the nation's fifth-biggest builder to turn a profit.

The Los Angeles builder Thursday reported an unexpected loss of $148.7 million, or $1.93 a share, for its second quarter ended May 31. That was in contrast to a profit of $205.4 million, or $2.45, a year earlier. Revenue slid 36% to $1.4 billion.

It was the builder's second quarterly loss in less than a year. The deteriorating value of unsold homes on its books and write-offs from deposits on land it no longer wants to buy played big roles in the losses. In the second quarter, KB recorded $308.2 million in pretax charges.

The most recent loss came in spite of KB Home's efforts to reduce the size -- and, therefore, the price -- of most of its homes.

The company said its newest homes were 200 to 300 square feet smaller on average. The average KB house or condominium is now 2,200 square feet, with the average second-quarter sales price at $271,600.

It's a move some analysts say should give the company an advantage over its competitors as they figure out how to attract reluctant buyers.

KB and other building companies have also been aggressively cutting prices, offering incentives and slowing production to work through their inventories of unsold homes.

Yet buyers have been staying out of the market, in large part because lenders have made it more difficult to qualify for mortgages and because of expectations that home prices will continue to decline.

"There's a feeling that consumers are not comfortable that home prices are going to stabilize," said Steve Johnson, a Riverside-based building industry consultant who focuses on the California market. "Consumers are looking for further discounts and further deals."

KB Home shares slid 54 cents to $39.89. The stock has fallen 22.2% since Jan. 1.

In the quarter, the company booked 7,265 net orders, a 3% drop from a year earlier but an improvement over the more-severe declines in recent quarters. On the West Coast, KB said orders rose 3%.

But the improvement in orders was the result of fewer canceled orders. The company said its cancellation rate was 34% of gross orders, down from 41% a year earlier.

"The company was aggressive in working to generate orders and likely found that, with the buyer fear at this point, lower prices do not always lead to increased traffic or sales," Banc of America Securities analyst Daniel Oppenheim said in a note to investors.

He predicts that KB's "profitability will remain elusive" for the remainder of the year.

KB Home Chief Executive Jeffrey Mezger refrained from offering any predictions on when conditions might improve, and he declined to offer any guidance to investors about the company's financial results for the rest of the year.

"It is too early to determine when the housing market will begin to stabilize," he told analysts in a conference call.


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