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TOL's Margins Under Pressure: Will Incentives Weigh on Earnings Ahead?
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Key Takeaways
Toll Brothers' Q3 adjusted home sales gross margin fell 130 bps year over year to 27.5%.
Incentives, especially on spec homes, are pressuring margins while aiding sales volumes.
Backlog revenues dropped 10% to $6.38B, though average sales price rose to $1.16M.
Toll Brothers, Inc. (TOL - Free Report) continues to navigate a complex housing market where affordability challenges, shifting buyer preferences and volatile mortgage rates are shaping demand. While the company benefits from a resilient luxury segment, the rising use of incentives has drawn concern over the stability of margins and future earnings performance.
In the third quarter of fiscal 2025, the company reported an adjusted home sales gross margin of 27.5%, down 130 basis points year over year. The decline was largely tied to increased incentives, particularly on completed spec homes, as the company balanced pricing with sales volumes. For fiscal 2025, the company projects an adjusted home sales gross margin of nearly 27.25%, representing a decline from the 28.4% in fiscal 2024.
Spec construction now accounts for roughly half of the business mix. While this approach allows faster cycle times and greater flexibility, it also exposes margins to more incentive-driven adjustments. In contrast, build-to-order homes continue to deliver stronger profitability, aided by structural upgrades and design options.
Although backlog declined, the pricing backdrop remains favorable. At the fiscal third-quarter end, potential revenues from backlog decreased 10% year over year to $6.38 billion. The average sales price in the backlog was $1.16 million, up from $1.04 million a year earlier. This stronger pricing provides some cushion with embedded margins. However, the broader trend of rising incentives underscores ongoing challenges in maintaining earnings strength.
Looking ahead, Toll Brothers faces the challenge of maintaining profitability while managing competitive dynamics. Backlog pricing and disciplined capital allocation will be central to offsetting the impact of higher incentives.
Incentive Strategies Pressure Margins Across Leading Builders
Incentive-driven strategies remain a key theme across homebuilders, with peers like Lennar Corporation (LEN - Free Report) and D.R. Horton, Inc. (DHI - Free Report) also navigating profitability pressures as affordability challenges weigh on the market.
Lennar has relied on price incentives and mortgage buydowns to maintain sales volumes, but this has taken a toll on margins. In the fiscal second quarter of 2025, gross margins slipped to 18%, down from 22.5% a year ago. Lennar expects margins to stay flat sequentially, indicating limited room for near-term earnings improvement despite cost-saving initiatives.
D.R. Horton is also feeling the impact of heavy incentive use. In the third quarter of fiscal 2025, 81% of buyers used its incentive programs. While this approach has helped drive demand, D.R. Horton has pressured profitability. Elevated costs and incentive spend continue to weigh on margins, with growth in sales orders expected to remain restricted.
TOL’s Price Performance, Valuation and Estimates
Toll Brothers’ shares have gained 34.5% in the past three months, outperforming the Zacks Building Products - Home Builders industry, broader Zacks Construction sector and S&P 500, as shown below.
TOL Price Performance
Image Source: Zacks Investment Research
In terms of its forward 12-month price-to-earnings ratio, TOL stock is trading at 10.52, down from the industry’s 13.29.
P/E (F12M)
Image Source: Zacks Investment Research
Over the past seven days, the Zacks Consensus Estimate for TOL’s 2025 earnings per share has declined to $13.82 from $13.86. The estimated figure indicates a 7.9% decline from the year-ago profit level.
Image Source: Zacks Investment Research
Toll Brothers currently carries a Zacks Rank #4 (Sell).
Image: Bigstock
TOL's Margins Under Pressure: Will Incentives Weigh on Earnings Ahead?
Key Takeaways
Toll Brothers, Inc. (TOL - Free Report) continues to navigate a complex housing market where affordability challenges, shifting buyer preferences and volatile mortgage rates are shaping demand. While the company benefits from a resilient luxury segment, the rising use of incentives has drawn concern over the stability of margins and future earnings performance.
In the third quarter of fiscal 2025, the company reported an adjusted home sales gross margin of 27.5%, down 130 basis points year over year. The decline was largely tied to increased incentives, particularly on completed spec homes, as the company balanced pricing with sales volumes. For fiscal 2025, the company projects an adjusted home sales gross margin of nearly 27.25%, representing a decline from the 28.4% in fiscal 2024.
Spec construction now accounts for roughly half of the business mix. While this approach allows faster cycle times and greater flexibility, it also exposes margins to more incentive-driven adjustments. In contrast, build-to-order homes continue to deliver stronger profitability, aided by structural upgrades and design options.
Although backlog declined, the pricing backdrop remains favorable. At the fiscal third-quarter end, potential revenues from backlog decreased 10% year over year to $6.38 billion. The average sales price in the backlog was $1.16 million, up from $1.04 million a year earlier. This stronger pricing provides some cushion with embedded margins. However, the broader trend of rising incentives underscores ongoing challenges in maintaining earnings strength.
Looking ahead, Toll Brothers faces the challenge of maintaining profitability while managing competitive dynamics. Backlog pricing and disciplined capital allocation will be central to offsetting the impact of higher incentives.
Incentive Strategies Pressure Margins Across Leading Builders
Incentive-driven strategies remain a key theme across homebuilders, with peers like Lennar Corporation (LEN - Free Report) and D.R. Horton, Inc. (DHI - Free Report) also navigating profitability pressures as affordability challenges weigh on the market.
Lennar has relied on price incentives and mortgage buydowns to maintain sales volumes, but this has taken a toll on margins. In the fiscal second quarter of 2025, gross margins slipped to 18%, down from 22.5% a year ago. Lennar expects margins to stay flat sequentially, indicating limited room for near-term earnings improvement despite cost-saving initiatives.
D.R. Horton is also feeling the impact of heavy incentive use. In the third quarter of fiscal 2025, 81% of buyers used its incentive programs. While this approach has helped drive demand, D.R. Horton has pressured profitability. Elevated costs and incentive spend continue to weigh on margins, with growth in sales orders expected to remain restricted.
TOL’s Price Performance, Valuation and Estimates
Toll Brothers’ shares have gained 34.5% in the past three months, outperforming the Zacks Building Products - Home Builders industry, broader Zacks Construction sector and S&P 500, as shown below.
TOL Price Performance
Image Source: Zacks Investment Research
In terms of its forward 12-month price-to-earnings ratio, TOL stock is trading at 10.52, down from the industry’s 13.29.
P/E (F12M)
Image Source: Zacks Investment Research
Over the past seven days, the Zacks Consensus Estimate for TOL’s 2025 earnings per share has declined to $13.82 from $13.86. The estimated figure indicates a 7.9% decline from the year-ago profit level.
Image Source: Zacks Investment Research
Toll Brothers currently carries a Zacks Rank #4 (Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.