Sluggish sales sap profit for struggling KB

Forced to cut home prices amid sluggish sales, Westwood-based developer KB Home posted a $268.2-million quarterly loss Friday, a surprise result that was more than twice as large as analysts had projected.

KB Home lost $3.47 a share in the first quarter, which ended Feb. 29, compared with a profit of $27.6 million, or 34 cents, a year earlier.

A Bloomberg survey of analysts had predicted a loss of $1.33 a share.

Shares of KB Home fell $1.25 on Friday, or 4.8%, to $24.54, but remain up 14% year to date.

Shares of builders have dropped sharply from their heights of last spring, but have rebounded in the last three months. Despite the major slowdown in the real estate market -- the Commerce Department reported this week that new-home sales in February hit a 13-year low -- a Standard & Poor’s index of 15 home builder stocks is up 12% since the start of the year.

In a conference call with analysts, KB Home Chief Executive Jeffrey Mezger predicted home prices would continue to fall.

“We see no reason to believe [home sales] in the next few months will improve dramatically enough to clear excess inventories,” he said. “Prices need to adjust further for that to occur.”

Mezger said KB Home had resisted price cuts but that weak sales were forcing a shift in strategy in several markets. Those price reductions cut into the company’s margins and were a major factor in the losses, he said.

The average selling price for KB Home’s properties fell 7% in the first quarter, compared with the previous year, and the total number of homes delivered was down 43%. Revenue fell 43% to $794.2 million and net orders plunged 75% to 1,449 homes.

As sales stalled, KB cut the size of many of its entry-level home models and offered them at lower prices. It recently began to offer a price guarantee to those who order new homes, promising to reduce the base price of the home if prices in the same development drop before the sale closes. The guarantee addresses the fear of many home shoppers that prices will continue to fall.

Mezger said the company’s new homes are now priced lower than comparable resale homes in most markets. Even with lower prices, the CEO said, “many potential buyers cannot or will not make a purchase” because they believe prices will continue to fall; are worried about losing their jobs in a weakening economy; or cannot get financing.

If existing home prices continue to fall, Mezger suggested KB Home would further cut its prices.

U.S. home prices posted their sharpest decline in January in more than 20 years, according to the Standard & Poor’s/Case-Shiller index released Tuesday. Prices of existing homes fell 11.4% in 20 metropolitan areas included in the index. Western markets showed some of the sharpest declines, with Las Vegas posting the nation’s worst year-to-year price drop of 19.4%, and Los Angeles and San Diego close behind with drops of nearly 17%.

KB Home said the West Coast and Southwest were mainly responsible for the decline in its average selling prices for the last quarter.

Mezger said KB Home has pulled out of areas in which performance was poor and would continue to do so. It recently left Washington, D.C., Chicago and New Mexico. The number of the company’s active housing developments is down 38% from a year earlier.

KB Home’s results come a day after Miami-based Lennar Corp., one of the nation’s largest home builders, said that it, too, swung to a loss in the first quarter. But Lennar’s loss of $88.2 million, or 56 cents a share, was not as bad as the $1.07 analysts had expected.

--

peter.hong@latimes.com