Toll Brothers Q1 2025: Contradictions in Demand, Inventory Strategy, and Margin Outlook

These are the key contradictions discussed in Toll Brothers' latest 2025Q1 earnings call, specifically including: Demand and Market Conditions, Inventory and Order Management Strategy, and Gross Margin Expectations:



Mixed Market and Sales Trends:
- Toll Brothers reported that first-quarter demand was strong, with 2,307 net contracts, up 13% in units and 12% in dollars compared to the previous year.
- Contracts were up 2% per community, but the spring selling season has been mixed, with affordability constraints and inventory pressures affecting sales at the lower end.
- Demand was solid in regions like Boston to Atlanta and Houston, but there was pressure in markets with growing inventories, particularly at the lower price points.

Spec Inventory and Construction Timing:
- The company had 3,200 spec homes in inventory at the end of the quarter, with 55% of sales and 52% of deliveries coming from spec homes.
- They are actively managing spec starts on a community-by-community basis, planning to reduce overall spec starts in the near term.
- The focus is on aligning spec inventory levels with seasonal demand, especially during the summer months.

Gross Margin and Financial Performance:
- Toll Brothers delivered 1,991 homes at an average price of $925,000, with a gross margin of 26.9%, 65 basis points above guidance.
- The adjusted gross margin exceeded expectations due to mix and operational efficiency improvements, while adjusted SG&A was 13.1%, 40 basis points above guidance.
- The financial results were strong despite impairments in joint ventures and delays in apartment property sales.

Financial Strength and Shareholder Returns:
- The company maintained a strong balance sheet with low net debt and increased liquidity, achieving over $2.3 billion in cash and availability under its revolver.
- They are committed to returning excess capital to shareholders, with a targeted $500 million in share repurchases for the full year.
- The strong cash flow generation from operations and flexibility in land positions support continued investment in business growth.