Toll Brothers' Q4 2025 Earnings Call: Contradictions Emerge on Gross Margin Guidance, Sales Pace, and Cost Trends

Business Commentary:

Here are the key themes and data trends from the Toll Brothers Q4 2025 earnings call, structured as requested:

• **Record Home Sales Revenue and Deliveries:

  • Record home sales revenue of $10.8 billion was generated for the full fiscal year, with 11,292 homes delivered. This represents a 4% increase in units and a 3% increase in dollars year-over-year despite a soft market.
  • The strong performance was achieved while maintaining an attractive adjusted gross margin of 27.3% and an operating margin of 15.7%, demonstrating the resilience of the company's luxury business model.

• **Conservative Guidance and Market Outlook:

  • Fiscal 2026 guidance is described as conservative, with no assumption of market improvement. For the full year, deliveries are projected between 10,300 and 10,700 homes, with an average price between $970,000 and $990,000. The adjusted gross margin guide is 26.0%.
  • The guidance is based on current choppy market conditions and does not factor in potential rate cuts, easing affordability pressure, or improved consumer confidence.

• **Spec Home Strategy and Pricing:

  • Specs accounted for approximately 54% of deliveries in fiscal 2025, with a similar ratio expected for 2026. This strategy appeals to buyers seeking quicker move-ins.
  • The company maintains a measured approach to pricing, with an average incentive of ~8% of delivered price (~$80,000 per home) and an average sales price of $972,000 in Q4, down slightly due to mix.

• **Land Position and Cost Trends:

  • The company controls ~76,000 lots, with a long-term target of a 60% optioned / 40% owned mix. It continues to target an 8-10% community count growth for FY2026.
  • Lot cost inflation is expected to be flat for 2026, with opportunities for renegotiation in a softer market. Construction costs are seeing a modest decrease of $2-$3 per square foot.

• **Financial Strength and Customer Profile:

  • Toll Brothers' customers are characterized as wealthier and less impacted by affordability pressures. Over 70% of business serves the move-up and move-down segments, while ~17% is active adult (~17% of revenue).
  • Financial strength is highlighted by a ~26% all-cash buyer rate, low LTVs (~69% for mortgage-takers), and an industry-low contract cancellation rate of 4.3%.
  

Contradiction Point 1

Gross Margin Guidance and Market Assumptions

This is a direct contradiction in the forward-looking assumptions embedded in the company's financial guidance. In Q1, the CEO stated the guidance was based on an improved market outlook and confidence. By Q4, he explicitly states the guidance is conservative and assumes *no* market improvement. This shift in the foundational premise of the same financial guidance is a major point of contention.

Does the FY2026 outlook include a cushion, given past outperformance on delivery and margin guidance and potential market improvement? - John Lovallo (UBS)

20251209-2025 Q4: The guidance is conservative and does not assume any market improvement. It is based on current choppy conditions... - Douglas Yearley(CEO)

What was your original 2025 forecast, and why hasn't the earnings outlook changed despite the weaker start? - Ivy Zelman (Zelman & Associates)

2025Q1: The company is now feeling better, with stronger spec pricing and a favorable product mix... supporting confidence in the current margin guide. - Douglas Yearley(CEO)

Contradiction Point 2

Sales Pace Expectation for FY2026

This represents a significant change in a key operational and revenue driver. In Q3, the tone was optimistic about growth and implied an improvement in the sales pace from the then-current rate. By Q4, the guidance explicitly assumes the same pace (~2 contracts/community/month) with no improvement, directly contradicting the earlier growth-oriented outlook.

Is the expected decline in closings for FY2026 primarily due to the lower starting backlog, or are timing factors or a slower sales pace being used to protect margins? - Michael Rehaut (JPMorgan)

20251209-2025 Q4: The guidance assumes the same sales pace of ~2 contracts per community per month and does not assume an improvement in that rate. - Douglas Yearley(CEO)

Has your target of 2 homes sold per community per month changed? Can you reach 2 in 2026 despite the 1.8 pace in 2025? - John Lovallo (UBS Investment Bank, Research Division)

2025Q3: The company feels better about the market than a few months ago and is poised for growth in 2026. - Douglas C. Yearley(CEO)

Contradiction Point 3

Land Cost and Development Cost Trends

The statements present a material shift in the narrative around cost pressures and the company's ability to negotiate. In Q3, the CEO stated no significant relief had been seen and a potential downward pressure was a risk. In Q4, he claims costs are flat and the softer market provides *opportunities* to renegotiate and improve pricing, which is being actively pursued. This change in tone from risk-averse to opportunity-seeking regarding a critical cost line is substantial.

What was the lot cost inflation exiting 2025, and what is embedded in the 2026 guidance? - Richard Reid (Wells Fargo)

20251209-2025 Q4: Lot costs are flat year-over-year... The softer market provides opportunities to renegotiate land deals and improve pricing, which is being actively pursued. - Douglas Yearley(CEO)

Are you seeing relief in development costs, how widespread is this relief, and what's the timeline for it to impact the P&L? - Trevor Scott Allinson (Wolfe Research, LLC)

2025Q3: No significant relief on land development costs has been seen yet. Potential downward pressure may come if land developers become more aggressive, but that has not materialized. - Douglas C. Yearley(CEO)

Contradiction Point 4

Construction Cost Outlook for FY2026

This involves contradictory guidance on a key input cost. In Q3, the outlook was described as "flat to modestly down" with a clear expectation of decline "across the board." In Q4, the characterization shifts to "modestly decreasing or flat" with the guidance explicitly *not* assuming further decreases. This is a change in the expected trajectory of costs, impacting margin and pricing strategy.

What are your guidance assumptions for 2026 stick-and-brick and labor costs? - Victoria Piskarev (Bank of America, on for Rafe Jadrosich)

20251209-2025 Q4: Construction costs are modestly decreasing or flat across most of the country... The guidance for FY2026 does not assume further decreases in building costs for the balance of the year. - Douglas Yearley(CEO)

What was your year-to-date cash flow from operations? Which components of construction costs are expected to decline in the near term? - Stephen Kim (Evercore ISI Institutional Equities)

2025Q3: Construction costs are expected to be flat to modestly down in the short term. The decline is driven by trades and suppliers negotiating better terms... building costs are beginning to decrease across the board. - Martin P. Connor(CFO)

Contradiction Point 5

Impact of Lower Interest Rates on Demand

This shows a change in the assessment of a key external factor (interest rates) on near-term business performance. In Q3, the CEO acknowledged lower rates would likely increase buyer activity, though not immediately. By Q4, despite lower rates being in effect, the outlook is described as "conservative," with key headwinds remaining, suggesting the anticipated positive impact has not materialized as expected.

Are you seeing any changes in consumer confidence or selling desire due to mixed signals like a strong stock market, challenging economic data, and high delistings? - Alan Ratner (Zelman & Associates)

20251209-2025 Q4: The overall outlook remains conservative. - Douglas Yearley(CEO)

With lower construction costs and rising lot costs, will incentives decrease in 2026? How will 20-30 bps rate cuts affect demand compared to incentives and seasonality? - Michael Jason Rehaut (JPMorgan Chase & Co, Research Division)

2025Q3: Lower rates will likely increase buyer activity, but the impact is not immediate (August is slow season). More data is needed through fall. - Douglas C. Yearley(CEO)