Toll Brothers (TOL) shares dropped nearly 7% on Wednesday after the luxury homebuilder reported first-quarter earnings and revenue below analyst expectations.
The company also warned of weakening demand in certain markets, raising concerns about the impact of high mortgage rates and affordability constraints heading into the crucial spring homebuying season.
Missed Expectations and Weak Outlook
For the fiscal first quarter of 2025, Toll Brothers posted earnings per share (EPS) of $1.75 on revenue of $1.86 billion. Both figures fell short of analyst estimates, which had projected EPS of $2.04 and revenue of $1.91 billion. Home sales slipped 4.7% to $1.84 billion, while deliveries increased 3.3% to 1,991 units—both below expectations.
CEO Douglas Yearley, Jr. attributed the earnings miss primarily to impairments and a delay in the sale of a stabilized apartment property in a joint venture. However, he acknowledged broader industry challenges, stating, "While demand has remained healthy in many of our markets, affordability constraints and growing inventories in certain regions are pressuring sales—especially at the lower end."
Looking ahead, Toll Brothers forecasted second-quarter deliveries of 2,500 to 2,700 units, below analysts’ projections of 2,766 units. The guidance signals potential softness in the upcoming spring selling season, historically a peak period for homebuilders.
Margin Pressures and Market Disparities
Higher mortgage rates and increasing price competition among homebuilders have squeezed margins across the industry. Toll Brothers reported that its adjusted home sales gross margin declined 200 basis points year-over-year to 26.9%. While this was slightly better than the company’s guidance of 26.25%, the drop reflects ongoing pricing pressures.
Toll Brothers' strongest markets were concentrated in the Northeast and Mid-Atlantic regions—stretching from Boston to Atlanta—as well as in Houston, Dallas, Boise, Denver, Las Vegas, and California. These areas benefited from limited competition from other major builders. In contrast, the weakest-performing markets included Jacksonville, Tampa, San Antonio, Phoenix, Reno, Salt Lake City, and Portland, where affordability concerns and growing inventories dampened sales.
Broader Industry Concerns Weigh on Sentiment
The earnings disappointment from Toll Brothers coincided with broader concerns in the homebuilding sector. On the same day, the National Association of Home Builders (NAHB) reported that builder confidence in February fell to its lowest level in five months, citing policy uncertainties and cost factors.
Adding to investor unease, the implementation of tariffs could drive up material costs, further squeezing margins for homebuilders. While Toll Brothers has yet to experience immediate tariff-related impacts, the uncertainty surrounding trade policies adds another layer of risk to an already volatile market.
Despite near-term headwinds, Toll Brothers remains bullish on the long-term outlook for the housing market, particularly for the luxury segment. Favorable demographics, a persistent undersupply of homes, and accumulated wealth from home price appreciation and stock market gains provide a foundation for future growth. However, investors appear cautious in the face of margin pressures and affordability challenges that could weigh on performance in the months ahead.
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