Toll Brothers Profit Drops 24% as Deliveries Slide, Margins Shrink
The luxury homebuilder posted $280.1 million in net income as delivered volume fell 10% and adjusted gross margin narrowed for a third consecutive quarter.
Toll Brothers Inc. (TOL), the nation's largest luxury homebuilder, reported a 24% decline in fiscal third-quarter net income as fewer home deliveries and persistent margin compression weighed on results, even as contract signings edged higher.
Net income fell to $280.1 million, or $2.97 per diluted share, from $369.6 million, or $3.73 a share, a year earlier. Home sales revenues dropped 8% to $2.65 billion, driven by a 10% decline in delivered homes to 2,662 units. The average price of a delivered home rose roughly 2.3% to $996,400, cushioning the top-line decline but not enough to offset the volume shortfall.
The margin picture told a more concerning story. Adjusted gross margin on home sales came in at 25.6%, down 190 basis points from 27.5% a year ago and marking the third straight quarterly decline — from 26.5% in the fiscal first quarter to 26.2% in the second and now 25.6%. The result still beat the company's guidance midpoint by 35 basis points, but the trajectory underscores rising cost pressures and a less favorable product mix that management has not yet reversed.
Operating expenses compounded the margin squeeze. SG&A as a share of home sales revenues climbed to 10.0% from 8.8% a year earlier, a 120-basis-point deleveraging on lower revenue. The overhead burden has worsened sequentially through the year, from 13.9% of revenues in the first quarter to 10.3% in the second and 10.0% in the third, though the company's fourth-quarter guidance projects a sharp improvement to 8.1% as delivery volume ramps. Income from operations fell 26% to $359.2 million, representing 13.5% of total revenues compared with 16.6% a year ago.
On the demand side, the picture was more encouraging. Net signed contract value rose 5% to $2.52 billion, covering 2,508 units, up from $2.41 billion and 2,388 units in the year-ago quarter. Cancellation rates improved meaningfully, falling to 2.6% of beginning-quarter backlog from 3.2%, and to 5.4% of signed contracts from 7.5%. The company expanded its selling community count 12% to 471 from 420 and reaffirmed full-year community growth of 8% to 10%.
Yet contracts per community slipped to 5.4 from 5.6, and the geographic mix shifted notably. Contract value in the South region surged 22% to $638.6 million while Pacific-region contracts fell 22% to $397.4 million, reflecting a rotation away from West Coast markets that carry higher average price points. Backlog value declined 2% to $6.24 billion, covering 5,312 homes, though the average backlog price ticked up to $1,174,400.
Below the operating line, joint venture impairments added to the pressure. The company recorded $39.6 million in JV impairments during the quarter, compared with zero a year earlier, bringing the year-to-date total to $97.4 million. Land sales and other revenue collapsed to $6.3 million from $64.1 million, with the associated margin swinging to negative 153.6%. Inventory impairments in home-building cost of revenues rose 25% year-to-date to $61.8 million, and pre-development write-offs climbed 38% to $29.6 million.
Toll Brothers reaffirmed its full-year fiscal 2026 guidance of approximately $10.5 billion in home sales revenues, an adjusted gross margin of 26.1%, and deliveries of 10,500 to 10,600 units. The fourth-quarter targets imply adjusted gross margin of 26.0% and deliveries of 3,450 to 3,550 units, which would represent a meaningful sequential step-up in volume.
The company continued to return capital aggressively, raising its full-year share repurchase target to $700 million from $650 million. Through the first nine months, $506 million went back to shareholders via repurchases and dividends. Cash and equivalents stood at $1.06 billion, down from $1.26 billion at the end of fiscal 2025, while the debt-to-capital ratio improved to 24.5% from 26.0%. Lots owned and optioned declined modestly to approximately 75,500 from 76,800.
Nine-month net income totaled $751.7 million, or $7.87 a share, down from $899.8 million, or $8.95 a share, on home sales revenues of $7.02 billion, a 5.5% decline.