Hovnanian Q1 Earnings Rise 23%, Margins Decline On Incentives

Shares of Hovnanian Enterprises, Inc. HOV have declined 2.7% since the company reported its earnings for the first quarter of fiscal 2025. This compares with the S&P 500 index’s 0.6% fall over the same time frame. Over the past month, the stock has declined 26.6% compared to the S&P 500’s 1.2% growth.

HOV’s Revenue and Earnings Performance

Hovnanian reported fiscal first-quarter 2025 earnings per diluted share of $3.58, up from the $2.91 reported in the year-ago quarter.

The company reported a 13.4% year-over-year increase in total revenues, reaching $673.6 million in the first quarter of fiscal 2025, compared with $594.2 million in the same period last year.

Home sales revenues rose 12.8% to $646.9 million on 1,254 homes delivered, up from $573.6 million on 1,063 homes a year ago. However, revenues fell short of analyst expectations by $32.18 million. Income before income taxes grew 22.4% to $39.9 million, driven by improved SG&A leverage and lower interest costs, which offset lower gross margins.

Hovnanian’s Segment-Wise Performance

Hovnanian’s performance varied across its geographic segments:

Northeast: Home deliveries increased 34% to 445 homes in the first quarter of fiscal 2025 compared with 332 in the first quarter of fiscal 2024. Revenues from home sales grew 48.2% year over year to $281.6 million in the first quarter of fiscal 2025. However, the average selling price (ASP) declined 10% to $645,391, reflecting a shift toward more affordable offerings.

Southeast: Deliveries declined 36.4% to 124 homes in the first quarter of fiscal 2025 from 195 in the prior year. Correspondingly, revenues dropped 51.3% to $51.4 million. The ASP in the region fell 23.4% to $414,815, suggesting increased reliance on incentives.

West: Deliveries rose 27.8% to 685 homes in the first quarter of fiscal 2025 compared with 536 a year ago. Revenues from home sales increased 12.9% to $313.8 million in the reported quarter. The ASP fell 11.7% to $458,145 as the company prioritized pace over price.

HOV: Other Key Business Metrics

The homebuilding gross margin declined year over year. The gross margin, before the cost of sales interest expenses and land charges, was 18.3%, down from 21.8% a year ago. The homebuilding gross margin, after the cost of sales interest expenses and land charges, dropped to 15.2% compared with 18.3% in the previous year. The decline was attributed to the increased use of incentives, particularly mortgage rate buy-downs, which 74% of buyers utilized in the quarter.

SG&A expenses were $86.9 million in the first quarter of fiscal 2025, an increase from the $86.1 million in the prior-year quarter. The company’s backlog value decreased 16.1% to $931.9 million, reflecting increased sales of quick move-in (QMI) homes, which cycle through the backlog more quickly.

New home contracts increased 6.9% to 1,205 units, with the total contract value up 3% to $643.3 million. Including joint ventures, contracts grew 9.5% to 1,400 homes. The company’s consolidated community count rose 5.9% year over year to 125, with total communities (including joint ventures) reaching 148, a 9.6% increase.

HOV: Management Commentary

CEO Ara Hovnanian acknowledged the impact of persistently high mortgage rates on sales volatility but emphasized the company’s ability to sustain a strong pace of home sales through incentives and pricing strategies. The company reported a shift toward a "land-light" strategy, with 84% of controlled lots now optioned, reducing upfront capital requirements.

Hovnanian also highlighted the importance of quick move-in homes, which accounted for 69% of total sales, the second-highest level in the last 10 quarters. While the higher QMI mix lowered gross margins, it supported revenue growth and backlog conversion. The company achieved a 76% backlog conversion rate, the highest in 27 years.

Factors Influencing HOV’s Performance

The company’s gross margin contraction reflects a tradeoff between sales pace and profitability. Incentives, including mortgage rate buy-downs, averaged 9.7% of the average selling price, up 160 basis points from a year ago. The cancellation rate also ticked up slightly to 16% compared with 14% in the previous year.

Rising land and development costs weighed on margins. Land and land development spending increased 7.5% year over year to $247.6 million. Despite these costs, Hovnanian’s increased lot control and community count position the company for future growth.

Hovnanian’s Guidance and Outlook

For the second quarter of 2025, the company expects total revenues between $675 million and $775 million. The adjusted homebuilding gross margin is projected between 17.5% and 18.5%, while SG&A expenses as a percentage of revenues are expected to improve to a range of 11%-12%. Adjusted pre-tax income is forecasted between $20 million and $30 million, down from $41 million in the first quarter due to the absence of joint venture asset sales.

Management expects margins to remain pressured due to the continued use of mortgage rate incentives but sees long-term upside from growing deliveries and disciplined capital allocation.

Other Developments at HOV

During the quarter, the company repurchased 131,460 shares for $17.9 million at an average price of $135.93 per share. Hovnanian also plans to redeem the remaining $26.6 million of its 13.5% senior notes before maturity in February 2026, reducing its interest expenses.

The company continues to expand its footprint, putting 5,800 lots under option or acquisition across 41 communities. Total controlled lots increased 28.8% year over year to 43,254, supporting future delivery growth.

Conclusion

Despite delivering higher revenues and earnings, Hovnanian stock has underperformed due to concerns over declining gross margins and increasing reliance on incentives. While management remains confident about its long-term strategy, investors appear cautious amid ongoing affordability challenges in the housing market.

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