KB Home Posts Quarterly Loss,
Issues Bleak Outlook for Market

KB Home recorded a fiscal third-quarter net loss, while painting a bearish picture for the home-building industry as operating results slumped amid the U.S. housing market's long, deep slide.

The Los Angeles home builder posted weak results despite booking proceeds from the sale of its 49% stake in its French operations. Its report also comes on the heels of larger-than-expected losses reported by Lennar Corp. Tuesday and underscores Wall Street's view that home builders will continue to face hard times amid a crippling credit crunch, national mortgage crisis and recessionary concerns.

Indeed, KB Home, one of the largest builders in the U.S., said it didn't see the housing market improving in the near future. In wake of the earnings report, KB Home's shares lost 11 cents, or 0.5%, to $23.98, near the 52-week low of $23.79 set Wednesday.

KB recorded a net loss of $35.6 million, or 46 cents a share, for the quarter ended Aug. 31, compared with net income of $153.2 million, or $1.90 a share, a year earlier.

Results included a $438.1 million gain from the July sale of its stake in Kaufman & Broad SA and a $307.1 million income-tax benefit. They were largely offset by pretax charges of $690.1 million related to inventory and joint-venture impairments and the abandonment of land option contracts, and a $107.9 million goodwill impairment.

Steep impairment charges are seen as a trend among home builders as they struggle to whittle down huge backloads of inventory amid weak sales. Lennar on Tuesday also flagged that it expects to have additional impairment charges after it reported $344.7 million in land-sale losses and equity in loss from unconsolidated entities of $127.4 million.

Similar to Lennar, "KBH's write-offs were higher than expected and this is likely to be a trend that is echoed across the group," said Citigroup in a report.

J.P. Morgan said in a report that it anticipated that charges for the rest of the industry in the third quarter "will also be materially higher" and bring the industry's total charges to date in the 20% to 30% range.

Meanwhile, KB Home reported that revenue dropped 32% to $1.54 billion.

"The oversupply of unsold new and resale homes and downward pressure on new home values has worsened in many of our markets as tighter lending standards, low affordability and greater buyer caution suppress demand," said President and Chief Executive Jeffrey Mezger. He also noted effects from higher foreclosures and builders and investors cutting prices to move supply, all of which cut the company's prices and profit margins and "prompted us to take substantial write-downs of inventory and goodwill."

Excluding charges, gross margins fell to 13.9% from 23.3%.

As for the future, Mr. Mezger said, "We see no signs that the housing market is stabilizing and believe it will be some time before a recovery begins."

KB's home deliveries fell 28% to 5,699 in the latest quarter as the average sale price fell 7% to $267,700. Net home orders slid 6.2% to 3,907.

The housing market continued to weaken over the summer, with sales, prices and starts all in decline. The S&P/Case Shiller 10-city composite home price index posted a 4.5% plunge in August, the largest monthly drop since July 1991, and the trend shows no sign of reversing. Indeed, prices began heading south in the beginning of the year and declines have only grown larger. Housing starts were off 6.9% in July, with sales dipping 3.9%. Some industry experts don't expect a turnaround until at least 2009.

However, things haven't been all bad for the company. KB used the proceeds from the sale of its French operations to pay down $650 million in debt. Debt levels are down nearly 40% from a year earlier.

The company has also seen some modest success with its Martha Stewart-branded homes, which currently represent less than 5% of KB's construction. The company has plans to expand the two-year-old collaboration to as many as 36 new markets as soon as possible.

KB isn't stopping there with the branded house idea. On Wednesday, the company announced a deal with Walt Disney Co. to offer "Disney inspired" elements in new homes.

Though predicting losses, Wall Street has been particularly kind to the company over the quarter. Two months ago, Citigroup Inc. raised its investment rating on KB's shares to buy, citing its cash generation and debt repayment. UBS AG this week initiated coverage of KB Home with a buy rating. KB's shares have fallen by half thus far this year.

- - Kevin Kingsbury and Andrew Edwards contributed to this article.

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