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UPDATE 2-D.R. Horton takes hit from discounts as housing demand slows
July 24, 2014 / 1:45 PM / 3 years ago

UPDATE 2-D.R. Horton takes hit from discounts as housing demand slows

* D.R. Horton profit down 23 pct due to discounts

* Takes impairment charge due to weak Chicago market

* PulteGroup profit up 15 pct on higher prices

* Says no plans to offer discounts

* D.R. Horton shares down 10 pct, PulteGroup down 3 pct (Adds PulteGroup results, executive comments, updates shares)

By Ankit Ajmera

July 24 (Reuters) - D.R. Horton Inc, the No.1 U.S. homebuilder, said it had to offer discounts in the third quarter to boost sales in Chicago, a particularly bleak spot in a weak U.S. housing market.

D.R. Horton’s shares fell more than 10 percent, their largest intra-day percentage fall since 2009, after the company said an impairment charge on its Chicago properties led to a 23 percent slump in profit.

“We (increased) the level of incentives in many communities throughout the spring in an effort to improve sales and maximize returns and profit,” Chief Financial Officer Bill Wheat said on a conference call.

Higher U.S. home prices along with rising mortgage rates in 2014 have reduced affordability for many, resulting in an underwhelming spring selling season, which is to homebuilders what the holiday season is to retailers.

A recovery in the overall U.S. housing market has slowed more than expected this year. New home sales dropped 8.1 percent in June, the largest decline in about a year, according to a report from the Commerce Department on Thursday.

D.R. Horton said on Thursday that Chicago in particular was performing below its expectations.

The company reported a 15 percent drop in home deliveries in the Midwest, including Chicago, and the Southwest in the quarter. Each region accounted for 8 percent of the company’s revenue in 2013.

Incentives such as lower selling prices reduced D.R. Horton’s gross margins to 20.7 percent in the quarter ended June 30 from 21.4 percent a year earlier.

In contrast, smaller peer PulteGroup Inc said on Thursday higher prices helped it post a 15 percent rise in profit for the quarter ended June 30. It said gross margins rose to 23.6 percent, from 18.8 percent.

D.R. Horton primarily targets first-time buyers, the group considered most sensitive to interest rates. PulteGroup focuses on buyers trading up for the first time, as well as first-time buyers.

D.R. Horton’s orders - a key indicator for builders, who do not book revenue until they deliver a house - fell 13 percent in the Midwest and 22 percent in the Southwest during the quarter.

Its net income of $113.1 million, or 32 cents per share, included a $54.7 million pre-tax impairment charge related to properties in Chicago purchased before the financial crisis.

PulteGroup, which also reported a decline in orders, said it had not offered any discounts in the quarter, and didn’t intend to do so going forward.

“We’re definitely running the company for the highest returns on invested capital and we are not pushing discounts,” said Richard Dugas, Pulte’s chief executive.

“I can’t speak to what competitors are doing.”

D.R. Horton’s stock, which has risen about 11 percent this year through Wednesday’s close, were down 10.9 percent at $22.095. PutleGroups’s shares were down 3 percent at $19.25 in afternoon trading. (Writing by Sagarika Jaisinghani in Bangalore; Editing by Kirti Pandey and Savio D‘Souza)

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