Homebuilding company Toll Brothers (NYSE: TOL) reported revenue ahead of Wall Streets expectations in Q3 CY2025, with sales up 2.7% year on year to $3.42 billion. Its non-GAAP profit of $4.58 per share was 6.1% below analysts’ consensus estimates.

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StockStory’s Take

Toll Brothers’ third quarter results were met with a negative market reaction, as the company reported revenue ahead of Wall Street expectations but missed on non-GAAP profit forecasts. Management attributed the mixed performance to persistent affordability challenges in the broader housing market, which were partially offset by the firm’s focus on wealthier buyers less affected by higher mortgage rates. CEO Douglas Yearley noted that, despite the environment, “our luxury business is differentiated as we serve a more affluent customer who is less impacted by the affordability pressures that continue to impact the broader housing market.” The delay in closing the Apartment Living business sale also weighed on earnings per share, a factor management cited for the shortfall.

Looking forward, Toll Brothers’ guidance is shaped by ongoing economic uncertainty, with no improvement in market conditions assumed for future forecasts. The company expects stability from its strategy of targeting move-up and move-down buyers, alongside an 8% to 10% growth in community count. CEO Douglas Yearley explained, “We are projecting new home deliveries...with an average price between $970,000 and $990,000,” emphasizing that guidance is conservative due to continued affordability headwinds. While management sees potential tailwinds from lower mortgage rates and demographic trends, their outlook remains cautious until more clarity emerges in the housing market.

Key Insights from Management’s Remarks

Management identified several factors influencing Q3 performance, including a resilient luxury buyer segment, a shift in business mix, and execution on land and inventory strategies.

• Affluent Buyer Focus: Toll Brothers’ performance was supported by a customer base of older, more affluent buyers, who are less sensitive to interest rate fluctuations and affordability pressures. Management noted that over 70% of its business serves move-up and move-down buyers, with first-time buyers in this segment being older and wealthier than the national average.

• Spec Home Strategy: The company leaned into a balanced mix of build-to-order and spec (speculative) homes, with specs accounting for approximately 54% of deliveries. This approach allowed Toll Brothers to appeal to buyers seeking quicker move-ins and to adapt to changing market conditions by offering both customization and inventory homes.

• Regional Strength Variability: Geographic performance was mixed, with relative strength observed in the East Coast—particularly from Boston to South Carolina—and in coastal California and Boise. These regions benefited from limited competition and constrained resale supply at Toll Brothers’ price points.

• Incentive Management: The average incentive offered per home remained stable at about 8% of the delivered price. Management indicated that incentives are used more as a marketing tool to drive traffic rather than as a necessity for buyer qualification, given the financial strength of their client base.

• Multifamily Business Exit: A delayed closing of the Apartment Living business sale impacted quarterly earnings, but Toll Brothers is moving forward with a full exit from the multifamily segment. Proceeds from the sale will be used to support core homebuilding growth and capital returns to shareholders, aligning the company more closely with pure-play homebuilding peers.

Drivers of Future Performance

Toll Brothers’ outlook is shaped by conservative planning, with management expecting muted housing market conditions, stable incentives, and continued focus on higher-end buyers to sustain results.

• Community Count Expansion: The company aims to grow its community count by 8% to 10% in the coming year, banking on new openings and selective land acquisition. Management highlighted that more than a third of communities can deliver homes in less than eight months, supporting faster inventory turnover and sales flexibility.

• Margin Pressures Remain: Gross margin guidance reflects the impact of elevated incentives and a higher percentage of spec home deliveries later in the year. Management expects margins to compress modestly as average incentives per home remain at around $80,000, up from $68,000 the previous year, and as fixed cost leverage is reduced by lower starting backlog.

• Luxury Demographic Tailwind: The company continues to benefit from longer-term trends, such as an aging homebuyer population and the ongoing structural undersupply of new homes. These demographic forces, combined with Toll Brothers’ focus on move-up and move-down segments, are viewed as stabilizing factors even amid broader market uncertainty.

Catalysts in Upcoming Quarters

Looking ahead, the StockStory team will monitor (1) the pace of community count expansion and successful opening of new communities, (2) whether gross margins remain stable despite persistent incentive levels and a high mix of spec deliveries, and (3) continued resilience among luxury buyers, especially in core East Coast and coastal California markets. Execution on the planned exit from multifamily and redeployment of proceeds into homebuilding will also be key milestones.

Toll Brothers currently trades at $132.75, down from $136.10 just before the earnings. Is there an opportunity in the stock?See for yourself in our full research report (it’s free for active Edge members).

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