Meritage Homes Corporation

Second quarter 2026 home closing revenue was $1.4 billion, down 14% year over year, driven by 11% lower closing volume and a 4% decline in ASP on closings to $373 thousand. Adjusted home closing gross margin was 18.6%, while reported gross margin was 18.3% versus 21.1% in the prior year; adjusted diluted EPS was $1.42 and reported diluted EPS was $1.37 versus $2.04 last year. Orders were 3.58 thousand, down 9% year over year, and average absorption was 3.5 net sales per community per month. For Q3 2026, management guided to 3.3 thousand to 3.6 thousand closings, $1.26 billion to $1.35 billion of home closing revenue, around 18% gross margin, a 24.5% to 25% tax rate, and diluted EPS of $1.10 to $1.30. For full-year 2026, management updated guidance to around 5% below full-year 2025 home closings and revenues, with revenue potentially a bit lower if incentives rise.

Phillippe Lord framed the quarter as solid execution in a softer demand backdrop, emphasizing that the company is controlling what it can by reducing aged inventory, keeping cycle times below 110 days, and balancing pace and price. He said the business is being rebalanced over time toward a roughly one-third first-time move-up and two-thirds entry-level mix, but stressed that this is a long-term strategy tied to land sourcing and demographics rather than a near-term market call. He also said the company is not going to force absorptions through higher incentives or sacrifice profitability.

Hilla Sferruzza highlighted the main financial drivers behind margin and earnings: a 6% year-over-year reduction in direct costs per square foot, improved leverage from better Q1-to-Q2 volume, and some benefit from temporary rate dips that lowered incentive costs. She noted Q2 gross margin was 18.3% reported and 18.6% adjusted, with $3.6 million of inventory impairment and about $300 thousand of terminated land-deal walkaway charges, and said land costs remain a near-term headwind because the current land basis is mostly from 2022 to 2025 vintages. On the balance sheet, she cited $87 million of cash, no revolver borrowings, a 17.1% net debt-to-cap ratio, and a June refinancing that expanded the revolver to $980 million, extended maturity to 2031, and increased the accordion to $1.47 billion. She also said Q2 land spend was $357 million, full-year land acquisition and development spend is expected to be $1.7 billion to $2 billion, and the company returned $131 million to shareholders in Q2.

Analysts focused heavily on why gross margin came in better than expected, how much of the cost improvement was sustainable, and what drove the strategic shift toward first-time move-up homes. Management said the margin beat came from a mix of higher volume leverage, lower direct costs, and lower incentive costs during a brief rate dip, but they do not expect major further direct-cost improvement. On the portfolio shift, Philippe Lord said it was always part of the long-term plan, but the land market now supports more first-time move-up opportunities and the impact should mostly begin in 2028 and beyond. Questions also pressed on Q4 delivery implications and incentives; management said the back-half ramp is primarily driven by community count growth, not a bet on demand recovery.