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Toll Brothers (TOL), the leading U.S. luxury homebuilder, delivered a strong Q3 performance, surpassing EPS and revenue expectation and building upon its robust Q2 results. This follows D.R. Horton’s (DHI) better-than-expected Q3 earnings on July 22, signaling stabilization, if not slight improvement, in the new home construction market. 

|However, TOL reported a 10% qtr/qtr decline in net orders to 2,388 units, missing analyst expectations, with net signed contract value flat at $2.41 bln. The company highlighted ongoing affordability pressures and uncertain economic conditions, which, combined with the net orders shortfall, suggest that TOL and peers like DHI and PulteGroup (PHM) may face challenges sustaining sales growth into 2026, despite a resilient luxury segment.

• In Q3, TOL delivered 2,959 homes, up 5% yr/yr, hitting the high end of its 2,800-3,000 unit guidance range, reflecting strong execution in a high-rate environment. For Q4, the company guided for 3,350 home deliveries at an average price of $970,000-$980,000, a 13% qtr/qtr increase, underscoring confidence in its pipeline. TOL has leaned on its diversified price points and geographic presence, particularly in affluent markets like St. Louis and Santa Fe, to sustain demand, with 24% of buyers using all-cash purchases and an average loan-to-value ratio of 70%.
• Like competitors, TOL has relied on incentives, averaging 7% of the sales price, to maintain momentum, though management emphasized strategic pricing discipline to balance pace and profitability.
• Adjusted home sales gross margin contracted to 27.5% in Q3 from 28.8% a year earlier, driven by elevated incentives and rising input costs, though it remains robust compared to industry peers due to TOL’s affluent customer base and premium pricing, with an average selling price of $973,320. The company’s focus on high-margin luxury and build-to-order homes (50% of units) helps mitigate margin pressure.
• TOL reaffirmed its FY25 adjusted gross margin guidance of 27.25%, signaling confidence in its ability to navigate cost inflation and incentive pressures through operational efficiency and a favorable product mix. Improved SG&A efficiency, at approximately 9% of revenue, further bolsters profitability despite macroeconomic headwinds.

TOL's Q3 upside, driven by strong deliveries, pricing power, and operational discipline, underscores its resilience in the luxury housing segment, bolstered by affluent buyers and strategic diversification. However, the 10% drop in net orders highlights persistent affordability and economic pressures, suggesting that the new home construction market, while stabilizing, remains challenging for sustained sales growth.