Lennar’s cost structure
Lennar Corporation’s (LEN) total homebuilding cost for fiscal year 2014 was $5.96 billion. This was an increase of 30.2% over 2013.
Cost of homes sold is the highest at 85.6% of Lennar’s homebuilding cost structure. This is followed by SG&A (selling, general and administrative expenses) at 12% and cost of land sold at 2.4%.
Cost of homes sold amounted to $5.1 billion in 2014 compared to $3.97 billion in 2013, up by 28.4%. Cost of homes sold as a percentage of total homebuilding revenue has been declining consistently from 89.1% in 2009 to 72.6% in 2014.
SG&A was $714.8 million in fiscal year 2014 compared to $559.5 million in 2013. As a percentage of total homebuilding revenue, SG&A expenses improved to 10.2% in 2014 compared to a peak of 15.9% in 2009.
During fiscal year 2014, labor and material costs increased by 7%. That represents a slowing down of cost increases for the past two years. Overall, the total homebuilding cost as a percentage of homebuilding revenue was at 84.9%, the lowest since 2009 when it was at its peak of 113.3%.
Building materials and labor
Although the cost as a percentage of revenue declined in 2014, Lennar (LEN) experienced increases in the prices of some building materials and shortages of skilled labor in some areas. Shortages of skilled labor and increased costs of building materials such as lumber, framing, concrete, steel, and other materials could cause increases in construction costs and construction delays going forward.
Sustained increases in construction costs may erode margins for Lennar as well as other homebuilders such as D.R. Horton (DHI) and PulteGroup (PHM) if pricing competition restricts their ability to pass additional costs of materials and labor on to homebuyers.
Any erosion in homebuilders’ stock prices might lead to less attractive returns from homebuilder ETFs such as the iShares Dow Jones U.S. Home Construction Index Fund (ITB) and the SPDR S&P Homebuilders ETF (XHB).