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Toll Brothers’ 2014 Cost Structure Breakdown



Cost structure

The consolidated cost of Toll Brothers (TOL) rose sharply by 42.1% to $3.51 billion in 2014 over 2013. This is the highest rise in total cost Toll Brothers has seen in over a decade. The total cost as a percentage of revenue was at 89.8% in 2014, the lowest since 2009, when it was at 129%.

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Cost of homes sold

The cost of homes sold amounted to $3.08 billion in 2014, compared to $2.13 billion in 2013, up by 44.5%. This is the third consecutive sharp rise in the cost of homes sold.

The cost of homes sold includes the land acquisition, land development, and construction materials costs. The cost of homes sold as a percentage of total homebuilding revenue has been declining consistently from 111.2% in 2009 to 78.8% in 2014. This decrease was due to an increase in average selling price rather than strict control over expenses.

Peer group comparison

Though Toll Brothers’ cost of homes sold as a percentage of its revenue has been declining, it is still higher in comparison to major competitors such as Lennar (LEN) at 72.6%, Pulte Group (PHM) at 76.2%, and D.R. Horton (DHI) at 78.1%. At 81.2%, KB Home (KBH) comes in slightly higher than Toll Brothers.

Selling, general, and administrative expenses

Selling, general, and administrative expenses (or SG&A) reached $433 million in fiscal 2014, up by 27.2% over 2013. The increase in SG&A was primarily due to a rise in employee compensation, higher sales commissions, increased sales and marketing costs, and higher insurance costs.

As a percentage of total homebuilding revenue, SG&A expenses improved to 11.1% in 2014, compared to 18.5% in 2010. The improvement in SG&A expenses as a percentage of revenues was due to an increase in both the volume and the average selling prices of homes closed, combined with the company’s efforts to keep the growth in overhead expenses at a lower level than the growth in home closings volume and revenues.

Investors looking for diversification in the homebuilding sector can consider ETFs like the SPDR S&P Homebuilders ETF (XHB) and the iShares US Home Construction ETF (ITB). Toll Brothers (TOL) forms 7.78% holdings of the Shares US Home Construction ETF (ITB).

In the next part of our series, we’ll analyze Toll Brothers’ gross margin.


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