Meritage Homes Corporation has released its second-quarter 2026 earnings, demonstrating resilience and strategic adjustments in a dynamic housing market. The company faced a decrease in home closing revenue and diluted earnings per share (EPS) compared to the prior year. However, it successfully implemented operational efficiencies, including reducing finished spec inventory and maintaining quick cycle times. A significant strategic shift involves rebalancing its housing portfolio to include more first-time move-up homes, catering to the evolving needs of the millennial demographic. The management emphasized a disciplined capital allocation strategy, which includes share repurchases and increased cash dividends, alongside a cautious outlook for the remainder of 2026.
During the second quarter, Meritage Homes reported a decline in home closing revenue and adjusted diluted EPS, attributed to softer demand and lower average sales prices. Despite these challenges, the company maintained an impressive backlog conversion rate of 200% and reduced its spec home inventory by 27% year-over-year. Management highlighted cost-saving initiatives, particularly a 6% reduction in direct construction costs per square foot, driven by improved purchasing and vendor negotiations. The company's liquidity position remains strong with $807.3 million in cash and no outstanding borrowings under its refinanced credit facility, supporting its investment-grade credit rating and long-term growth objectives.
Strategic Portfolio Rebalancing and Operational Adaptations
Meritage Homes is strategically reorienting its business model to better align with demographic shifts, specifically targeting the aging millennial demographic with an increased focus on first-time move-up homes. This move signifies a shift from its earlier emphasis on entry-level housing, with an ultimate goal of achieving a one-third first-move-up and two-thirds entry-level home mix. This strategy, while not opportunistic, is a long-term vision that the company has always intended, with market conditions now making such land acquisitions more viable. The company aims to provide higher-quality homes without extensive personalization options, maintaining its core operational efficiency and quick-close strategy, which includes a 60-day closing guarantee.
Operationally, Meritage Homes continues to prioritize efficiency and cost control. The company has successfully reduced its finished home inventory by over 1,100 units year-over-year, replacing older stock with newer, lower-cost products. Cycle times have consistently remained under 110 calendar days for five consecutive quarters, enabling earlier home starts and supporting guaranteed closing periods. Despite a slight dip in active community count compared to the previous quarter, the company reiterates its full-year 2026 community count growth expectation of 5% to 10%. Furthermore, rigorous purchasing and vendor negotiations have led to a 6% year-over-year reduction in direct construction costs per square foot, providing a tailwind for future margins.
Financial Performance and Future Outlook
The second quarter of 2026 saw Meritage Homes' home closing revenue reach $1.4 billion, a 14% decrease from the previous year, primarily due to lower closing volumes and a 4% decline in average sales prices. Adjusted diluted EPS stood at $1.42, excluding certain inventory impairments and land deal charges. The adjusted home closing gross margin was 18.6%, a decline of 280 basis points year-over-year, influenced by reduced revenue leverage and higher lot costs, though partially offset by improved direct costs. Looking forward, management anticipates margin relief by late 2027 or early 2028 as lower-cost land acquired during the 2022-2025 period begins to impact the profit and loss statement, assuming stable energy prices.
For the full year 2026, Meritage Homes projects home closing volume and revenue to be approximately 5% below 2025 figures, with a cautious stance on market conditions that might necessitate higher incentives. Third-quarter projections include home closings ranging from 3,300 to 3,600 units, revenue between $1.26 billion and $1.35 billion, and diluted EPS in the range of $1.10 to $1.30. The company remains committed to its long-term gross margin target of 22.5% to 23.5% under normalized market conditions, which assumes more favorable incentive and interest rate environments. Meritage Homes also demonstrated strong shareholder returns, repurchasing over 1.5 million shares for $100 million and distributing $31 million in cash dividends, totaling 201% of earnings returned to shareholders year-to-date. The balance sheet remains robust, bolstered by a recent refinancing of its revolving credit facility, ensuring ample liquidity and financial flexibility.