M/I Homes Inc

NYSE:MHO

Earnings Call Transcript 2018-Q2

[Operator]

Good afternoon. My name is Kyle, and I will be your conference operator today. At this time, I would like to welcome everyone to the M/I Homes Conference Call. All lines will be placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session [Operator Instructions]. Thank you.

I would like to turn the call over to our host, Mr. Creek. You may begin your conference.

[Phillip Creek, Chief Financial Officer and Director]

Thank you. Thanks for joining us. Joining me on the call today is Bob Schottenstein, our CEO and President; Tom Mason, EVP; Derek Klutch, President of our Mortgage Company; Ann Marie Hunker, VP, Corporate Controller; and Kevin Hake, Senior VP. First to address Regulation Fair Disclosure; we encourage you to ask any questions regarding issues that you consider material during this call, because we are prohibited from discussing significant non-public items with you directly. And as to forward-looking statements, I want to remind everyone that the cautionary language about forward-looking statements contained in today’s press release also applies to any comments made during this call.

Also, be advised that the Company undertakes no obligation to update any forward-looking statements made during this call. Also during this call, we disclosed certain non-GAAP financial measures. A presentation of the most directly comparable financial measure calculated in accordance with GAAP and a reconciliation of the difference between the non-GAAP financial measures and the GAAP measure was included in our earnings release issued earlier today that is available on our Web site.

With that, I’ll turn the call over to Bob.

[Bob Schottenstein, Chairman, President and Chief Executive Officer]

Thanks, Phil. Welcome everyone. Good afternoon. Thank you for joining our call to review our second quarter results. We reported another solid quarter of growth in revenue and earnings and we are well positioned for another strong year. We are continuing to experience healthy sales and traffic, and housing demand is benefiting from continued growth in the overall U.S. economy.

Our second quarter results set all-time second quarter records for new contracts, homes delivered and revenues. We saw 1,631 homes in the second quarter. This was 17% increase from a year ago and the highest number of new contracts for the second quarter in our Company’s 42-year history. We have been achieving solid growth for the past 10 years since coming out of the housing downturn with one of the most consistent growth rates of any public builder over that same 10 year period. Specifically, our second quarter contracts have grown at 12% compounded rate since 2008 and our annual sales, at least through last year, have also grown at that 12% rate.

In the second quarter, we experienced strong sales across most of our markets, and our aggregate sales absorptions per community also improved. As a result of our strong sales, our backlog sales value increased to 29% compared to last year's second quarter to an all-time record of $1.2 billion in value. And units of backlog were up 23% to 2,966 homes.

We closed 1,409 homes in second quarter, which was also a record for the quarter and represented 16% increase over a year ago. Total revenues increased 22% for the quarter to record $558 million, while the average home closing price increased 6% from last year to $387,000 per home.

Pre-tax income for the second quarter increased 8% to $36.5 million and that excludes $3 million of purchase accounting adjustments in this year's second quarter and also includes the impact of some stucco-related charges in last year's second quarter. Clearly, we benefited from a significantly lower tax rate in this year's second quarter. And as a result, net income improved dramatically by more than 60% to $27.9 million from $17 million in last year's second quarter.

While we were pleased with our overall growth and our earnings for the quarter, our gross margins did decline from last year's second quarter by about 140 basis points to 20%. That number excludes the purchase accounting charges I referred to as well as the stucco-related charges from a year ago. The decline in our gross margin was primarily due to cost pressures in both, labor and materials for new home construction, as well as the mix of communities delivery homes in the quarter, rising land costs and frankly, lower pricing margins on our mortgage originations. Well all that said, consistent with our prior comments over the last year or so, we believe we will continue to see our gross margins in the 20% to 21% range.

We continue to make progress on our overhead expense ratio, which improved 60 basis points from last year's second quarter with total SG&A for the quarter coming in at 12.6% of revenues. We continue, as we've said over the last several years, to be very focused on improving our pre-tax margins. And we primarily expect to do this by continuing to gain leverage with our SG&A ratio as low as growing our divisional operations.

Our balance sheet liquidity remained strong. We ended the quarter with a healthy home building debt to capital ratio of 47% and shareholders' equity of $816 million, which is 18% better than a year ago. We are well positioned for another strong performance this year. We have a solid lot position of more than 28,000 lots under control and feel very good about the location of our communities. Speaking of communities, we opened an additional 16 in the second quarter and are on track to achieve our planned community count growth this year with 209 active communities at the end of the quarter, up approximately 12% from the year ago. We fully expect to continue to expand our community count and grow our aggregate market share in our 16 existing markets, while remain focused on continued improvement in our profitability.

Before reviewing our housing markets, in particular, I want to comment on the success we've had with our Smart Series line of homes. As you may recall, our Smart Series is a more affordable product line with an average sale price below $300,000 that we developed several years ago to cater primarily to the first time home buyer. We've been extremely pleased with the success and growth of our Smart Series locations. We are now offering the Smart Series in half of our markets that’s eight of 16 markets. And our Smart Series of the aggregate comprised close to 15% of total company sales. Additional Smart Series locations are planned for later this year and well into 2019 and beyond.

Now, I'll provide more detail about our specific housing markets and their performance, first beginning with the Southern region, which is comprised of our three Florida and four Texas markets. In the Southern region, we have 666 deliveries for the quarter, this is the 28% increase from a year ago and 47% of company total. New contracts in the Southern region increased 20% year-over-year. The dollar value of our sales backlog in the Southern region at the end of the quarter was 38% higher than a year ago, and our controlled lot position in the Southern region slightly decreased to 2% compared to last year.

We had 95 active communities in the Southern region at the end of the quarter. This is 9% increase from June of last year. And as to our four Texas divisions, in particular, we have 55 communities at the end of the quarter versus 56 a year earlier. We are starting to gain traction in all of our newer markets, in particular with five communities now open and selling in Sarasota, and continued improved scale in all four Texas markets, which is leading to improved performance year-to-date.

Finally, on the Southern Region, let me just add that Orlando and Tampa continued to be very strong operations for us. Next is the Midwest region, which consists of our Columbus, Cincinnati, Indianapolis, Chicago, Minneapolis and Detroit markets. We have 554 deliveries in the second quarter. This was up 27% from the year ago and represents nearly 40% company total. New contracts in this region were up 24% year-over-year that includes our new Detroit divisions, and closings were up 13% in our existing Midwest divisions, excluding the impact of Detroit.

Our sales backlog in the Midwest was up 35% from a year ago in dollar value and our controlled lot position in the Midwest region improved by 23% compared to a year ago. Both the backlog and lot position number were positively impacted by our recent Detroit acquisition. We ended the quarter with 87 active communities in the Midwest, that's an increase of 32%. 10 of those communities came from our Detroit acquisition. With respect to Detroit, I'm pleased to report that we're very pleased with the acquisition off to a very solid start its first full quarter of operations for us, and we've made solid progress on integrating systems and processes. Overall, our entire Midwest operations -- all of our five Midwest operations in addition to Detroit continued to perform at a very high level.

Finally, the Mid-Atlantic region, Raleigh and Charlotte have been strong markets for us for many years. We have, however, experienced a modest fall off in sales pace and closings in both of these markets, primarily due to getting new communities online and selling out of existing communities earlier than anticipated. The DC market on the other hand continues to be challenging for us. We have reduced our investment level and number of active communities in that market. We ended the quarter with 27 communities in the Mid-Atlantic region, which is down 21% from a year ago. As a result, new contracts were down 9% for the quarter and sales backlog value was down 3% from a year ago. We delivered 189 homes in the Mid-Atlantic region in the first half of 2018. This is 26% decrease from a year ago and 13% of total. Our total controlled lots in the Mid-Atlantic region at quarters’ end decreased 9% compared to last year.

Before turning the call over to Phil, let me simply conclude by saying what I’ve already said, but I want to say it one more time. We’re very pleased with our first half results and believe we are well positioned to have a very good 2018. Phil?

[Phillip Creek, Chief Financial Officer and Director]

Thanks Bob. As far as financial results, new contracts for the second quarter increased 17% to a second quarter record of 1,631 and our community count was up 12%. Our new contracts were up 22% in April, up 15% in May and up 13% in June. As to our buyer profile, about 34% of our second quarter sales were the first time buyers compared to 38% in this year’s first quarter and 45% of our second quarter sales for inventory homes compared to 42% in the first quarter.

Our active communities were 209 at the end of the second quarter, up 12% versus last year’s second quarter and up 11% from year end. The breakdown by region is 87 in the Midwest, 95 in the South and 27 in the Mid-Atlantic. During the quarter, we opened 6 new communities while closing 12 and we opened 38 new communities in the first half of the year. For 2018, our current estimate is that average community count for the year should be up about 10% to 15% from the average of 183 communities in 2017.

We delivered 1,409 homes in the second quarter, delivering 51% of our backlog compared to 55% a year ago. Revenue increased 22% in the second quarter of ’18, reaching a second quarter record $558 million. This was primarily the result of an increase in number of homes delivered, as well as record second quarter revenue from our financial services operation. Our average closing price for the second quarter was 387,000, 6% increase when compared to last year’s second quarter average closing price of 366,000. And our backlog sale wise is 396,000, up 5% from a year ago. Land gross profit was 82,000 in the second quarter compared to 142,000 in last year’s second quarter.

We sell land as part of our land management strategy and as we see profit opportunities. Excluding the purchase accounting adjustments from our first quarter acquisition, our second quarter operating gross margin was 20%. This is down 140 basis points year-over-year and down 60 basis points over this year’s first quarter. This decline was primarily due to cost pressures, particularly from lumber, closing mix and lower margins on our mortgage origination. We estimate that our construction costs increase about 2% in the second quarter and our first quarter construction costs were up about 1.5%.

Our second quarter SG&A expenses were 12.6 of revenue, improving 60 basis points compare to 13.2 a year ago, reflecting greater leverage, improving our operating efficiencies continue to be a major area of focus. Our second quarter pre-tax results were impacted by $3 million of purchase accounting expense related to our first quarter Detroit acquisition. Excluding these adjustments, pre-tax income was $36.5 million, an 8% increased over last year's $33.7 million, which excludes $8.5 million of stucco-related charges taken in last year's second quarter.

Interest expense increased $1.1 million for the quarter compared to last year. Interest incurred for the quarter was $12.1 million compared to $9.1 million a year ago. This increase is due to higher outstanding borrowings in this year's second quarter, as well as their higher weighted average borrowing rate. We have $19 million of capitalized interest on our balance sheet. This was about 1% of our total assets. And our effective tax rate was 17% in the second quarter compared to 33% in last year's second quarter. Our rate benefited from the Tax Cuts and Jobs Act and energy tax credits under the Bipartisan Budget Act of 2008. We currently estimate our annual effective rate in 2018 to be 25%.

Our earnings per diluted share for the quarter increased 42% to $1.04 per share, excluding the impact of acquisition related cost of 0.08% per diluted share. We redeemed outstanding convertible debt during the first quarter of this year, which will be accretive to our diluted earnings per share in the remaining two quarters of this year. With that, I'll turn it over to Derek Klutch to address our mortgage company results.

[Derek Klutch, President of our Mortgage Company;]

Thanks, Phil. The financial services operation benefitted from strong number of closings with higher volume compared to last year. However, as Bob and Phil mentioned, we continued to see lower pricing margins on the loans originated due to competitive pressure. As a result, our mortgage and title operations pre-tax income decreased from $6.2 million in 2017 second quarter to $5.2 million in the second quarter of this year.

Loan-to-value on our first mortgages for the second quarter was 82% in 2018, down a point from 2017’s 83%. 80% of the loans closed in second quarter were conventional and 20% were FHA or VA. This compares to 75% and 25% respectively for 2017 same period. Our average mortgage amount increased to $306,000 in the quarter compared to $299,000 in 2017 second quarter. Loans originated increased 11% from 840 to 930 and the volume of loans sold increased by 5%. For the quarter, the average borrower credit score on mortgages originated by M/I Financial was 7.44, up from 7.40 a quarter earlier.

Our mortgage operation captured about 80% of our business in the quarter, the same as last year's second quarter. At June 30th, we had $68 million outstanding under the MIF credit agreement, which is $125 million commitment that was recently expanded and expire at June of 2019. We also have $25 million outstanding under a separate $35 million repo facility, which expires on October of this year. We expect to extend to the repo facility prior to its expiration. Both facilities are typical 364 day mortgage warehouse line that we extend annually.

Now, I'll turn the call back over to Phil.

[Phillip Creek, Chief Financial Officer and Director]

Thanks Derek. As far as the balance sheet summary, we continue to manage our balance sheet carefully, focusing on investing in new communities, while also managing our capital structure. Total homebuilding inventory at June 30, 2018 was $1.7 billion, an increase of $273 million above last year's levels, primarily due to higher investment in our backlog, higher community count and more finished lots, including our acquisition of Pinnacle Homes.

Our unsold land investment at June 30, 2018 is $707 million compared to $612 million a year ago. And at June 30th, we had $316 million raw land and land under development and $391 million of finished unsold lots. We owned 4,902 unsold finished lots with an average cost of 80,000 per lot and this average lot cost is 20% of our 396,000 backlog average sale price. Our goal is to maintain about one year of supply of owned finished lots. The market breakdown of our $707 million of unsold land is $282 million in the Midwest, $304 million in the South and $121 million in the mid-Atlantic.

Lots owned and controlled as of June 30, 2018 totaled 28,000 lots, 47% of which were owned and 53% under contract. We own 13,000 lots, of which 41% are in the Midwest, 46% in the South and 13% in the mid-Atlantic. A year ago, we owned 11,000 lots and controlled an additional 16,000 lots for a total of 27,000 lots. During this year second quarter, we spent $90 million on land purchases and $47 million on land development for a total of $137 million and about $45 million of the purchase amount was raw land. Our estimate today for 2018 land purchase and development spending is $575 million to $625 million. And last year, we spent about $530 million of land.

At the end of the quarter, we had 374 completed inventory homes, about two per community and 1,272 total inventory homes. Of the total inventory, 435 were in the Midwest, 631 are in the Southern region and 206 are in the mid-Atlantic. At June 30, 2017, we have 338 completed inventory homes and 1,093 total inventory homes. At June 30, 2018, we had goodwill of $16 million as a result of our Detroit acquisition. Our financial condition continues to be strong with $816 million in equity, and homebuilding debt to cap ratio of 47%.

At June 30, 2018, there was $182 million outstanding under our unsecured revolving credit facility. We increased our borrowing availability under this facility from $475 million to $500 million by exercising our $25 million accordion during the second quarter of this year. This completes our presentation. We'll now open the call for any questions or comments.

[Operator]

[Operator Instructions] Your first question comes from the line of Alan Ratner from Zelman & Associates. Your line is open.

[Alan Ratner, Zelman & Associates]

So my question on the margin guidance you gave, the 20% to 21%. On one hand, the order numbers are very strong and I think certainly stronger than what your peers are reporting. And what's the macro data is suggesting these days. So it seems like you're still seeing a pretty strong demand environment. But in order to hit the 20% to 21% gross margin guidance, I guess it implies a pretty healthy ramp in the back half of the year, both sequentially as well as just seeing that year-over-year compression shrinking. So I was hoping you could just dig in a little bit more on what you're seeing on the pricing power side, are you still seeing a pretty good ability to push prices on to consumers? And then is there any alleviation expected on the cost front that gives you comfort of hitting that the guidance for the year? Thank you.

[Phillip Creek, Chief Financial Officer and Director]

As far as this year the first quarter, margins were 20.6% equals to second quarter there were 20%. And again, we're talking about staying in that 20% to 21% approximate range for the year.

[Bob Schottenstein, Chairman, President and Chief Executive Officer]

I think the one thing -- this is Bob Schottenstein, Alan and thanks for the question. When our margins were 21.4%, I think in response to a question and might have even been from you, this was a year or so ago. I think we said then that we believe that our margins would likely run in the range quarter-to-quarter of 20%, 21%. You never know for sure, because you’re forecasting the future. But that's where we really believe the business is. There's always going to be a little choppiness quarter-to-quarter.

We had some things happen this quarter that added up a bit that put us into lower end of that range. I think that some of the cost pressures appear particularly the lumber side appear to be subsiding. I think we've already heard a little bit about that. That's a good thing. Certainly, did maybe fully appreciate the impact of some of the pressures on the mortgage side, understandable with a lot of the refinancing business going away that's creating other pressures within the lending world. But we made it 20% to 21% business this quarter was closer to 20% and our goal is to be closer to 21%.

[Alan Ratner, Zelman & Associates]

And then just on that same topic, obviously, your orders are quite healthy. Some of the macro data has been a bit softer of late. I've seen a few of your competitors have launched some national sales events in over the last couple of weeks. I'm not sure if that's normal for this time of year or something outside of what typical seasonality would suggest. But are you -- we're all concerned about hitting a little bit of a wall on the pricing front in your markets? I guess the question is how much more room do you have to push that? And are you starting to see some incentive creeping up at all from peers?

[Bob Schottenstein, Chairman, President and Chief Executive Officer]

A couple things, first of all, yes, there have been some national sales incentives announced, retail one coming up in a few weeks ourselves, which we did last year and I believe the year before as well. Some of that is common this time a year. I think there will be pressure on the ability to raise prices. I think there will be maybe a little softening across the industry of some margins. I don't -- I already said how we think our margins are going to be. But I also think that we remain very bullish on our industry. I'm not saying it's a runaway trade, because it isn't and I think you know that.

But I think that inventory levels, while they’re creeping up a little bit, they’re still relatively very, very low. In some markets at or near historic lows for this time of year; even though they have kicked up here in recent months; and I think that the fundamentals overall remain good for housing; housing is nowhere near where most people think it should be; we gave the guidance on land spend, it's about 10% to 15% increase over 2017; that tells you what we think and how we expect to continue to grow. And we think we will. I mean, we’ve grown to the 10% to 12% or actually closer to 12% rate for the last seven, eight, 10-years and we're working to continue that over the next several years.

[Operator]

Your next question comes from the line of Alex Barrón from Housing Research Center. Your line is open.

[Alex Barrón, Housing Research Center]

I wanted to ask about your exposure to the entry level segments, and just your thoughts around whether you guys are seeing more opportunity there to expand, if you can talk about that?

[Bob Schottenstein, Chairman, President and Chief Executive Officer]

Yes. I mentioned in my comments, Alex that several years ago we launched our entry level line actually began in Tampa. We internally branded it as our Smart Series. And we started with one community several years ago. Today, we're offering the Smart Series, which is again our -- it's primarily designed to cater to the first time buyer, average price below $300,000. And we're now selling in half of our markets. It's about 8% to 9% of total communities. And it's approximately 12% to 15% today of total company wide sales. My guess is it will continue to hover around that 15% for the next number of quarters, it may even grow slightly above that. We have a number of planned new community openings for Smart Series locations later this year and in 2019. I think over the next number of years it will become a greater percentage of our business. So I don't know if that will be over 20%, but I think it will continue to grow from where it is today. The market has reacted excellently to it so far and we're very pleased with the rollout.

[Phillip Creek, Chief Financial Officer and Director]

And another point, Alex is we're just starting to get our first Smart Series communities opened in Texas and we're really excited about getting it opened in almost all of our Texas cities. Most of that won't be happening until next year, because we've had to develop a lot of that ground ourselves. But we think it's going to be very well received in Texas.

[Alex Barrón, Housing Research Center]

So if it's being well received, why would you only limit it to 20%, why wouldn't you make it something bigger?

[Bob Schottenstein, Chairman, President and Chief Executive Officer]

Well, so first of all, that's where I realistically think it will be. Secondly, our move up business very strong and continues to grow. And I think that the Company has been growing at 10% plus clip. And that’s something that we'll constantly look at and evaluate, product is always evolving. I never want to be one to put all -- too many or all of our eggs in any one basket. We don't have to. We don't need to. And we'll see. We'll monitor it. Some of our divisions, Phil mentioned Texas and some of our Texas markets I think the half of our business. And some of our other divisions and maybe none of our business, it's just depends upon suitability, zoning regulations, pricing and so forth.

[Alex Barrón, Housing Research Center]

Couple of other questions, one I might have missed it and I apologize because I’ve got a little bit late on the call. Just wanted to understand what drove the lower tax rate this quarter? And second, your thoughts around the stock repurchases, where the stock is at this level?

[Ann Marie Hunker, Vice President, Corporate Controller]

The lower tax rate was a result of the lowering of the corporate rate from 35% to 21%, as well as the retroactive granting of the energy efficient credit. We finished our certifications in this quarter and we took $3 million benefit, and it relates to 2017 business.

[Alex Barrón, Housing Research Center]

You haven't taken that as corporate in?

[Ann Marie Hunker, Vice President, Corporate Controller]

No, I mean as you recall, it extended late in the year and we hadn’t done all of our certifications at that point.

[Alex Barrón, Housing Research Center]

And as it pertains to your thoughts or comments on stock repurchases?

[Bob Schottenstein, Chairman, President and Chief Executive Officer]

I'll simply say this. It’s something that we look at from time-to-time with our board. We have a board meeting coming up in a couple of weeks and we'll look at it again at that point. I don't know if Kevin Hake wants to add anything to that. It looks like he does…

[Kevin Hake, Senior Vice President]

So I’ll just add that we consider repurchases as part of our overall capital and our cash flow projections as we move forward and try to stay on track over a longer period of time. We do feel comfortable with our leverages. We did make larger acquisition earlier in the year and we're digesting that. We do feel pretty good about where our balance sheet. So we within that context, as Bob said that we would talk with Board. We're clearly not pleased with the share price is. But we think decisions to repurchase shares need to be part of a bigger capital structure overall position.

[Operator]

[Operator Instructions] Your next question comes from the line of Jay McCanless from Wedbush. Your line is open.

[Jay McCanless, Wedbush]

Phil, could you please repeat what the monthly order comps were? I missed those.

[Phillip Creek, Chief Financial Officer and Director]

The order by month Jay were -- our sales were up 22% in April, they were up 15% in May, and they were 13% in June.

[Jay McCanless, Wedbush]

And then would you guys -- or how much did Pinnacle contribute from a unit order standpoint for quarter?

[Phillip Creek, Chief Financial Officer and Director]

Detroit, as Bob said, Detroit was about 10 communities, the orders were about 2% or 3% of the increase. So without that we were still up 13%, 14%.

[Jay McCanless, Wedbush]

And then on the financial services, if you -- could you maybe quantify what the actual impact was either in gross margin percentage or in dollars from less -- I'm assuming it's less gain on sale for loan?

[Phillip Creek, Chief Financial Officer and Director]

If you look at the impact of the 140 basis points change in the margin, about 50 basis points of that was mortgage operations.

[Jay McCanless, Wedbush]

And then, Bob, I've seen the same increases in inventory that you're talking about. It does look like some more product, both from an existing and new side, is coming to market. Without generalizing too much, are you seeing more entry level product coming out? Is it more people trying to sale second and third move up? What are you seeing in your different markets and is product that you think is competitive than what M/I is offering now?

[Bob Schottenstein, Chairman, President and Chief Executive Officer]

Number one, I think that first of all, it's hard to paint it with two broader brush; as an example, the inventory levels, to the best of my knowledge in the latest data that I've seen, have not increased in all of our markets; Orlando and Tampa, in particular, I think they continue to decline; whereas in some other places like Charlotte, they have jumped up a little bit more than nominally. With all that said, in many of our markets they’re still lower than they were a year ago. I'm really looking at sequential month -- the numbers that I'm looking at, I focus more on how the inventory levels look in June versus May, or in May versus April as opposed to June versus June a year ago.

In any of our markets, the inventory levels -- and primarily I'm focusing on MSL Listings, are still at or about the same level or lower than a year ago, but they have ticked up sequentially. I think they’re still at very low levels but it’s something that we watch and watch closely. And so far I don't really feel like it's impacting us. In most of our markets well located homes are selling very fast. I think that pricing power though is going to be very, very -- is going to defer dramatically from submarket to submarket and depending upon where you are.

[Jay McCanless, Wedbush]

And that was going to be our next question. Are you hearing, and I think Alan asked this too. But are you hearing more anecdotal evidence about builders cutting price and maybe trying to move some specs a little bit faster, just given how soft the macro data seems to have been in last month, as well as rates starting to pick?

[Bob Schottenstein, Chairman, President and Chief Executive Officer]

We haven't even had 12 hours to react to that data, which will be revised tomorrow and the next 30 days. But I know everybody likes to react intensely that what just was said. I haven't really seen or heard much craziness. I mean, yes, there is some annual sales that have been announced, as I indicated, we’ve got one coming up. We have planned out nine months ago. It's not because of the announcement yesterday. And we still think it makes sense. And my suspicion is that some of the things that we're seeing other builders do is part of an overall more comprehensive review. I think most people are still feeling pretty good about demand.

[Phillip Creek, Chief Financial Officer and Director]

I mean, pricing power is so much driven by the location you have, the products you have, the competition you're faced with. And we're opening a lot of new stores, which we're really excited about. But we did have a few more cost pressures the second quarter than we did the first. But as Bob said, the business overall continues to be strong.

[Jay McCanless, Wedbush]

And just would love to also chime in about share repurchases, given that it seems like it may be a bit trickier environment going forward. I’d certainly love to see you guys starting and maybe do a little share repurchase, because it seems like stock is very inexpensive at these levels.

[Bob Schottenstein, Chairman, President and Chief Executive Officer]

I agree with that last comment. And as we said before, it's something that we do look at from time-to-time. And we’ll be addressing at least the issue and discussing it with our Board at our upcoming August meeting.

[Operator]

Your next question is from the line of Alex Barrón from Housing Research Center. Your line is open.

[Alex Barrón, Housing Research Center]

I wanted to ask about the purchase accounting adjustments. Would you expect that to be a few more quarters or just one more quarter?

[Ann Marie Hunker, Vice President, Corporate Controller]

It will be about two more quarters, but primarily it relates to the profit and inventory. So when it comes through at the inventory that we bought, we have bought from as we bought some as they close. It could be two to three more quarters but some of that relates to spec homes as well.

[Operator]

There are no questions at the moment. Please continue.

[Bob Schottenstein, Chairman, President and Chief Executive Officer]

Thank you very much. Look forward to talking to you again next quarter.

[Operator]

That concludes today's conference. You may now disconnect.