Hilla Sferruzza: When we’re looking at it, Alan, we mentioned, just on a mix perspective, 89% of our sales in the quarter were entry-level. It’s not that different from 82% last year’s fourth quarter. So the mix is in somewhere in the 80s category. So that’s not probably a material shift that with this material, a price reduction that we’re still north of 20% margin. That gives us the confidence to say that, as we sit here today, we don’t see broad-based impairment with north of 20 margins not just in the current quarter but in the quarter that we gave guidance for. So, how does that math work? How can you drop 20% from 31.6% and still be above 20%? There are some other pieces that go into the mix, certainly some increased efficiencies and simplification of the product.
But then also the high volume is helping us leverage some costs, particularly as we saw in the fourth quarter. So there’s a lot of other pieces that roll into those calculations. But overall, you’re seeing the impact of lower prices already in our numbers which is why we feel comfortable, especially looking at our January numbers that without any large material shifts in the market that we have a good ASP to hit our 3 to 4 net sales.
Phillippe Lord: And where we’ve made the most meaningful adjustments in Phoenix, Denver, we’ve also saw the most meaningful direct cost savings which have softened what our margins have done. When we quoted earlier in our script that we got 15,000 per house, that’s in Colorado and Phoenix. That’s where we got those numbers where the market has adjusted the most and also where prices ran up the most over the last 3 years.
Alan Ratner: That’s all really helpful. And I think it’s really impressive that you’ve been able to reduce prices as much as you have and bring the affordability equation at a more reasonable level for your consumers and still generate the margins you are. I think it obviously speaks to the execution of the operation there. So well positioned to kind of take — continue taking share from that regard. The second question, we heard from another builder last night that kind of gave similar commentary on January activity but they did kind of add in a comment that they might have seen a bit of a leveling off of the improvement over the last week or 2 kind of implying that things really accelerated kind of back half of December into early January. Not to get too fine here on weekly activity here but is that a statement you would agree with? Or do you feel like the market is continuing to gain momentum at this point?
Phillippe Lord: I mean we just gave out monthly. Now you want weekly sales trends. I can just tell you, we would not agree with that statement.
Operator: The next question is coming from Mike Rehaut of JPMorgan.
Mike Rehaut: I appreciate you taking my questions. I just wanted to circle back and make sure I’m understanding some of the puts and takes on the gross margin side and obviously appreciating you’re only giving first quarter guidance at this point. But if I heard right, you said that you’re thinking about your long-term gross margins being in a 21% to 22% range, I believe you said which is where you are in the first quarter. How should we think about the puts and takes beyond first quarter just directionally at least? Because obviously, we’re talking a lot about reduced construction costs, either materials or labor or both which, everything else equal, could be a tailwind, as you had said, might impact late 2023, early 2024. I’m wondering if there’s anything that would kind of perhaps even offset that, if you’re thinking about trying to hit a 21%, 22%, it could even still be above that, given some of the lower construction costs.
Or is there any lag in the impact of the incentive and pricing environment that you’ve seen over the last few months that might create a little bit of a — even a further dip in the second quarter relative to where you are in the first quarter?
Hilla Sferruzza: So thanks for the question, Mike. The 2020 — the 21%, 22% that we guided to for the first quarter that’s — but there are any homes that are under production. So we know what those costs are, right? They’re closing in the quarter. We either came in to them with backlog or there’s specs that can close in the quarter. So we have a good visibility into Q1. Now not to be too cute here but when we spoke about our long-term trend, obviously, we’re not talking about 2023 as a whole. We’re talking about long-term trends. We said at or above from the normal margin of 20%. So I think that what we’re trying to communicate there is that the long-term margins are 22% or north of that. So to be honest, we kind of just really got our whole operational structure in place right when COVID hit, right?
2019 is the first year that we really kind of had all engines coming in a new strategy. And then we had COVID and it was impossible to look at what an environment would be in a normalized pace. So at the beginning, we thought it would be 21. Since then, we raised it to 22. And on today’s call, we said normalized would be at or north of 22 as we continue to harvest the efficiencies that we’re seeing in the business. So when we look at Q1, I don’t — I can’t predict sitting here today if it’s the trough. I know the builder took that position, so that’s going to be the low point for the year. By not providing guidance for the whole year, we’re not confident that we understand all the dynamics yet for the rest of 2023. We do feel confident in the long term operational structure that we have, the long term will be 22% or higher.
As that clarifies over the coming quarters, we’ll give additional insight there.
Mike Rehaut: That’s great. That’s helpful. I appreciate that, Hilla. And just to make sure also one element of my question around the current pricing environment. Would you say that in terms of where you are in the last couple of months, in terms of incentives on orders that, that is more or less fully reflected in your first quarter gross margin guidance? Or because I would assume that incentive levels in December were higher than October, let’s say but maybe I’m wrong on that? So just trying to get a sense of where the first — what the first quarter gross margins reflect and if current incentive levels are higher than that or in line with that.
Hilla Sferruzza: So I’ll just clarify. I know you said incentives but just to clarify, we don’t look at incentives because we expect builder primarily with 89% of our volume coming from entry level. So we use base price incentives and financial discounts interchangeably because we’re solving for a payment for the buyer. So all in, what you’re seeing in our Q1 guidance includes the January sales. This is our current volume and what we expected. Those specs that we mentioned that we have 1/3 of them entering the year, ready to close in the quarter, we sold some of those. We sold 1,200 of those in Q1 already. So what we’re seeing in the margin guidance of 21 to 22 reflects the current environment.
Operator: The next question is coming from John Lovallo of UBS.
John Lovallo: I know you mentioned about potentially being more open to returning capital to shareholders. But just thinking about your liquidity position, the stock’s valuation, there’s no debt coming due to 2025, I mean, is there an opportunity here to get aggressive on share buybacks?
