2nd UPDATE: Lennar 2Q Loss Widens, But Sales Help Revenue

Creative sales strategies helped Lennar Corp. (LEN) blow through unsold inventory and easily beat the Street's revenue estimate, but it wasn't enough to narrow the quarter's loss. The builder also now has fewer homes to sell going forward.

Still, the Miami-based builder's stock soared Wednesday and was, by far, the sector's biggest gainer: After spiking more than 4% in the pre-market, shares recently traded up more than 16%, compared with the Dow Jones US Home Construction Index's 3.79% boost. All the major builders saw gains topping 1.4%.

In its fiscal second quarter, Lennar, the nation's fourth-largest builder by annual closings, saw its loss widen on increased write-downs and charges. For the period ended May 31, it posted a loss of $125.2 million, or 76 cents a share, compared with a year-earlier loss of $120.9 million, or 76 cents a share. There were 3.9% more shares outstanding in the more recent period. The latest results included 65 cents in write-downs and tax-valuation allowance charges, compared with 60 cents a year earlier.

Revenue dropped 21% to $891.9 million, though that beat the $597 million analysts surveyed by Thomson Reuters had expected. And while down nearly 20% from a year earlier, deliveries and new orders both skyrocketed from Q1: 47% and 63%, respectively.

While not all orders make it to the closing table, the company seemed optimistic. "There are some significant positive influences out there that are beginning to shape a more positive future," Stuart Miller, president and chief executive, said in an earnings call. "The abject pessimism that has defined the overall market sentiment for the past year seems to have given way to a sense that opportunities are available for those who can qualify."

The builder said liquidity was aided by shaving completed, unsold inventory by 53% to 626 homes from 1,321 homes at Feb. 28. The industry's average is 1,365 homes, with 817 of them finished, according to JPMorgan.

Known as speculative inventory, unsold homes have dogged builders during the downturn because they typically require extensive, profit-eroding specials - such as free upgrades or tropical vacations - to catch buyers' eyes. Lennar has shown itself as one of the more creative marketers: Its specials have included no-money-down and a 3.625% mortgage rate - one of the industry's lowest for the loan's life, instead of a "teaser" for an introductory period before it resets higher. More recently, it tried a "sealed-bid home auction" that let buyers help set the price.

Such specials appear to have been effective, given that builders face tough competition from foreclosures which can sell for bargain prices, and have so far been the stars of the spring selling season. The cancellation rate came in at an impressive 15%, down from 22% in 2008's second quarter. The rate, which compares with an industry average of 25%, is well below the 33% the builder reported at the end of 2006, according to JPMorgan.

But the deals came with a cost: Sales prices remain depressed. Sales incentives increased 8% year-over-year and now stand at $52,600 per delivered home, or some 21% of the average sales price, according to Fox-Pitt Kelton. UBS expects incentives "will likely remain elevated as the company focuses on maintaining its sales pace."

The dramatic reduction in front doors leaves the builder with fewer homes to sell at a time when builders have slowed down construction in response to the worst downturn in decades. That could hurt Lennar as it tries to lure first-time buyers looking to tap a federal tax credit of up to $8,000 for deals before Dec. 1. Such contracts need to be inked soon to close on time.

And there's concern the industry could see fewer sales going forward. While the federal tax credit could be renewed and/or expanded, that's not definite. And the $100 million California set aside to give buyers of new homes a tax credit of up to $10,000 is nearly depleted.

Meanwhile, the company recorded $99 million in pre-tax impairments and option write-offs, well below Credit Suisse's $428 million estimate.

That doesn't ease the firm's prediction of pain going forward. "We still expect $1.1 billion in total future charges as we continue to see significant risk from its joint venture holdings and expect further pricing pressures will hurt land values."

-By Dawn Wotapka, Dow Jones Newswires; 212-416-2193; [e-mail]

(Kerry Grace contributed to this report.)