CAVCO INDUSTRIES, INC. (CVCO) Q3 2026 Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the Third Quarter Fiscal Year 2026 Cavco Industries, Inc. Earnings Call Webcast. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Mark Fusler, Corporate Controller and Investor Relations. Please go ahead.

Good day, and thank you for joining us for Cavco Industries Third Quarter Fiscal Year 2026 Earnings Conference Call. During this call, you'll be hearing from Bill Boor, President and Chief Executive Officer; Allison Aden, Executive Vice President and Chief Financial Officer; and Paul Bigbee, Chief Accounting Officer. Before we begin, we'd like to remind you that comments made during this conference call by management may contain forward-looking statements. Forward-looking statements include statements about our future or expected business and financial performance and are not promises or guarantees of future performance. They are expectations or assumptions about Cavco's financial and operational performance, revenues, earnings per share, cash flow or use, cost savings, operational efficiencies, current or future volatility in the credit markets or future market conditions. All forward-looking statements involve risks and uncertainties, which could affect Cavco's actual results and could cause its actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of Cavco. For a discussion of material risks and important factors that could affect our actual results, please refer to those contained in our filings with the SEC, which are also available on our Investor Relations website and at sec.gov. This conference call also contains time-sensitive information that is accurate only as of the date of this live broadcast, Friday, January 30, 2026. Cavco undertakes no obligation to revise or update any forward-looking statements, whether written or oral, to reflect events or circumstances after the date of this conference call, except as required by law. Now I'd like to turn the call over to Bill Boor, President and Chief Executive Officer. Bill?

Thanks, Mark. Welcome, and thank you for joining us today for our third quarter results for fiscal 2026. There are a lot of moving parts in our Q3 results, mostly due to the closing of the American Homestar deal and its impact on the quarter. Later in my comments, I'll discuss the integration activities and our solidifying view of the deal synergies. But I'd like to start by framing the discussion that Allison and Paul will fill in around the profit and EPS results. The year-over-year EPS decrease is best dissected starting from the bottom of the income statement. Our tax rate was considerably higher than a year ago, partly due to declining tax credits from the phasing out of the Energy Star program and partly due to nondeductible deal costs. Moving up the P&L to SG&A, the increase this quarter was mainly the result of bringing American Homestar overhead costs into the company and the aforementioned one-time transaction costs. These SG&A and tax rate items represent a considerable part of the year-over-year EPS difference, but not all of it. So now let's get into the underlying business environment and results. Based on HUD shipment data, industry shipments slowed in October and November. Those 2 months were down 13% from the calendar 2024 period. We don't yet have the December data point to round out the quarter. We were not immune to the overall decrease. Excluding the volume pickup we got from American Homestar, our volume was down about 4% compared to last year and 6% sequentially. From an operational perspective, we took some additional down days around the holidays where it made sense, but we deliberately maintained our daily production rate or floors per day so that we could stay positioned for opportunities in the spring selling season. While we're all looking to see how orders shape up in the weeks ahead, the bias in our plants generally is to hold pace and go up from here whenever orders and backlogs allow. As part of staying poised for market opportunities, we utilized about a week of overall backlog, similar to what we did last year in the third quarter, and we finished this quarter in the 4 to 6 weeks range. Early indications are that backlogs are stable and could increase or if we pick up production pace, be maintained at this level heading into the spring. Last quarter, I referenced some relative slowdown in the Southeast region of the country compared to other regions. I said at the time that we didn't see any systemic reason for the variation and sure enough, the Southeast stabilized and saw higher volume in Q3 versus Q2, while most all of the other regions had decline in shipments. Regarding channels, communities represented most of the reduced volume we experienced. Retailers remained steady quarter-to-quarter. A positive indicator of underlying demand continues to be average selling price, which grew sequentially despite the volume drop-off. After considering the impacts of product mix and retail integration, both of which pushed average selling price upward, single-section home prices were roughly flat and multi-section pricing was up. We have seen the trend toward multi-section homes for a while now, both in the HUD data and our results. It's difficult to pinpoint any one reason. However, it seems fair to conclude that affordability at the lowest price levels is increasingly strained. In other words, households that are seeking to become homeowners of the lowest-priced homes seem to be increasingly priced out or they're lacking the confidence to purchase in this environment. Sequentially, our gross margin dropped in the quarter despite the average selling price increase. While usually the primary factors driving movement in factory-built gross margin are manufacturing costs, those period-to-period changes roughly netted out. We saw some compression between retail and wholesale prices in our retail operations, which drove the bulk of our gross margin decrease. And to be clear, those retail comments are based on our pre-Homestar network, not due to the addition of the acquired operations. And it's worth noting that our retail operations remain primarily centered in the South Central region. We don't believe that price compression is either an indication of the broader market or that it represents a meaningful shift over time. I know the focus is rightly looking forward and trying to figure out where the industry will go from here in the coming quarters. While the uncertainty remains, the tone we are picking up in both our operations and in the market is optimistic. The leading indicators such as retail traffic remain healthy. Notably, policy discussions are increasingly focused on affordable housing and specifically on increasing supply for first-time buyers. Affordable housing is one of the highest voter priorities heading into the November election and policies to increase supply, remove barriers, enable innovation and help buyers are all supportive of factory-built housing. It will be interesting to see the proposals shape up in the coming months. It's important to comment on financial services, where the trend continued with another strong quarter, driven by our insurance operations. Our lending operations have been less of a contributor in recent periods. However, we've been making progress identifying buyers of our loans, and I expect the originations and loan sales to pick up in the coming quarters. Both of these operations are important strategic contributors to the integrated value of Cavco and our ability to provide complete solutions for our homebuyers. Now I'd like to take a few minutes to talk about the American Homestar integration. First, we had a solid integration plan heading into the combination and both organizations have come together, really hitting the ground running as one company. We're right on that plan with impressive execution from HR benefits and payroll to finance, IT and operations. Now that we've been together for over a quarter, our view of synergies is starting to firm up. What I'd like to share today is our view of the most tangible cost reduction synergies. We spoke previously about this deal offering meaningful purchasing, labor and SG&A cost savings. Our total view of these tangible and measurable synergies is now above $10 million on an annual basis, and we estimate that about half has been achieved in the run rate as we entered Q4. The positive impact didn't show itself in Q3 because the gains were achieved as the quarter progressed, and they were offset by integration costs that will decline going forward. I thought it important to provide this information at a time when we are well into our integration work and can provide a more informed view. It's good news that the current picture is significantly higher than our pre-deal internal estimates. Additionally, there are a number of areas where precise quantification is difficult, but where we know value is being created. Areas like the ability to optimize product within and across plants as the system grows and the ability to fill out company store offerings with Cavco product from various plants are examples of the very real ways in which the strategic benefits of a combination like this show. Again, these are very real synergies and are not included in the tangible cost savings I laid out. And finally, we continued our share repurchases during the quarter with another $44 million used to buy back company stock. With this return of capital and the significant use of cash for the acquisition in the quarter, our unrestricted cash balance at the end of Q3 was a healthy $225 million.

Thank you, Bill. Net revenue for the third fiscal quarter of 2026 was $581 million, up $59 million or 11.3% from $522 million in the prior year quarter. Sequentially, net revenues increased $24.5 million, driven by the addition of American Homestar, which contributed $42 million and an increase in average revenue per home sold, partially offset by a reduction in base business units sold. Within the Factory-Built Housing segment, net revenue was $558.5 million, up $57.6 million or 11.5% from $500.9 million in the prior year quarter. The increase was primarily due to the addition of American Homestar and an increase in base business average revenue per homes sold, partially offset by a decrease in the number of base business homes sold. The increase in base business average revenue per home was largely due to a higher proportion of homes sold through our company-owned stores, more multi-section homes in the mix, along with product pricing increases. Financial Services segment net revenue was $22.5 million, up $1.3 million or 6.2% from $21.2 million in the prior year quarter and sequentially up $1.1 million. These increases were due to the addition of American Homestar Financial Services and higher insurance premium rates, partially offset by fewer loan sales and fewer insurance policies in force. In the third fiscal quarter, consolidated gross margin as a percentage of net revenue was 23.4%, down from 24.9% in the same period last year. In the Factory-Built Housing segment, gross profit was 21.7% in the third quarter, down from 23.6% in the prior year quarter. The reduction was broadly due to higher per unit cost. Financial Services gross margin as a percentage of revenue increased to 65.2% in the third quarter from 55.5% in the prior year quarter. This increase is primarily due to lower weather-related claims, the growing impact of rate increases and underwriting changes on policies. Selling, general and administrative expenses in the third quarter were $81.4 million or 14% of net revenue compared to $66 million or 12.6% of net revenue during the same quarter last year. Expenses rose primarily due to the addition of American Homestar, which contributed $6.9 million in operating costs and $2.9 million in deal-related expenses, along with higher year-over-year compensation. The American Homestar operating costs are expected to decline as we realize projected synergies. Interest income for the third quarter was $3 million, down from $5.4 million in the prior year quarter, primarily due to lower cash balances after the purchase of American Homestar at the beginning of the quarter. Pretax profit was down 16.9% this quarter to $57.6 million from $69.3 million for the prior year period. The effective income tax rate was 23.5% for the third fiscal quarter compared to 18.6% in the same period in the prior year. This increase was driven primarily by a reduction in tax credits and the nondeductibility of certain American Homestar deal costs. Net income was $44.1 million compared to net income of $56.5 million in the same quarter of the prior year, and diluted earnings per share this quarter was $5.58 versus $6.90 in last year's third quarter. Before we discuss the balance sheet, I'd like to take a minute to talk further about capital allocation. During the quarter, we repurchased just over $44 million of common shares under our Board-authorized share repurchase program, leaving approximately $98 million under authorization for further repurchases. Additionally, we've closed our acquisition of American Homestar. Our capital deployment will continue to align with our strategic priorities, which include enhancing our plant facilities, pursuing additional acquisitions and consistently assessing opportunities within our lending operations. Share buybacks will then serve as a mechanism to responsibly manage our balance sheet after considering these initiatives.

Thank you, Allison. In the quarter, we had a decrease in cash and restricted cash of $157.5 million, bringing our balance to $242.5 million. Cash provided by operating activities was $66.1 million. Cash used in investing activities was $179.7 million, primarily related to the American Homestar acquisition and cash used in financing activities was $43.9 million, primarily due to share repurchases. As you would expect, when we compare the December 27, 2025 balance sheet to March 29, 2025, several of the balances increased from the addition of American Homestar, including inventories, notes receivable, property, plant and equipment, goodwill and intangibles, accrued liabilities and deferred income taxes. Base business accrued expenses and other current liabilities increased from higher volume rebates and warranty accruals. And finally, treasury stock increased due to stock buybacks executed in the period. With this, I'll turn it back to Bill for closing remarks.

Thanks, Paul. Before I turn it over to questions, I'd like to briefly comment on our continuing brand and market strategy progress. I know everyone is focused on the numbers this call, but I think this is really important, and it reflects a long-term strategy that's been unfolding really nicely for us. Over a long period, you've heard me talk initially about a redesign of our digital marketing infrastructure. We then rolled out dramatically improved websites, not only for our operations, but micro sites for our retail partners. Last year, we talked about rebranding 19 manufacturing brands to 1 under the Cavco name. And most recently, at the Louisville show just a couple of weeks ago, we unveiled our product line framework that organizes every home made across our system under defined lines that we can then market locally and nationally. This is a huge milestone and a long-term strategy aimed at helping a potential homebuyer more easily find their best fit Cavco home and helping our retail partners with more and better leads. A lot of very impressive teamwork continues to be exhibited to transform our go-to-market strategy all the way from concept to customer conversations across the system. And I believe we're really well positioned to be a great partner for our retailers and to get more deserving families into quality homes. So I imagine there may be a couple of questions. So Marvin, go ahead and open up the line.

And our first question comes from Daniel Moore of CJS Securities.

Let me start with utilization, obviously ticked a little bit lower than I think some people expected. Last quarter, you talked about keeping production steady overall. Where did you see maybe some pockets of weakness that caused you to pull back a little bit or take some more days of downtime? And I guess, probably more importantly, how should we think about production as you see the world in Q4 relative to Q3?

Yes, it was interesting. October and November saw a decline, which was significant for the industry. In my earlier comments, I mentioned the Southeast region because it previously stood out as struggling compared to others. However, that trend has reversed. To be honest, the Southeast had the strongest quarter in terms of holding and slightly increasing volume. As you know, we often discuss seasonality, and the drop in October and November was greater than typical seasonal expectations, but generally, things across the North do slow down heading into that quarter. That said, we’ve seen an improvement. I want to emphasize that increasing production at a plant is more complicated than reducing it, as it requires having trained teams in place. Thus, our strategy, similar to last year, involved maintaining our production rate and staffing at our plants, even when we anticipated a potentially slower third quarter. In cases where backlogs were minimal, some plants took additional time off during the holidays to manage market balance. This approach positions us well for an anticipated increase in the spring season. We tend not to engage much in predicting future trends; instead, we focus on being flexible to adjust our operations as needed. Currently, our maintained production rate puts our plants in a favorable position for the spring selling season we’re hoping for. I realize people might be tired of hearing this, but at events like the Louisville show and through conversations with our plants and customers, there’s generally a positive outlook. We've started the quarter strong despite some early year weather challenges that may impact traffic and shipping, but I see these as temporary setbacks. Our sales aren’t lost; even plants that faced delays due to weather are working extra hours to keep up, which reflects their optimism for the spring.

Very helpful. I would like to explore your earlier comments regarding our position. If I understood correctly, we are generally set to maintain production levels, with backlogs possibly increasing unless we choose to ramp up production, in which case they may remain stable. Overall, it seems we can expect flat performance sequentially, with a potential for some upside in fiscal Q4, but please correct me if I'm mistaken.

Yes, you caught me. I included a bit of an update there, a mid-quarter update. What I wanted to share is that as we sit here today, we're fairly confident that our backlogs are stable. If we see an uptick, especially from the spring selling season, we will have control over whether to increase our production rate or let the backlog remain as it is or grow a little. Being at a 4 to 6 week backlog is reasonable if it feels stable. So, that's a bit of an update for the first quarter, and we don't feel like our backlog has diminished.

Really helpful. Shifting to gross margin, factory-built gross margins. You mentioned higher per unit costs. Wondering, Allison, if we can just tease that out a little bit. I mean the questions I'd have is, is there any lingering impact in acquisition accounting? And how do we think about the impact of kind of lower utilization versus mix in the quarter?

Yes, thank you for that. Year-over-year, we can reflect on the situation. Consistent with our previous statements, there was no impact on gross margins from the acquisition. However, when looking at margins year-over-year, they decreased due to rising input costs. In summary, prices remained stable and showed resilience, although less so in forward markets. This indicates a consistent underlying demand. Nevertheless, the prices did not rise sufficiently to cover the increased input costs. This situation is somewhat unusual, especially on the retail side, but we do not view it as a systemic change.

And as you mentioned, the retail margin was a little lighter, and I assume that flowed through there as well.

That was somewhat unusual and we've not observed that in the past. We wanted to highlight it to clarify the downward effect on gross margin. Nonetheless, I encourage everyone to keep in mind that our retail operations, even with our expansion, are still primarily focused in Texas and the surrounding Southern states. Therefore, I wouldn't want people to assume that retail margins across the country for independents or the broader industry experienced the same situation. It was a single quarter where they managed to reduce their home buying and selling costs, but this is localized. Additionally, we don't believe there's much to interpret from the situation in Texas at this time. However, it was a factor that had a more considerable impact on gross margin than we have seen previously.

Is retail slightly lower margin than producing homes, or is that not necessarily the case?

Typically, we don't see that as the case.

Okay. Last for me, I'll jump out. Deal-related costs, I think you said $2.9 million. Are those largely behind you? And can you quantify at all the impact of integration plan spend in the quarter and what that kind of looks like in fiscal Q4 and beyond?

Yes. The deal costs would have concluded in the third quarter when the deal was closed. When we think about integration costs, we absorbed a significant amount of integration costs this quarter, which somewhat muted the increase we experienced from early synergies. I would say that as the synergies take hold and we see an increase there, we will also see the integration costs decrease slightly as we move forward.

Perfect. Just with my follow-ups. Go ahead.

This quarter was focused on positioning ourselves with American Homestar. Some of the deal-related expenses, like adviser fees that depend on the deal's success and cannot be capitalized, have been paid and are now behind us. This quarter helped us clear out those negatives. Moving forward, I anticipate that we will start to see the positive synergies emerge.

Our next question comes from the line of Greg Palm of Craig-Hallum.

I guess just digging in a little bit more about activity by channel. Bill, I think you mentioned that you saw maybe relative weakness or underperformance, I forget the term you used in communities versus retail. So can you talk a little bit about what you're seeing from some of the REITs in the community in general and as a whole?

Yes, you heard me correctly. The volume decrease we observed was primarily focused on the community side. We reviewed past quarters and found that communities can be quite volatile from one quarter to the next. What we're analyzing is our revenue by channel, which can fluctuate quarter-to-quarter, sometimes without clear reasons. As we approach the end of the year, there may be various factors at play, such as allocations to different suppliers. Earlier in the year, we performed well, and there might be some leveling off occurring. Additionally, their capital management at the end of their calendar year can impact our sales. However, I haven't picked up any negative sentiment from the communities regarding concerns about finding buyers or renters for their homes. They don't seem worried about the end consumer. Our discussions with larger REITs cover their overall plans for the upcoming year and beyond, and I haven't detected any pessimism about slowing those plans. So, while it appears that communities contributed significantly to the sales weakness this quarter, I want to highlight this observation. We're monitoring the situation, but I don’t think we should label it as a trend just yet.

Yes, I understand. You mentioned October and November several times, but can you share your thoughts on December? It seems like October was trending a bit better, yet you've also referred to some poor production data. I'm trying to grasp how December performed and the flow of activities throughout the quarter.

Yes. I mentioned October and November because that’s the industry data we have. I wasn't avoiding discussing what happened in December. We're still waiting for the December shipment data. From what I recall, overall for the year, we saw seasonally adjusted shipment rates. In the early part of the year, it was quite strong, around 106,000. In October, it fell to about 96,000, and then in November, it decreased further to 93,000. Those declines were significant, no question. We wish we had the December industry data before this call. Regarding the quarter, I would say it was lower from October to December. Although November's seasonally adjusted rate was down compared to October, we didn’t feel that internally there was a steep decline during the quarter. It was a holiday quarter, which needs to be considered. It didn't seem like things were worsening significantly month after month.

Yes. Okay.

It was a holiday quarter, so you always have to consider that. However, it didn't seem like things were deteriorating month-to-month.

Yes. No, that's helpful. And on the gross margins, you talked about what a little bit of compression at retail. And I'm just wondering, was this some sort of company-specific strategy because you said it was not an industry thing. It kind of sounded like it was more, I don't know, certain geographies within your footprint, but I just wanted to better understand exactly what you meant.

I can't comment on other companies, so I can't say if they experienced the same situation. To be frank, our retail volume was quite strong compared to the market we are in. Sometimes I refer to our retail presence as limited to Texas, but it's actually broader now; however, a significant part of our retail performance still comes from Texas. We had a strong quarter where our volume exceeded what we observed in the market, even though we did experience some compression. We will analyze this to determine if we were below market expectations. This is more of a tactical discussion, and it appears to be an isolated issue that we will address and resolve.

And just to be clear, there were no purchase accounting inventory step-up impacts in gross margin in the quarter. And is there a meaningful difference in Homestar gross margins versus Cavco?

So no, there was no real impact on the consolidated gross margins, gross profit due to any purchase accounting associated with the acquisition as we had experienced in previous acquisitions. I think that's consistent with comments that we also shared last quarter. So in general, as we've mentioned, when we look at the acquisition, their margins tend to be broadly in line with Cavco margins.

That's at both retail and manufacturing.

Yes, within the company.

The other thing we've commented on last time people had asked questions about it was they're more integrated on average. They were about 60% selling their homes through their stores versus previous Cavco was in probably the 22% range. So while they're small relative to the rest of the system, just directionally, that means that those integrated sales are upward pushing on the gross margin. So if anything, we have a little bit of an upward push from bringing American Homestar into the company.

Do you have an updated metric on the homes sold through company-owned stores for the quarter, including Homestar? And do you have it on a like-for-like or same-store basis, excluding that impact since they sell significantly more through company-owned stores than you do?

Yes, Greg, American Homestar was 343 homes.

Total, not just through retail.

Not just through retail, right. So this quarter, our company-owned store was 1,339. And the prior year quarter was 1,075. So it's up 25%.

And that would be, I think, consolidated with American Homestar.

Our next question comes from the line of Jesse Lederman of Zelman & Associates.

I appreciate all the color thus far. I wanted to dig in a little bit more on kind of the cadence through the quarter and maybe into the beginning of the year here. Appreciating you don't have national industry shipments yet for December. Are you able to comment on internally, maybe your progress, how things might feel if you're not willing to share specific numbers going from November to December and then December to January and maybe your outlook for the spring selling season?

Yes, December is typically a slower month due to the holiday season. When considering the seasonally adjusted averages, December didn't seem like a drop-off compared to November based on our data and the overall industry sentiment. While I can't provide precise figures without industry data, I would estimate that December's seasonally adjusted rates will be similar to November’s, but we’ll have to wait and see if that holds true. As for this quarter, we’re confident that our backlogs are stable, which is encouraging. However, weather conditions have been unpredictable and could impact operations, especially with recent storms. It's still early in the quarter, and I expect the effects of any setbacks will be minimized by the time we reach the end of the quarter. Our sales continue despite weather challenges, and our plants are already ramping up operations to compensate for any lost time. Thus, I believe the fluctuations in activity will balance out without causing significant concerns. I hope that provides some clarity.

No, that's really helpful. I appreciate the comments there. When you say backlogs aren't dropping off, it seems they've kind of stabilized in the near term. Is that at a similar utilization that you ended the quarter with? Or have you slowed things maybe just a touch quarter-to-date, maybe given the weather, given some other trends you've seen?

No, we haven't slowed down. Think about our production rate in two parts: how much we produce each day across the entire system and how many days we operate. We didn't slow down in the third quarter with our production rate, nor have we slowed down in early January. However, we have lost operating days due to the storm, and we are working on ways to recover that lost time. At this point, we are not looking to reduce our daily production rate in the plants; instead, we're focused on maintaining it and preparing to increase it.

Okay. That's great to hear. What is your sense from conversations maybe at the Louisville show or from communities or other dealers that's driving some of the optimism for the spring selling season that makes you think that you could see an increase in backlog or perhaps an increase in capacity utilization? Are there any early indicators that you're hearing or you're seeing or you're looking for that give you that confidence?

The overall sentiment from the show was positive, even though I couldn't attend. I spoke with many attendees, and our team was genuinely excited about the event, which was encouraging to hear. They felt good about our presence, as well as the conversations they had with customers, dealers, and communities regarding their expectations for the upcoming year. We're all focused on similar metrics like traffic and quotes, the latter of which I consider an important early indicator. So far, we've not observed any decline in quote activity; in fact, it's been quite robust. Everyone seems to approach the Louisville show with optimism about what spring might bring. This reflects our overall mindset. More concrete metrics such as traffic and quotes still appear strong, which is what we're currently assessing. As we reach this point in the year, it’s always intriguing to have our conference call, even though it's slightly early for us to gauge how spring is unfolding. We get anxious this time of year to examine weekly sales activity, as it provides an early glimpse into spring, but we’re not quite there yet.

Got it. Okay. Two more for me. One is from an inventory level perspective, is there any evidence maybe across your captive retail that there's any evidence of destocking that could pressure near-term orders even if end demand is recovering a bit?

You're saying destocking? Or are you worried about overstocking?

Overstocking, sorry.

I believe that since the significant issue we encountered about 1.5 to 2 years ago, people have maintained a disciplined approach. I haven't come across any instances of anyone stocking up, and there's a reason for that. Consider the dealers; they can order a home, and given the current backlogs, there's not much of a wait to receive it. As a result, they're not placing multiple orders out of concern for how quickly they can get a home. This leads them to adhere closely to their individual store target inventory. Therefore, I don't think we've observed any buildup in that area.

Okay. That makes a lot of sense. And the last one for me is a little bit more high level. Given you have great exposure in Texas, particularly bolstering that with the American Homestar acquisition, we're aware of some legislation that's been passed that's set to be effective in the middle of 2026, just statewide to level the playing field a little bit more, at least as it pertains to zoning for manufactured homes relative to single-family homes. Quite frankly, surprised. We haven't heard much about that or even other statewide legislation reform over the last few years. What are your thoughts on that? Why maybe have we not heard of it? Is there optimism surrounding it? Any clarity there would be great.

Yes, I noticed your comments on that, particularly regarding Kentucky, which is an important market and where the changes are more substantial and potentially more significant locally. It's puzzling that we haven't heard more discussions about it. I appreciated that you brought it up. Perhaps people aren't monitoring the activities in those legislatures closely, but it serves as a great illustration of the gradual yet positive progress the industry will achieve over time in terms of zoning. It's encouraging to see states enact legislation that either supports or urges local municipalities to be more open to these solutions. This is truly a positive development, and we should be optimistic about it. I'm not sure how significant the impact will be, but it's definitely an area worth our attention, and you've highlighted it well.

Our next question comes from the line of Daniel Moore of CJS Securities.

You covered a lot of ground, but could you provide some insight on the updated and upgraded synergy targets? I believe you mentioned $10 million. How should we understand where those targets are coming from? You indicated that roughly half have been actioned and we should start seeing results in the March quarter. How should we view the timeline moving forward as well?

Do you want that one? Go ahead.

Sure, I'll go for it. We discussed that we're aiming for an annualized rate of $5 million this quarter, with the goal of reaching a $10 million level, which translates to about $2.5 million each quarter. Looking ahead to the next quarter, if we finish the third quarter at an annualized rate of around $5 million, we could see a positive uplift of approximately $1.25 million in profitability for Q4. We've identified specific areas where we expect synergies to impact our financials, including purchasing savings and optimization, as well as direct labor savings at the cost of goods sold level. Over time, we've demonstrated our ability to effectively drive synergies through our shared services, particularly in selling, general, and administrative expenses. These are the main categories that contribute to the $10 million target.

On the ASP front, it increased to $107,000 during the quarter. How much of this is due to the mix from American Homestar, which includes a higher percentage of homes sold through captive retail? Do you believe this number is sustainable as we move forward?

Yes, Dan, this is Mark. It increased a little bit due to the high proportion of homes sold through company-owned stores, but it was about a $1,000 increase from the sequential increase that you saw.

Due to American Homestar.

There were several factors at play that made it difficult to analyze our average selling price. During this period, various elements contributed to an upward trend. American Homestar played a significant role in this increase, primarily due to their integration between manufacturing and retail. I acknowledge that I'm using the term integration in different contexts throughout this call. Overall, we noticed a shift in our previous business toward retail, which was ongoing. Additionally, there was a definite shift in product mix toward multi, a trend we've observed for several quarters. I also mentioned what we believe is the best indicator of how a specific product is selling now compared to the previous period, which showed a slight increase. Therefore, this quarter saw a combination of factors driving the price up.

Got it. We discussed the factory-built gross margin in Q3. Do you have any thoughts about factory-built gross margins for Q4 and how we should expect them to compare to Q3 over the next quarter or two?

I believe Allison mentioned that there is some upward movement in commodities. Lumber is starting to see some changes, and some increases in steel have been announced, so we will see how those developments play out. Allison, you might have more insights, but overall, I think there will be some changes in the cost of goods, specifically regarding bill of materials.

Yes, to elaborate on that, we haven't discussed it yet, but let's bring it up now. We know that tariffs are affecting our cost of goods sold. However, it has become quite challenging to accurately estimate the extent of this impact. For this quarter, our best estimate is that our cost of goods sold was affected by around $3 million. The difficulty in projecting this going forward relates to the suppliers' ability to pass through tariffs, which is influenced by the demand for products. For instance, if the demand for lumber or steel increases significantly, we will likely see the full impact of the tariffs. This is the area we need to monitor concerning margin pressures.

Helpful. And last one, the tax rate. I appreciate you kind of delineating some of those pressures this past quarter. What do we think about where that should settle out in fiscal Q4? And how much is transitory, how much is kind of permanent?

Yes. No, thanks for the question. I think just high level, it's reasonable to use the Q3 rate of 23.5% that we experienced in Q3 and then subtract out of that the nonrecurring item of about 1%, which hit the tax rate or increased the tax rate, and that was really due to the nondeductibility of the American Homestar deal cost. So that won't reoccur in Q4. So you take that 23.5% down by 1%.

I'm showing no further questions at this time. I'll now turn it back to President and CEO, Bill Boor, for closing remarks.

Yes, I'll be brief. We've talked a lot here in this one, but happy to have follow-up calls. We're looking forward to the coming months. I think we're positioned well to execute when the market improves. Part of that positioning is just having the ability to adjust quickly to near-term conditions. And I think we've shown our ability to do that. Over time, we don't get too nervous because we know that factory-built housing is the primary solution to the housing unit shortage in the country. And that's what we're working every day to step up to that challenge. So I really do appreciate everyone's interest and joining us for the call, and we'll look forward to keeping you updated. Thank you.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.