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4QFY24 Adjusted EPS of ($0.39) Slightly Ahead of WTR Estimate of ($0.45) on 19.4% Sales Decline; FY25 CHF Restructuring and Improved Operating Leverage the Focus

Culp posted slightly better-than-expected results in a quarter characterized by very challenging industry conditions. 4QFY24 EPS of ($0.39) was roughly flat with the prior year ($0.38) and slightly ahead of our estimate of ($0.45), as both segments (mattress fabrics and upholstery fabrics) posted double-digit revenue declines in the face of very weak macro conditions for home furnishings. Weak demand for home furnishings remains the key challenge. In mattress fabrics (CHF), sales declined 16.1% to $25.8 million (about $3 million ahead of our revenue estimate), while upholstery fabrics (CUF) saw sales decline by 22.6% to $23.8 million (below our revenue estimate of $27 million). Weak home sales, the after-effects of demand pull-through experienced during the pandemic lockdowns, lower spending on higher-ticket consumer durables versus ‘experiential’ consumption categories, inflation concerns, and economic uncertainty all played a role. Asset intensity differences in the current production model highlighted the differential margin performance across mattress and upholstery segments during the quarter. GM% remained solid in CUF at 20.6%, while operating margin declined 114 bps to 4.1% on negative absorption of SG&A expense even as cost discipline yielded lower total operating expense spend on an absolute basis in dollar terms. GM% in CHF, where CULP’s production model traditionally involves greater capital investment and fixed cost overhead, declined to 79 bps to 1.1% in the quarter, leading to a $2.9 million operating income loss. Restructuring in CHF is focused on ‘right sizing’ the business for demand levels, lowering fixed costs, and improving margins and operating leverage. In May, Culp said that it would close one CHF facility in Quebec, consolidate production in North Carolina, and take significant fixed costs out of the business model, while increasing its sourcing in order to keep its ability to serve customers and agilely grow when demand improves. It expects to incur the bulk of the $8 million in restructuring charges in 1HFY25, while it pegs that the benefits ($10-12 million in annualized COGS savings) will begin gaining traction in 2HFY25. Ultimately, these restructuring actions should help Culp push operating margins in CHF up to as much as 9-10% (versus 7-8% in CUF) as demand improves and production efficiencies accrue. This positions Culp for significant earnings growth when demand and revenues improve. The balance sheet remains strong. Culp has $10 million in cash and the ability to borrow. Asset sales from the restructuring should cover cash restructuring expenses and ultimately improve cash balances by the end of FY25. 1Q25 revenue guidance is for modest sequential improvement. Culp is currently not providing EPS guidance. New WTR estimates and model will be forthcoming following the company’s conference call. Our variance analysis is posted below.