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Culp to Restructure Mattress Division, Eliminate Excess Capacity, Given Foreseeable Demand Outlook; Reduces 4QFY24 Guidance; Lowering 4QFY24 Estimates; Out-Year Estimates Under Review

After Wednesday’s market close, Culp announced aggressive actions to ‘right-size’ capacity in CHF, its Culp Home Fashions (CHF) segment. CHF is the market leader and serves the mattress/bedding fabric market. In the face of persisting weak end market demand for mattresses, Culp initiated restructuring initiatives to right-size CHF capacity to match industry conditions for the foreseeable future. These actions will evolve during FY25 (began May). The bulk of the ~$8MM in planned restructuring charges and restructuring-related costs should be booked in 1QFY25. The majority of the anticipated $10-12MM annualized cost savings and productivity improvements should gain traction in 2H25. Importantly, of the ~$8MM in accounted expenses that will hit Culp’s P&L, only $2.5MM is likely to be in cash and planned to be funded by proceeds from sales of assets and equipment that management believes will generate $10-12MM, net of tax and expenses. Culp expects to reduce CHF headcount by 240, or ~35% of its CHF workforce. The majority of these will be at the firm’s Quebec, Canada facilities. Cost savings in corporate overhead and shared services should total ~$1.5MM annually. It’s déjà vu all over again. These actions confirm leadership’s commitment to shield Culp, given today’s MACRO. Although unpleasant, Culp’s leaders are determined to protect its ultimate viability and financial presence. We saw Culp execute an even more extensive restructuring in the early 2000s when it dismantled nearly all its US upholstery manufacturing assets and developed its asset-light upholstery fabric sourcing model. At the end, Culp was stronger and more viable. Persistent weak demand culminated in Culp having too much CHF capacity. Culp will consolidate its knitting operations in its Stokesdale, NC facility. It will close its Quebec facility, sell the equipment, and the building. Culp will also move to a strategic sourcing model for woven products (Culp produces knit and woven products in Quebec), leveraging the capabilities of its long-standing strategic partners in Turkey and other locales. Culp will consolidate its Haiti ‘cut & sew’ operations into one building to improve productivity. It will take other actions too. Attaining profitability at today’s level of demand is imperative. Management is committed to returning Culp to sustained profitability given current demand through these difficult, but necessary, restructuring initiatives. Eliminating excess capacity should reduce fixed costs, improve operating leverage, and enhance productivity as the firm focuses its operational footprint on fewer facilities. These actions should empower Culp to be profitable at current demand and improve profitability if and when revenue growth returns. Management updated and lowered 4QFY24 guidance. For 4QFY24, it now expects sales to fall by 19% and pegs an operating loss of $4.2-4.7MM. Our 4QFY24 revenue estimate falls to $49.7MM from $54.6MM and our EPS loss estimate falls to ($0.45) from ($0.40). For now, we put our out-year estimates under review and will reissue them when we work out the implications. Despite the increased loss, management expects to end FY24 with no debt and ~$10MM in cash. Assuming it sells the assets as planned, it will end FY25 with more cash and remain debt-free. Culp plans to report 4QFY24 in late June.