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FY25 to Be a Year of Transformation; CHF Restructuring to Reduce Asset Intensity, Improve Agility, and Enhance Operating Leverage as Demand Improves; Balance Sheet and Cash Flows Remain Strong

Home furnishings demand remains challenged. As Culp’s FY24 drew to a close, sales declined in both of its segments (mattress fabrics -16.1% to $25.8 million and upholstery fabrics -22.6% to $23.8 million). Weak housing markets (home sales are a traditional driver of furniture ‘spend’), ‘exhausted’ consumers (many had refurbished their homes during the pandemic lockdowns), weather, and economic uncertainty all played a role, with little evidence of a near-term catalyst for improvement. Announced initially in early May, Culp provided additional insight about its CHF restructuring initiatives in its 4QFY24 earnings release and investor call. In light of the macro headwinds, management has taken aggressive actions to ‘right-size’ the business to current demand, announcing plans to consolidate knitted mattress fabrics production into its North Carolina facility, increase its use of strategic sourcing partnerships (echoing its upholstery fabrics business model), and reduce the asset intensity of its operating model. These actions should strengthen the balance sheet, improve cash flows, reduce fixed costs in CHF, and significantly enhance Culp’s operating leverage as demand improves, while, importantly, preserving its ability to effectively serve its customers and (ultimately) grow the business. Margin improvement is the primary objective of the restructuring. As outlined in prior notes (see links above), Culp will take an $8 million restructuring charge ($2.5 million in cash), the bulk of which will fall in 1HFY25, with the majority related to its exit of its Quebec mattress facility, and consolidate production in Stokesdale, NC (Culp will also consolidate/restructure two smaller operations in Haiti and China as part of this plan). This transformation plan should reduce fixed costs by $2-3 million per quarter (annualized), with traction increasing over 2HFY25, and should enable the firm to reach break-even given current demand. When the macro environment improves, Culp’s leaner operating model should generate significant operating leverage and earnings growth with ‘normalized’ consolidated operating margins targeted at 4-6%. Equipment and Quebec facility sales should fund the restructuring expenses, enabling an improved FY25 ending balance sheet versus FY24 end. The appraised net value of the assets for sale exceeds the planned restructuring expense. The timing of working capital needs and restructuring payouts means that the company will likely tap into its short-term borrowing facilities during FY25, but we expect restructuring proceeds and cash flows from operations to enable the company to pay this back and end FY25 with more cash than it has now. Our new adjusted EPS estimates for FY25–FY27 reflect stronger margins, flat revenue in FY25, and only modest out-year revenue growth. Demand improvement timing remains the key variable gating EPS growth/earnings leverage. New financial model and 4QFY24 variance analysis below.