Lower Near-Term Expectations; Culp Likely to Restructure
We are cutting estimates on Culp, responding to weak demand, and bracing for a restructuring in 4QFY24. Culp’s 3QFY24 earnings report, issued Wednesday after the close, highlighted improved revenue and operating results, Y/Y and sequentially. Consolidated sales were $60.4 million, up 15% Y/Y and 3% sequentially, aided by a calendar shift in the Chinese New Year from 3Q to 4Q. Operating loss of $1.7 million improved from a loss of $7.8 million in 3QFY23 and a loss of $2.2 million in 2QFY24. Still, the home furnishings demand is challenging and arguably deteriorating. Management noted a sharp revenue drop in February in both segments and guided to an elevated loss for 4QFY24. Our revised revenue and EPS estimates are $54.6 million, down 11.1% Y/Y, and ($0.40), respectively, versus $64.2 million and ($0.08) previously. In response, CEO Iv Culp committed to “right sizing” Culp’s cost structure to demand and a continued defense of its debt-free balance sheet. We expect news on specific actions sometime before 4QFY24 ends. Culp Home Fashions (CHF, aka mattress fabrics) improved profitability Y/Y in 4QFY24 but not from 3QFY24. Irrespective, CHF is on a path to improved profitability. Management noted that the segment incurred incremental costs related to the product transformation in the quarter. Those costs will continue into early 2025. Management allowed that about one-third of the CHF lineup is still for legacy products at sub-optimal margins. It is accelerating the replacement or remerchandising of those products. Improved pricing catalyzed the CHF Y/Y sales. Culp Upholstery Fabrics (CUF) posted a better-than-expected 3QFY24, in part due to the calendar shift of the Chinese New Year. That shift will hurt 4Q sales.Culp operates three segments: mattress fabrics, which markets primarily knitted and woven fabrics, as well as sewn covers made from those fabrics, which are used in the production of bedding products; upholstery fabrics, which markets a variety of fabric products that are used principally in the production of residential and commercial upholstered furniture, as well as window treatment products and installation services for customers in the hospitality and commercial industries; and home accessories, which markets a variety of bedding accessories and home goods directly to consumers and businesses through global e-commerce and business-to-business sales channels.
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