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Revising Estimates After 2QFY24 Positive Surprise

We are revising our earnings estimates following Culp’s 2QFY24 earnings release and conference call. Management’s 3QFY24 guidance suggests that our prior estimate was overly optimistic about the pace of improvement. The objective of operating profitability by 4Q remains intact and achievable. We expect, and are modeling, positive net income in FY25. Specifically, we are moderating our expectations for the pace of improvement in CHF (Mattress Fabrics). That adjustment results in a reduction in our 3Q EPS estimate to a loss of $0.17 from a loss of $0.13. We remind readers that EPS is a less important, and somewhat arbitrary, metric for Culp because of the company’s large and capricious international tax exposure. Our estimate for operating income (loss) is sequentially improved from ($3 million) in 2Q to ($1.2 million) in 3Q. Investors interested in Culp should remain focused on the trajectory of that improvement and the strength of the balance sheet. CHF continues to capture higher-margin business and cull out the low-margin products. Nonetheless, we are not modeling segment operating profitability until 4Q. CUF is showing steady improvements in operating profitability in a challenging market. We expect Y/Y and sequential revenue gains in both segments despite weak end-market conditions. Culp has demonstrated an ability to capture new and higher-margin business. Furniture manufacturer and retail inventories have cleared. But consumer demand for furniture remains at recessionary levels. We see no end-demand improvement into CY24.