Revising Estimates to Reflect Continued Demand Weakness and Margin Improvement
Herein we revise our estimates for Culp, which reported 1QFY24 results and issued guidance in the face of continued weak demand juxtaposed against improving and better-than-expected margins. Gross margin for CHF, Culp’s mattress fabrics segment, is recovering faster than expected (up ~700 bps in 1QFY24 versus 1QFY23). For CUF, Culp’s upholstery fabrics segment, management grew 1QFY24 gross margin by 667 bps despite a significantly down Y/Y sales comparison (~ -17.4%). The combination of Y/Y weaker sales forecasts despite improved gross margins (pricing and efficiencies) leads us to lower near-term estimates. Our new 2QFY24 EPS estimate is ($0.25) {was ($0.17)}, on $57.8 million in revenues {was $65.5 million}. For FY24, our revised EPS is ($0.69) {was ($0.53)} on $237.9 million in sales {was $254.2 million}. Figure 1 compares our new estimates with previous estimates. Management is positioning Culp to recover and sustain profitability when upholstery and mattress sales normalize to low single-digit Y/Y gains. Our estimates assume a modest Y/Y sales gain in 2HFY24. Management expects to deliver positive operating profit by the end of FY24. Irrespective, we forecast an FY24 net loss after tax. Specific profit improvement measures cited: (1) concentrating upholstery cut-and-sew in Asia, ceasing duplication in Haiti; (2) wider pricing gains in profitable mattress SKUs; and (3) additional CHF supply chain and operating efficiencies. 1QFY24 CUF sales fell dramatically, down 17.4% Y/Y. Within CUF, hospitality sales rose ~10%, implying residential upholstery sales fell ~28% Y/Y. Hospitality strength and orders/placements in residential suggest modest recovery can develop more rapidly than we expected earlier. Culp management deserves kudos for maintaining its debt-free balance sheet and avoiding material exposure to troubled and/or insolvent furniture manufacturers.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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