Culp, Inc. (NYSE: CULP) reported Q1 EPS of $0.11, $0.04 worse than the analyst estimate of $0.15. Revenue for the quarter came in at $74.8 million versus the consensus estimate of $73.23 million.

Fiscal 2020 First Quarter Highlights

• Net sales were $74.8 million, up 4.7 percent over the prior year, with mattress fabrics sales up 12.5 percent and upholstery fabrics sales down 7.6 percent. Net sales for home accessories were $4.3 million, with no full period of comparable prior-year sales as a result of the June 22, 2018, investment in eLuxury.
• Pre-tax income was $2.8 million, compared with $1.9 million for the prior-year period. The results for the first quarter of fiscal 2019 included restructuring and related charges of $2.0 million related to the company’s closure of the Anderson, South Carolina, production facility. Excluding these charges, pre-tax income for the first quarter of fiscal 2019 was $4.0 million. (See reconciliation tables on page 7).
• Net income attributable to Culp, Inc. shareholders was $1.3 million, or $0.11 per diluted share, compared with net income of $957,000, or $0.08 per diluted share, in the prior-year period. The results for the first quarter of 2019 include the restructuring and related charges noted above.
• The company’s financial position reflected total cash and investments of $44.2 million and outstanding borrowings totaling $925,000 as of August 4, 2019, for a net cash position of $43.3 million. (See summary of cash and investments table on page 6).
• Cash flow from operations and free cash flow were $2.0 million and $986,000, respectively, compared with cash flow used in operations and free cash flow of $(1.9 million) and $(4.6 million), respectively, for the prior-year period. (See reconciliation table on page 8).
• The company announced a quarterly cash dividend of $0.10 per share, payable in October.
• The company’s Board of Directors has approved additional share repurchases up to a total of $5.0 million.

Commenting on the results, Frank Saxon, chairman and chief executive officer of Culp, Inc., said, “We are pleased to report a solid start to fiscal 2020 with our overall sales in line with expectations. We are especially encouraged to see higher sales in mattress fabrics, following a difficult year of declining sales related to the influx of low-cost mattress imports from China, as well as retail disruption. The domestic mattress industry appears to be stabilizing, and we are realizing some benefits from the punitive anti-dumping measures announced by the U.S. government early in the first quarter. We are optimistic our business will continue improving with the further reduction of excess inventory of China mattress imports. We have also faced considerable external challenges in the upholstery fabrics business due to the ongoing international trade disputes and recently imposed additional tariffs. However, in spite of lower sales and uncertain market conditions, our upholstery fabrics business showed improved profitability for the first quarter of fiscal 2020. Additionally, we continue to evaluate and develop our strategy for Culp Home Accessories, our finished products business. We are focused on the best way to leverage this new online sales platform and expand our market reach with new products and customers.

“In each of our businesses, we executed our product-driven strategy with a relentless emphasis on design creativity and product innovation. With the support of our flexible and growing global platform, we are confident we can sustain our strong competitive advantage and respond to the changing demand trends of our diverse customer base. Importantly, we have the financial strength to pursue our growth strategy,” added Saxon.

Mattress Fabrics Segment

Mattress fabrics sales for the first quarter were $38.7 million, up 12.5 percent compared with $34.4 million for the first quarter of fiscal 2019. Notably, this is the first quarter over quarter sales increase since the third quarter of fiscal 2018.

“We were energized by the return to a positive sales trend for mattress fabrics for the first quarter of fiscal 2020,” said Iv Culp, president and chief operating officer of Culp. “In addition to an extra week of sales for the quarter, these results reflect a strong performance from CLASS, our sewn mattress cover business, as well as higher than expected sales of woven mattress fabrics. We are benefitting from the growing demand for mattress covers from customers in the popular and expanding roll-packed (boxed) bedding space. We have diversified our customer base in this market segment, and we are encouraged by additional opportunities with existing and new customers. Our flexible, global platform supports this strategy and has allowed us to meet changing customer demands with outstanding service and delivery performance.

“While we were pleased with our top-line growth, our operating performance was affected by several factors during the first quarter of fiscal 2020. We experienced temporary lower demand for our more profitable knitted products as customers absorbed existing excess inventory, resulting in reduced production schedules. We also incurred certain employee-related costs that were higher than expected. In spite of these challenges, we believe business conditions are stabilizing and will result in improved profitability going forward, as we continue to rationalize production in the most cost-effective locations. Further, our sustainable manufacturing platform with enhanced capacity and distribution capabilities continues to provide the flexibility and scalability necessary to serve our customers in a changing global environment.

“We also remain committed to product innovation as we strive to deliver a favorable product mix of mattress fabrics and sewn covers. As a firm acknowledgement of the evolving trends in bedding and mattresses, we have established a dedicated innovation team to ensure we are developing and offering the latest technologies and forward-looking products for our customers. At the same time, we are enhancing our design capabilities with an expanded creative team to complement our innovation strategy. Culp has traditionally enjoyed a strong competitive advantage in the marketplace with our creative designs and innovative products, and our new initiatives will allow us to further leverage these capabilities and expand our market reach.

“Looking ahead, we are optimistic that the mattress industry is improving and is benefiting from the anti-dumping measures against the Chinese importers and the continued sell-through of excess inventory. We have a compelling business model supported by creative designs, innovative products, and an efficient global platform with the ability to provide the latest product offerings from fabric to sewn covers. We look forward to the opportunities ahead for our mattress fabrics business in fiscal 2020,” said Culp.

Upholstery Fabrics Segment

Sales for this segment were $31.9 million for the first quarter, down 7.6 percent compared with sales of $34.5 million in the first quarter of fiscal 2019.

“Our upholstery fabrics sales were in line with expectations for the first quarter of fiscal 2020,” noted Boyd Chumbley, president of Culp’s upholstery fabrics division. “The modest drop in sales over the prior-year period reflects the continued soft retail environment for residential furniture, as well as ongoing issues surrounding international trade agreements and the associated tariffs. This unstable environment has disrupted supply chains throughout the furniture industry.

“In spite of these challenges, we aggressively pursued our product-driven strategy and remained focused on the diversification of our customer base. We are continuing to make progress with Read Window Products (RWP), our window treatment and installation services business, which has supported our ability to expand our reach in the hospitality market. We are optimistic about the future contribution from RWP as we grow this business. We also continue to see favorable demand trends from our residential furniture customers for our popular line of highly durable, stain-resistant, LiveSmart® performance fabrics. Notably, we recently extended this brand with the introduction of LiveSmart Evolve™, a new line of fabrics featuring the same performance technology combined with recycled fibers to deliver a sustainable textile product. The LiveSmart Evolve™ launch has been well received in recent showings and affirms Culp’s ongoing commitment to environmental responsibility. Above all, we continue to focus on product innovation and creative designs that meet the changing demands of our customers.

“Our improved operating performance for the first quarter of fiscal 2020 reflects a favorable product mix and a better currency exchange rate than we experienced a year ago. While additional tariffs took effect during the quarter, we have worked closely with our customers to make adjustments in response to these new tariffs. We are also pleased with the efficient scale-up of operations of our strategic partner relationships in Vietnam for additional sourcing of our cut and sew kits, and we will further pursue this opportunity to support our valued customers in light of the ongoing trade disputes between the U.S. and China.

“Looking ahead, the uncertainties surrounding additional proposed tariffs and the associated geopolitical risks make it difficult to forecast the potential impact on our business. However, we are closely monitoring the situation, and we will enact appropriate responses as needed. Despite these current challenges, we believe Culp has the right strategy in place for upholstery fabrics and is well positioned for the long term,” added Chumbley.

Culp Home Accessories Segment

Sales for this segment, which include the operation of eLuxury, Culp’s e-commerce and finished products business offering bedding accessories and home goods, totaled $4.3 million for the first quarter of fiscal 2020. These sales are comparable to the fourth quarter of fiscal 2019. There is no full period of comparable prior-year sales as a result of the June 22, 2018 investment in eLuxury, which occurred in the middle of the first quarter of fiscal 2019.

Commenting on the results, Culp said, “Our home accessories sales were in line with our expectations. We are refining this business model with a more aggressive and strategic focus on the business-to-business market, along with greater customer diversification and new online retail marketplaces. We also remain committed to improving the performance of our legacy product lines. In tandem with our strategies, we are developing many new products and are excited about the opportunity to leverage this sales channel and reach new customers for Culp.”

Balance Sheet

“Maintaining a strong financial position remains one of Culp’s top priorities for fiscal 2020,” added Ken Bowling, executive vice president and chief financial officer of Culp, Inc. “We reported $44.2 million in total cash and investments and outstanding borrowings totaling $925,000 as of August 4, 2019, for a net cash position of $43.3 million. During the first quarter, we incurred $935,000 in capital expenditures and spent $1.2 million on regular dividends. Also, operating lease assets and liabilities totaling $6.5 million at August 4, 2019, were recorded as a result of the adoption of a new lease accounting standard.”

Financial Outlook

Commenting on the outlook for the second quarter of fiscal 2020, Bowling remarked, “We expect overall sales to be comparable to the second quarter of last year.

“We expect mattress fabrics sales to be slightly up compared with the second quarter of fiscal 2019, and operating income and margins are expected to be moderately up as compared with the previous year’s second quarter.

“In our upholstery fabrics segment, we expect sales to be comparable to the same period last year. Operating income and margins are expected to be slightly higher compared with the same period a year ago. However, our projections are contingent upon any potential additional tariffs that could be imposed in the future and could therefore affect our operating costs.

“In our home accessories segment, we expect second quarter sales to be considerably down as compared with the second quarter of fiscal 2019, as we refine our strategies and focus on higher margin products. We expect an operating loss for the quarter, but with meaningful improvement as compared to the first quarter of fiscal 2020.

“Considering these factors, the company expects to report pre-tax income for the second fiscal quarter of 2020 in the range of $3.2 million to $3.8 million. Pre-tax income for last year’s second quarter was $4.3 million, which included a net benefit of $543,000 in restructuring and related charges and credits and other non-recurring items. Excluding these charges, pre-tax income for the second quarter of fiscal 2019 was $3.7 million.

“Based on our current budget, capital expenditures for fiscal 2020 are now expected to be in the $7.0 million to $8.0 million range. Additionally, free cash flow for fiscal 2020 is expected to be comparable to last year’s results, even with an uncertain geopolitical environment,” added Bowling.

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