Earnings Call Transcript - CULP Q1 2026

Operator, Operator

Good morning, and welcome to the Culp First Quarter Fiscal 2026 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Dru Anderson. Please go ahead.

Robert Culp, President and CEO

Thank you, Dru, and good morning, and thank you to everyone for joining us today and for your interest in our company. With me on the call is Ken Bowling, our Chief Financial Officer. Tommy Bruno and Mary Beth Hunsberger are not on the call today as they are fully engaged in their respective roles as Chief Commercial Officer and Chief Operations Officer, both of which are going exceedingly well. I will begin the call with some detailed comments. And as mentioned in the introduction, we have posted a slide presentation to our website that provides some information that is supplemental to what we will speak about today. That slide presentation is simply entitled First Quarter FY '26 Supplemental Information. Ken will then review the financial results for the quarter. And after that, I will briefly review our business outlook for the remainder of fiscal '26, and we will take some questions. Looking at our performance for the first quarter, the key takeaway from our perspective is that we were able to build on the momentum we had to close out last fiscal year and realize improvement in our operating results despite not only the depressed demand across the home furnishings industry that we're all too familiar with at this point, but also the continuing challenges from tariffs and the uncertain global trade environment. Even with these two significant headwinds, we were able to achieve substantial double-digit improvement at both the gross profit and operating lines during the quarter, particularly due to our streamlined bedding segment. An improvement of that nature in this market and macroeconomic environment is a testament to the effective work of the Culp team over the last year. Throughout fiscal '25 and into fiscal '26, we made tremendous strides to successfully transform our Culp Home Fashions mattress fabrics business, which following the integration of our two former divisions we now call our bedding segment. I'm impressed with how our team was able to execute on the comprehensive restructuring effort, including the closure and pivoting of production at a long-term manufacturing facility in Canada to our owned U.S. facility and some external strategic partners while also making sure that our customer service levels remained the highest priority. I think it's important to emphasize that we're certainly not yet where we want to be from an operating and profitability standpoint and where we believe we ultimately will be, but our improving trend tells us that we're doing a good job of controlling and influencing the things we can in an unmistakably tough industry environment. The actions and gross profit impacts of our fiscal '25 North American bedding consolidation and restructuring project are summarized on Pages 8 and 9 of the supplemental presentation that is now available on our website. Before we take a closer look at our results for the quarter, I'd like to take a moment to focus on some interesting data and market commentary out there regarding activity in the bedding industry published by the International Sleep Products Association and others, which we've included on Page 13 and 14 of the supplemental presentation. While the industry is obviously still in a down cycle, this information effectively shows how long the industry has been running below historic unit levels in the current cycle and correspondingly, how much pent-up demand may be building to support an industry recovery in the future. Some analysts who closely follow the market appear to be of the mind that demand for mattresses is finally close to bottoming out and the demand may be set to increase due to cyclical factors such as product replacement cadence and growth in household formation. To some degree, this information and commentary align with our own thoughts on the general direction of the mattress market, given the low activity levels we've seen over the last several years. However, as I've already mentioned, we are making the changes and updates to our business that are necessary to return Culp to profitability in this current demand environment. We will be pleased when the market recovers, but we are not counting on that. We are just working to get ourselves even better positioned to strongly capitalize on any recovery. This industry data also indicates to us that we've been able to win market share and gain a larger piece of the available mattress business by leveraging our competitive advantages in scale, product development and innovation and the ability to use our global platform to value engineer products and offer better supply chain solutions to customers. With our Canada restructuring mostly behind us, we have competitive, stylish, and innovative offerings in knits, wovens, cut and sewn covers and some bedding accessory products. Despite the historically low industry volume and ongoing tariff fluidity, our bedding segment was able to grow sales sequentially versus last quarter and comp sales year-over-year. Moreover and notably, with our newly streamlined platform in place, we achieved double-digit gross margins in the bedding quarter compared to negative gross profit in the prior year period. We also expect that our bedding segment margins will continue to improve with sequential sales growth and normalize at a much higher range and particularly once the price increases we've initiated to mitigate tariff costs and also rightsize margins in certain areas become effective for the majority of the second quarter. Turning to Culp upholstery fabrics, which we will now just refer to as our upholstery segment. Soft market conditions across the home furnishings industry, driven by muted consumer spending and housing market trends continue to impact that part of our business, especially on the residential upholstery side. The global trade and tariff situation continue to add more complexity to this business during the quarter, due to the primarily Asian supply concentration that the residential upholstery industry has gravitated to in the last few decades. The historically high and temporary tariffs on China produced imports last spring, which again reached over 150%, basically shut down our residential upholstery orders and shipments for over a month. Rather than absorb these cost increases for which we had no realistic time to plan, we simply did not ship any containers from China to the U.S.A. and waited for tariff rates to reduce to a more commercially reasonable level. The delayed effects of that pause in activity, along with the general market uneasiness and hesitancy that all these tariff changes and negotiations have created significantly dampened sales in our first quarter of fiscal '26. We do have the ability company-wide to navigate tariff fluidity and a snapshot of our global footprint is shown on a map on Page 15 of the supplemental presentation. It has long been a hallmark of Culp to have options in our supply chain, and that advantage was definitely supportive to our bedding performance this quarter. We have tremendous flexibility in our supply chain to service bedding customers strategically and from multiple locations. Likewise, our global platform has a strength in upholstery as well, but the pace and ever-changing tariff rates in April and May were extremely challenging to the industry. With time to react, we can manage upholstery tariffs effectively and with strength, and we will continue to keep our ear to the ground and balance our production to best serve our customers. Sales in our upholstery segment were also challenged during the quarter by an uneven year-over-year comparison caused by a large residential fabric customer's decision to focus most of its purchasing in the front half of last year, including a notable onetime buying uptick in last year's first quarter. We think this issue is now pretty much behind us as we expect a more even purchasing cadence from that customer this year and for sales comparisons to smooth out in the second quarter and the rest of fiscal '26. Despite the challenges mentioned in residential upholstery, demand in the higher-margin channels of our upholstery segment, hospitality and commercial remained relatively solid, and those products comprised almost 40% of our total upholstery segment sales for the quarter. These channels are less directly impacted by discretionary consumer spending and housing market trends, given their focus on upholstery fabric for furniture, window treatments, and related applications in hotel, theater, office, retail and other commercial settings. Moreover, the supply chains in these channels are less Asia-centric, although we are seeing some of our customers' projects and building plans impacted by the current tariff environment. As a final bigger picture note on tariffs, they've obviously been a disruption to our overall business, whether it's actual tariff rates on our imported items or delays on customer projects. Again, though, when we can manage through changes with appropriate warning and time, we believe the disruption can actually become a competitive advantage for us. We've also made solid progress on an initiative we announced last quarter, the integration of our two former divisions into a unified Culp-branded business. We have internally named this activity Project Blaze, and our work should provide a significant boost to the operating profile of our business overall and also help us better navigate the difficult residential upholstery demand and tariff environments. This project supports the two industry sales channels we target, but also allows us to move to a shared cost and talent model. Under the leadership of Tommy Bruno as Chief Commercial Officer; and Mary Beth Hunsberger as Chief Operations Officer, we are becoming more streamlined in sharing best practices across products, resources, processes, technology, and supply chains. A summarized scope of this work by major project is contained on Pages 10 and 11 of our supplemental deck. The transition of upholstery operations at our leased facility in Burlington, North Carolina, to a shared management model within our Stokesdale, North Carolina location is underway, and we expect the anticipated cost and efficiency benefits of that move to begin to manifest in our second quarter results with the majority of the benefits supporting the second half of this fiscal year. Additionally, we recently announced internally a similar transition in our upholstery segment's Read Window business, via which we are consolidating and shuttering operations at a leased facility in Tennessee into a more cost-effective shared management platform within our owned Stokesdale location, along with outsourcing to some valued domestic partners. This move should begin to positively affect our results in the third quarter as we reduce lease and manufacturing costs accordingly. Once fully implemented, these integration actions, together with the price increases I previously mentioned that are going into effect in our bedding segment beginning in the second quarter to mitigate tariffs and rationalize margins in some areas are expected to generate at least $6 million in annualized cost and efficiency enhancements, which are additive to the $10 million to $11 million of annualized benefits expected from last year's restructuring initiatives. Once again, the schedule and impacts of all these actions are summarized on the table on Slide 11 in our supplemental deck. The Culp team has clearly not been sitting on its hands and waiting for the market to turn around. We are executing our strategies to become a leaner and more unified company that is prepared to thrive in a variety of market conditions, and we are very well-poised for an eventual and general market recovery. We have best-in-class innovative products and a strong U.S. manufacturing base with well-established nearshore and offshore platforms that together give us what we believe is a growing competitive advantage in the market, particularly as customers continue to look for supply chain alternatives and geographic diversity in the current trade and tariff landscape. And as I mentioned in our press release, our highest priorities at Culp are to get back to sustained operating profitability and reduce debt regardless of any improvement in market conditions, and we believe that we are well on our way to doing so. I'm encouraged by our progress, the talent we have leading our two segments and the opportunities I believe we have to grow revenue and increase our operating performance.

Kenneth Bowling, CFO

Thanks, Iv. Here are the financial highlights for the first quarter. Net sales for the first quarter, which included an extra week, were $50.7 million compared to net sales in the prior year period of $56.5 million. The decline was driven primarily by the continued market softness and the tariff-driven pause in residential upholstery shipments that Iv discussed earlier. Gross profit for the quarter was $7.2 million or 14.3% of sales compared to prior year period gross profit of $5.1 million or 9% of sales. This year-over-year improvement of 530 basis points was driven primarily by the cost and efficiency benefits flowing from the restructuring initiatives in the bedding segment completed last year. Operating income for the quarter was $1.6 million compared with a loss from operations of $6.9 million for the prior year period. Adjusting for restructuring credits and expenses, including a net credit of approximately $3.5 million driven by a gain on the sale of our Canadian manufacturing facility, non-GAAP operating loss for the quarter was $1.9 million compared to prior year period's non-GAAP operating loss of $4.1 million. Net loss for the fourth quarter was $231,000 or $0.02 per diluted share compared with a net loss of $7.3 million or $0.58 per diluted share for the prior year period. EBITDA adjusted for the impacts of restructuring and related credits and expenses was a negative $1.1 million for the first quarter compared to negative $2.7 million in the prior year period. Our overall operating performance for the first quarter as compared to the prior year period benefited primarily from continued momentum in our bedding segment driven by the positive impacts of last year's restructuring initiatives in that area. Operating performance also benefited from the continued profitability in our upholstery segment despite the low revenue industry environment and tariff-related challenges Iv spoke to. The effective income tax rate for the first quarter of this fiscal year was 120.3% compared with a negative 3.4% for the same period a year ago and was impacted by the gain on the sale of our Canadian manufacturing facility and by the company's mix of earnings between our U.S. and foreign subsidiaries. Our cash income tax payments totaled $46,000 for the quarter. Importantly, as of April 27, 2025, we had $88.1 million in U.S. federal net operating loss carryforwards with related future income tax benefits of $18.5 million. Before we take a look at our reporting segments, we now refer to our mattress fabrics business as our bedding segment and our upholstery fabrics business as our upholstery segment. Moreover, as part of that integration, we now manage and assess SG&A expenses on a consolidated basis. As a result, we will no longer report operating performance at the segment level, just down to the gross profit level. The segment breakdown is covered in more detail on Slides 4 through 6 in our investor presentation. For the bedding segment, sales for the first quarter were $28 million, generally flat compared with last year's first quarter sales. As I spoke to, sales continue to be pressured by low industry demand and challenges from consumer spending and housing market trends, but we were able to continue our trend of winning share in key targeted areas. The newly restructured cost platform in our Bedding segment drove gross profit to $2.9 million or 10.5% of sales, a significant improvement from the prior year period's negative $326,000 or negative 1.2% of sales. We were pleased to see the profitability momentum in this segment continued during the quarter. For the upholstery segment, sales for the first quarter were $22.6 million, down approximately 20% from the sales in the prior year period of $28.5 million. This decline in sales was driven primarily by the continued softness in the home furnishings market and corresponding weakness in the residential upholstery channel. In addition, the lagging effects of the pause in residential order flow in our fourth quarter last year, stemming from historically high tariffs on China imports impacted first quarter sales, and the uniquely heavier purchasing by a large residential fabric customer in last year's first quarter unevenly impacted our year-over-year sales comparison. As I mentioned, we expect this timing-driven disparity to smooth out beginning in the second quarter, given our expectation for this customer's purchasing activity in fiscal 2026. Gross profit in the upholstery segment was $4.3 million or 18.9% of sales, down from $5.5 million or 19.4% of sales in the prior year period and driven largely by comparable sales or lower comparable sales. Now I'll turn to the balance sheet. We reported $11.1 million in total cash and $18.1 million in outstanding debt as of the end of the first quarter, which includes $2.8 million attributable to supplier financing, maintaining an equivalent $7.1 million net debt position as compared to the end of fiscal 2025. The outstanding debt was primarily driven by worldwide working capital needs, but also includes approximately $3 million in debt we incurred voluntarily to take advantage of availability and borrowing opportunities at current preferred rates in China. We believe this decision was prudent given today's challenging economic environment and uncertain trade relations. Further, we were able to invest these proceeds into a high-yield savings account in China at a rate materially higher than the interest rate paid on the debt. This strategy more than covers our interest cost for the debt while at the same time, giving us significant flexibility in managing our worldwide cash position. Our liquidity breakdown and other supporting information are covered on Slide 7 in our investor presentation. Cash flow from operations was a negative $695,000 and primarily driven by operating losses, partially offset by favorable working capital. Adjusted for capital expenditures, proceeds from the sale of PP&E and other items, free cash flow was $311,000 positive for the first quarter. Generating free cash flow and reducing our debt continue to be among our highest priorities and key focus points throughout all areas of our company. Capital expenditures were $179,000 for the first quarter compared with $501,000 for the prior year period. This decrease stems from our strategic efforts to closely manage capital and focus on integration and other initiatives targeting operating efficiency. We expect capital spending for fiscal 2026 to generally track fiscal 2025 levels as we continue to spend only as necessary. Our liquidity at the end of the first quarter was $28.7 million, consisting of $11.1 million in cash and $17.6 million in borrowing availability under our domestic credit facility, which, as we mentioned last quarter, was recently extended for 3 years. Another important call out with regard to liquidity options concerns our Stokesdale, North Carolina manufacturing facility, which is owned. Our net book value for the land, building and building improvements as of August 3, 2025, was $12.1 million with an estimated market value of $40 million to $45 million.

Robert Culp, President and CEO

Now I'll turn the call over to Iv to discuss our updated outlook for the fiscal 2026, and then we'll take some questions. Thank you, Ken. Due to the market and macroeconomic uncertainty and the fluid global trade and tariff environment that we've talked about today, we are only providing limited forward guidance at this time. Despite what we anticipate to remain a low demand environment for home furnishings in the near term that pressures sales in both of our businesses, we currently expect sequential overall sales growth in the second quarter and throughout fiscal '26. We believe we are gaining market share with key customers that support this improvement. Moreover, we expect the cost and efficiency benefits of our multiple restructuring and division integration initiatives, along with the price increases I mentioned to drive adjusted EBITDA results in a range from near breakeven to slightly positive for the second quarter of fiscal '26. We also anticipate our operating performance and profitability to improve sequentially throughout the remainder of fiscal '26. As Ken spoke to, while we intend to continue to utilize borrowings as necessary under our credit facilities during fiscal '26, we will continue to aggressively manage liquidity and capital expenditures and prioritize free cash flow. And finally, please just note that our forward guidance and expectations are based on information available as of today and reflect certain assumptions regarding our business and overall industry trends, the projected impact of our restructuring and integration initiatives and ongoing market headwinds. Our expectations also assume no further meaningful impacts from tariffs and trade negotiations. Thank you again, and we'll now take some questions.

Operator, Operator

The first question comes from Doug Lane with Water Tower Research.

Douglas Lane, Analyst

Thank you for the commentary on tariffs. It's obviously been front and center in the news, particularly in your industry. Are you at the point now where all the known information on tariffs is out there and your initiatives, both from the cost side and the pricing side have captured that? Or is there still more actions to be taken based on the current news?

Robert Culp, President and CEO

Hi, Doug. Good morning, this is Iv. Thank you for joining today. I appreciate the question. Yes, we did try to touch on tariffs a lot in our script. It has been a major talking point in the industry, as you referenced. I actually think that where we are today, we can, in some ways, take tariffs off of our immediate worry. It's certainly been very disruptive. And it's not so much the level of tariffs that have been applied as it is the variability and the changes to the tariffs. It's just been hard to plan and everyone's been dealing in some uncertainty. The only real major issue we had was when tariffs were up over 150% in China, and we just had to stop shipping, which we talked about was impactful to our first quarter here. But we have options. That's long been our strategy. We've adjusted our pricing. We have multiple manufacturing locations. We can pivot to best support our customers as we need to. And of course, I'm only speaking to what I know today, but to your direct question, as it is now, we've immersed in the tariffs, and we are able to perform and grow our margins under this current environment.

Douglas Lane, Analyst

That's good news. You mentioned part of your initiatives of pricing. What is the elasticity these days? Are you able to put the pricing through? Or is it too early to tell?

Robert Culp, President and CEO

Well, Doug, we're certainly in competitive businesses. And there are certainly price levels that the markets will bear. But we have to be profitable, and we have to turn our business to profitability in this environment. We have options. Again, our supply chain allows us to be competitive across a myriad of different platforms. Prices are never easy to pass, but our customers understand the competitive landscape. And we're being fair but aggressive to get prices in to cover tariffs and to also rightsize margins. And we just have to do that with some discipline.

Douglas Lane, Analyst

No. And the margin story is looking really good, that chart on Slide 9 showing the steady improvement in gross profits. Maybe could you give us a feel you have on Slide 11, a list of all the initiatives you've taken. And the total is $18 million. How far along are we in realizing that $18 million? And when do you think we'll fully realize that $18 million annual run rate?

Robert Culp, President and CEO

Well, I can let Ken discuss some of this as well, but we've made efforts to schedule things as effectively as we can. It’s useful to go into more detail. The $10 million to $11 million was primarily a fiscal '25 initiative, mainly related to closing our Canadian operations and moving that business to the U.S. and to some strategic outsourced partners. That project has been completed and should be fully implemented for fiscal '26, which will have an impact throughout the entire year. We experienced some benefits in '25, but the main effect will be in '26. The other initiatives we've mentioned will mainly affect the second half of the year, specifically in Q3 and Q4, although some of the price increases we refer to will take place in Q2. So, much of it will impact '26, with all of it expected to be realized in the latter half of the year.

Douglas Lane, Analyst

Okay. That's helpful. I'm looking also at some of the market commentary that you referenced here. And I'm new to the company here, so I just maybe need a little bit of background on how would you compare this dip here post COVID, if you will, versus, say, The Great Recession back in the 2000s?

Robert Culp, President and CEO

Yes. Spending a long time in the textile industry means experiencing many ups and downs, which is both a blessing and a curse of my role. We've always dealt with market variability; it's not unusual for us. We've encountered cycles of decline and growth, but this current downturn feels prolonged. It's not uncommon to have downtimes, though they usually bounce back quickly. Since 2020, we have been in a continuous down cycle in units due to various factors, including early purchases during lockdowns, rising interest rates, and delayed purchases, along with slow housing activity. The good news is that we're in segments where, although not necessities, people want to buy furniture as part of their lifestyle. We believe the business will return, and we are confident about that. However, we are not going to sit and wait for it to recover. We will adjust our operations to achieve profitability in the current environment. When recovery occurs, we will be better prepared and leaner to take advantage of the upswing. We know it's coming, but we will take proactive steps; we can't afford to wait.

Douglas Lane, Analyst

No, you can't forecast when things turn. I mean you have the commentary from the research that you cited showing significant pent-up demand, people calling a turn in 2026, which, of course, may or may not happen. But what does that mean for Culp? Are you able to satisfy a turn in demand with your existing cost structure? Or will you have to begin to spend and chase the demand when it does come, assuming it does come in the next year or so?

Robert Culp, President and CEO

That's a great question. We have been very strategic with our restructuring initiatives and have made careful changes to our platform without sacrificing capacity. While we may not have multiple plants in the same regions, we possess the ability to expand our capacity globally. With proper planning, we can increase this capacity significantly. We are not limiting ourselves, and we see considerable potential leverage from our current operations. By increasing revenue, we can benefit from cost efficiencies without the need to add back, leading to improved margins. We're optimistic about our growth in the current market, and we believe we can enhance our margins now. When demand increases, we are well positioned to expand without limits, provided we plan and strategize effectively, as this is where our cost leverage becomes beneficial.

Douglas Lane, Analyst

That sounds encouraging for sure. And again, new to the story, I'm fascinated by some of these hidden assets that you have here, Ken. You mentioned a market value of real estate of $40 million to $45 million, and you've got federal NOLs of $88 million. How much of that real estate is on the books and how much of that is really not on the books? And then how are the NOLs going to play out going forward?

Kenneth Bowling, CFO

Yes, Doug, thank you for the question. Our net book value for the real estate asset is around $12 million, which leaves about $30 million in excess value. We estimate the property's worth between $40 million and $45 million based on similar sales in the area, and we are confident in that estimate. The property is in excellent condition, so we feel positive about its valuation. Regarding taxes, we assess that annually, and it is currently influenced by ongoing losses in the U.S., which means it may increase over time. For now, it represents a benefit, and once we start making profits in the U.S., this untapped value will come into play, providing us with significant advantages moving forward.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Iv Culp for any closing remarks.

Robert Culp, President and CEO

Thank you, Dru. And again, thank you for your participation and your interest in Culp, and we certainly look forward to updating everyone on our progress next quarter. Have a great day.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.