Culp Announces Results for Fourth Quarter and Fiscal 2023, Ends Year With Quarterly Sales and Operating Improvement and Higher Cash Position

Culp, Inc. (NYSE: CULP) (together with its consolidated subsidiaries, “CULP”) today reported financial and operating results for the fourth quarter and fiscal year ended April 30, 2023.

Fiscal 2023 Fourth Quarter Financial Summary

• Net sales for the fourth quarter of fiscal 2023 were $61.4 million, up 7.9 percent compared with the prior-year period, with mattress fabrics sales up 3.1 percent and upholstery fabrics sales up 13.1 percent. Sequentially, net sales were up 17.0 percent compared with the third quarter of fiscal 2023, with mattress fabrics sales up 24.3 percent and upholstery fabrics sales up 10.4 percent.
• Loss from operations for the quarter was $(4.0) million, as compared with loss from operations of $(5.4) million for the prior-year period and loss from operations of $(7.8) million for the third quarter of fiscal 2023 (which included $711,000 in restructuring expense).
• Net loss was $(4.7) million, or $(0.38) per diluted share, compared with a net loss of $(6.0) million, or $(0.49) per diluted share, for the prior-year period. The effective tax rate for the fourth quarter was negative (20.6) percent, reflecting the company’s mix of taxable income between its U.S. and foreign jurisdictions during the period.
• The company maintained a solid balance sheet, with total cash of $21.0 million and no outstanding borrowings as of April 30, 2023, up sequentially from total cash of $16.7 million as of the end of the third quarter.

Fiscal 2023 Full Year Financial Summary

• Net sales for fiscal 2023 were $234.9 million, down 20.3 percent from the prior year, with mattress fabrics sales down 27.1 percent and upholstery fabrics sales down 13.1 percent.
• Loss from operations for fiscal 2023 was $(28.5) million, compared with income from operations of $678,000 for the prior year.
• The loss from operations for fiscal 2023 includes approximately $9.9 million relating to certain inventory impairment charges, losses from inventory close out sales, inventory markdowns, and restructuring expense and related charges during the period.
• Net loss was $(31.5) million, or $(2.57) per diluted share, compared with net loss of $(3.2) million, or $(0.26) per diluted share, for the prior year. The effective tax rate for fiscal 2023 was negative (11.0) percent, reflecting the company’s mix of taxable income between its U.S. and foreign jurisdictions during the period.
• Cash flow from operations and free cash flow were $7.8 million and $6.9 million, respectively, for fiscal 2023, compared with cash flow from operations and free cash flow of negative $(17.4) million and negative $(24.3) million, respectively, for the prior fiscal year. (See reconciliation table at the back of this press release.)

Financial Outlook

• CULP achieved sequential and year-over-year improvement in its operating results for the fourth quarter of fiscal 2023 and remains well-positioned for the long term, especially with the transformation strategy underway in its mattress fabrics division. However, current macro conditions affecting consumer spending and demand trends are likely to continue for some period.
• Due to the continued volatility in the macro environment, the company is providing only limited financial guidance for the first quarter of fiscal 2024. The company’s consolidated net sales for the first quarter are expected to be slightly lower compared to the first quarter of fiscal 2023, due mostly to current softness in the residential home furnishings industry, as well as some slowing of demand and the timing of additional new program launches in the mattress fabrics segment. Despite the sales pressure, the company expects a consolidated operating loss (loss from operations) for the first quarter of fiscal 2024 that is in the range of $(3.5) to $(4.0) million, a solid improvement compared to the $(4.7) million operating loss for the prior-year period.
• The company’s expectations are based on information available at the time of this press release and reflect certain assumptions by management regarding the company’s business and trends and the projected impact of the ongoing headwinds.

Commenting on the results, Iv Culp, president and chief executive officer of Culp, Inc., said, “Our sales and operating results for the fourth quarter were better than expected, with solid improvement despite ongoing demand softness in the domestic mattress and residential home furnishings industries. The strong sequential improvement in our mattress fabrics segment was driven primarily by the roll out of new customer programs during the period, which were priced in line with current costs and are expected to grow this segment's market position in fiscal 2024. The mattress fabrics business also began to benefit from some improvement in operational efficiencies and cost reduction initiatives across our locations. For the upholstery fabrics segment, demand remained solid in our hospitality/contract business, and our residential fabrics business improved due to a seasonal pick up following third-quarter shutdowns for the Chinese New Year holiday, as well as a non-recurring payment relating to newly negotiated terms with a customer.

"We are especially pleased with our continued focus on cash generation and working capital management, including inventory reductions, throughout the quarter. We ended the year with a higher cash position than the prior year, with $21.0 million in cash and no outstanding borrowings. We also generated cash flow from operations of $7.8 million and free cash flow of $6.9 million for fiscal 2023, a significant improvement compared to the prior fiscal year.

"We continue to diligently manage the aspects of our business we can control, taking necessary steps to withstand current market challenges and position our business for renewed growth. In our mattress fabrics segment, we are executing on our comprehensive business transformation plan, laying the foundation for steady, sequential improvement in this business with new leadership and a restructured management team. While the pace of this improvement could be affected by recovery in the overall macroeconomic environment, we believe we are gaining market share with new program rollouts, and we are optimistic about additional program launches expected during calendar 2023. In our upholstery fabrics segment, the residential home furnishings industry remains under pressure due to shifting consumer spending trends and inflation affecting overall consumer spending. However, for fiscal 2024, we expect to benefit from improved inventory management, a solid hospitality/contract fabric business, improvement in our Read Window business, and a rationalized cut and sew platform.

"Fiscal 2023 was a difficult year, but we navigated the challenges and maintained our balance sheet strength. Our strong balance sheet allows us to focus on investing in our global manufacturing platform and growing profitable sales. We are especially thankful for the hard work and perseverance of our associates around the world in executing our product-driven strategy and meeting the needs of our customers this year. While we expect demand softness in the mattress and residential home furnishings industries will continue, our market position is strong, and we are diligently focused on achieving sustainable improvement and returning to profitability in fiscal 2024. We are well positioned for the long term, and our innovative product offerings, creative designs, and global manufacturing and sourcing platform will support us into the future, especially when market conditions improve,” added Culp.

Segment Update

Mattress Fabrics Segment (“CHF”) Summary

• Sales for this segment were $30.7 million for the fourth quarter, up 3.1 percent compared with sales of $29.8 million in the fourth quarter of fiscal 2022. Sequentially, sales were up 24.3 percent compared with sales of $24.7 million for the third quarter of fiscal 2023. This sequential improvement was driven primarily by the roll out of new customer programs, despite a difficult industry demand environment during the quarter.
• Operating performance for the fourth quarter, as compared both sequentially and to the prior-year period, was positively affected by higher sales, as well as some improvement in operating efficiencies, a favorable product mix, and lower costs resulting from the restructuring and rationalization of CHF's cut and sew mattress cover platform in North Carolina initiated during the second quarter.
• For fiscal 2023, sales were $111.0 million, down 27.1 percent compared with sales of $152.2 million for fiscal 2022. This decrease reflects a slowdown in consumer demand in the domestic mattress industry during the period, with industry reports reflecting significant unit contraction.
• For the full year, operating performance was affected by lower sales volumes, as well as operating inefficiencies driven by lower sales volumes; labor challenges resulting in increased employee training costs and operating inefficiencies; certain impairment charges, inventory markdowns, and losses from inventory close out sales; and higher raw material costs.

Upholstery Fabrics Segment (“CUF”) Summary

• Sales for this segment were $30.7 million for the fourth quarter, up 13.1 percent compared with sales of $27.2 million in the fourth quarter of fiscal 2022, which was adversely affected by COVID-related shutdowns in China during the quarter. Sequentially, sales were up 10.4 percent compared with sales of $27.8 million for the third quarter of fiscal 2023.
• Sales for CUF’s residential fabric business improved sequentially, as compared to the third quarter, due to a seasonal pick up in demand following shutdowns for the Chinese New Year holiday, which fell entirely within the third quarter this year. Sales were also positively affected by receipt of a non-recurring payment relating to newly negotiated terms with a customer.
• Demand remained solid for CUF’s hospitality/contract business during the fourth quarter, with sales for this business accounting for approximately 32 percent of CUF's total sales.
• Operating performance for the fourth quarter, as compared both sequentially and to the prior-year period, was positively affected by higher sales, including the non-recurring payment mentioned above, as well a favorable product mix, lower inventory markdowns, and lower overhead costs resulting from the restructuring of CUF's cut and sew platforms during earlier periods. These factors were partially offset by higher incentive compensation expense during the period due to CUF's significant contribution to the company's free cash flow for fiscal 2023.
• For fiscal 2023, sales were $123.9 million, down 13.1 percent compared with sales of $142.7 million for fiscal 2022. This decrease primarily reflects reduced demand in CUF's residential business during fiscal 2023, driven by high customer inventory levels and a slowdown in new retail business for the residential home furnishings industry, partially offset by higher sales in CUF's hospitality/contract fabric business.
• For the full year, operating performance was affected primarily by lower residential sales, as well as higher than normal inventory markdowns and operating inefficiencies in CUF's Read Window Products business. These pressures were partially offset by a significantly more favorable foreign exchange rate associated with CUF's operations in China, as well as lower overhead costs resulting from the restructuring of CUF's cut and sew platforms during earlier periods.

Balance Sheet and Cash Flow

• As of April 30, 2023, the company reported $21.0 million in total cash and no outstanding debt. This compares with $14.6 million in total cash and no outstanding debt as of the end of fiscal 2022.
• Cash flow from operations and free cash flow were $7.8 million and $6.9 million, respectively, for fiscal 2023, compared with cash flow from operations and free cash flow of negative $(17.4) million and negative $(24.3) million, respectively, for fiscal 2022. (See reconciliation table at the back of this press release.)
• The company’s cash flow from operations and free cash flow during fiscal 2023 were favorably affected by working capital management, namely reductions in inventory. Importantly, since the end of the third quarter of fiscal 2022, inventory reduction has contributed approximately $21.1 million to the company's cash position.
• Capital expenditures for fiscal 2023 were $2.1 million compared with $5.7 million for fiscal 2022. The company continues to manage capital investments, focusing on projects that will increase efficiencies and improve quality.
• As of the end of fiscal 2023, the company had approximately $47.8 million in liquidity, consisting of $21.0 million in total cash and approximately $26.8 million in borrowing availability under the company's domestic credit facility.

Dividends and Share Repurchases

To preserve liquidity and support future growth opportunities, the company’s Board of Directors suspended the company’s quarterly cash dividend on its common stock in June of 2022.

The company did not repurchase any shares during fiscal 2023, leaving approximately $3.2 million available under the current share repurchase program as of April 30, 2023. Despite the current share repurchase authorization, the company does not expect to repurchase any shares during the first quarter of fiscal 2024.

Conference Call

Culp, Inc. will hold a conference call to discuss financial results for the fourth quarter and fiscal 2023 year on June 29, 2023, at 11:00 a.m. Eastern Time. A live webcast of this call can be accessed on the “Upcoming Events” section on the investor relations page of the company’s website, www.culp.com. A replay of the webcast will be available for 30 days under the “Past Events” section on the investor relations page of the company’s website, beginning at 2:00 p.m. Eastern Time on June 29, 2023.

About the Company

Culp, Inc. is one of the world’s largest marketers of mattress fabrics for bedding and upholstery fabrics for residential and commercial furniture. The company markets a variety of fabrics to its global customer base of leading bedding and furniture companies, including fabrics produced at Culp’s manufacturing facilities and fabrics sourced through other suppliers. Culp has manufacturing and sourcing capabilities located in the United States, Canada, China, Haiti, Turkey, and Vietnam.

Forward Looking Statements

This release contains “forward-looking statements” within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995 (Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934). Such statements are inherently subject to risks and uncertainties that may cause actual events and results to differ materially from such statements. Further, forward looking statements are intended to speak only as of the date on which they are made, and we disclaim any duty to update such statements to reflect any changes in management’s expectations or any change in the assumptions or circumstances on which such statements are based, whether due to new information, future events, or otherwise. Forward-looking statements are statements that include projections, expectations, or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often but not always characterized by qualifying words such as “expect,” “believe,” “anticipate,” “estimate,” “intend,” “plan,” “project,” and their derivatives, and include but are not limited to statements about expectations, projections, or trends for our future operations, strategic initiatives and plans, production levels, new product launches, sales, profit margins, profitability, operating income, capital expenditures, working capital levels, cost savings, income taxes, SG&A or other expenses, pre-tax income, earnings, cash flow, and other performance or liquidity measures, as well as any statements regarding dividends, share repurchases, liquidity, use of cash and cash requirements, borrowing capacity, investments, potential acquisitions, future economic or industry trends, public health epidemics, or future developments. There can be no assurance that we will realize these expectations or meet our guidance, or that these beliefs will prove correct.

Factors that could influence the matters discussed in such statements include the level of housing starts and sales of existing homes, consumer confidence, trends in disposable income, and general economic conditions. Decreases in these economic indicators could have a negative effect on our business and prospects. Likewise, increases in interest rates, particularly home mortgage rates, and increases in consumer debt or the general rate of inflation, could affect us adversely. The future performance of our business depends in part on our success in conducting and finalizing acquisition negotiations and integrating acquired businesses into our existing operations. Changes in consumer tastes or preferences toward products not produced by us could erode demand for our products. Changes in tariffs or trade policy, including changes in U.S. trade enforcement priorities, or changes in the value of the U.S. dollar versus other currencies, could affect our financial results because a significant portion of our operations are located outside the United States. Strengthening of the U.S. dollar against other currencies could make our products less competitive on the basis of price in markets outside the United States, and strengthening of currencies in Canada and China can have a negative impact on our sales of products produced in those places. Also, economic or political instability in international areas could affect our operations or sources of goods in those areas, as well as demand for our products in international markets. The impact of public health epidemics on employees, customers, suppliers, and the global economy, such as the global coronavirus pandemic currently affecting countries around the world, could also adversely affect our operations and financial performance. In addition, the impact of potential asset impairments, including impairments of property, plant, and equipment, inventory, or intangible assets, as well as the impact of valuation allowances applied against our net deferred income tax assets, could affect our financial results. Increases in freight costs, labor costs, and raw material prices, including increases in market prices for petrochemical products, can also significantly affect the prices we pay for shipping, labor, and raw materials, respectively, and in turn, increase our operating costs and decrease our profitability. Finally, disruption in our customers’ supply chains for non-fabric components may cause declines in new orders and/or delayed shipping of existing orders while our customers wait for other components, which could adversely affect our financial results. Further information about these factors, as well as other factors that could affect our future operations or financial results and the matters discussed in forward-looking statements, is included in Item 1A “Risk Factors” in our most recent Form 10-K and Form 10-Q reports filed with the Securities and Exchange Commission. A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. Additional risks and uncertainties that we do not presently know about or that we currently consider to be immaterial may also affect our business operations and financial results.

Notes

Notes

Reconciliation of Free Cash Flow:

Notes

Notes

Notes