#Home Textiles
Culp announces results for First Quarter Fiscal 2024, with better-than-expected operating improvement and continued solid financial position
Fiscal 2024 First Quarter Financial Summary
• Net sales for the first quarter of fiscal 2024 were $56.7 million, down 9.5 percent compared with the prior-year period, with mattress fabrics sales flat, down 0.5 percent (a solid performance in the face of industry softness), and upholstery fabrics sales down 17.4 percent compared to a strong quarter the prior year (fueled by a lift in sales following pandemic-related shutdowns in China).
• Loss from operations was $(3.1) million, which included $517,000 in mostly non-cash restructuring and related charges associated with the discontinued production of cut and sewn upholstery kits in Haiti during the quarter.
• Excluding this $517,000, adjusted loss from operations for the quarter was $(2.6) million, a better-than-expected improvement as compared with loss from operations of $(4.7) million for the prior-year period and loss from operations of $(4.0) million for the fourth quarter of fiscal 2023. (See reconciliation table at the back of this press release.)
• Net loss was $(3.3) million, or $(0.27) per diluted share, compared with a net loss of $(5.7) million, or $(0.47) per diluted share, for the prior-year period. Net loss for the quarter included the $517,000 in restructuring and related charges noted above. The effective tax rate for the first quarter was negative (26.5) 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 $16.8 million and no outstanding borrowings as of July 30, 2023. Total liquidity as of July 30, 2023, was $42.3 million (consisting of $16.8 million in cash and $25.5 million in borrowing availability under the company's domestic credit facility).
• Adjusted EBITDA for the period was close to break even at negative $(416,000), as compared to adjusted EBITDA of negative $(2.7) million for the prior-year period.
CEO Commentary
Commenting on the results, Iv Culp, president and chief executive officer of Culp, Inc., said, “We are pleased to report better than expected improvement in our operating performance for the first quarter, as we are continuing our aggressive business transformation. As expected, our top-line performance was impacted by the difficult macro-economic environment that continues to pressure the industries we service. However, our operating performance improved despite this pressure on sales, driven by internal improvements in both businesses. In our mattress fabrics segment, we continue to gain market position with the roll out of new fabric and sewn cover placements that are priced in line with current costs. This segment also achieved a 52 percent improvement in its operating results as compared to the prior-year period, and a 45 percent improvement as compared sequentially to the prior quarter. These gains were driven by our ongoing focus on operational efficiencies and cost reduction initiatives across our locations. For the upholstery fabrics segment, we saw operational improvements and fixed cost savings, along with solid demand in our hospitality/contract business, including improvement for Read Window. However, sales in our residential fabrics business were lower as compared to the first quarter of last fiscal year, which was a strong quarter, due to the ongoing demand softness affecting the home furnishings industry.
“We also continued our diligent focus on prudent financial management, including maintaining a strong balance sheet and ensuring a strategic level of working capital. We ended the quarter with $16.8 million in cash and no outstanding borrowings. We believe we are well positioned, and we are strategically investing in our business, especially within our mattress fabrics segment, to support future profitable sales growth and further improve operating efficiencies.
“Understanding that the furniture and bedding macro-environment remains challenged, we continue to manage the aspects of our business we can control, taking necessary steps to withstand current market conditions and position our business for renewed growth. We believe this recovery will be led by our mattress fabrics segment, where our ongoing execution of a comprehensive business transformation plan is laying the foundation for steady, sequential improvement in this business. Although market conditions are pressuring the residential home furnishings industry, it is important to note that our upholstery fabrics business has maintained consistent profitability despite these market pressures, and demand remains solid in our growing hospitality business. We also further rationalized our upholstery cut and sew operation in Haiti during the quarter by discontinuing production of cut and sewn upholstery kits from this platform. This move, which was driven by ongoing demand softness for residential upholstery kits, allows us to further reduce our cost structure while utilizing our strong Asian (China and Vietnam) supply chain to support the needs of our customers.
“While the difficult industry environment affecting the mattress and residential home furnishings industries is expected to continue for some time, our market position is strong and improving, and we believe we are poised for a considerably better second half performance, with a return to operating profitability in fiscal 2024. Regardless of the current demand backdrop, we expect continued progress in improving our operating results, especially in our mattress fabrics segment, but the speed of our recovery may be affected by overall industry trends. We are well positioned for the long term, and our strong leadership teams, innovative product offerings, creative designs, and resilient global manufacturing and sourcing platform will support us into the future, especially when the industry environment improves,” added Culp.
Business Segment Highlights
Mattress Fabrics Segment (“CHF”) Summary
• Sales for this segment were $29.2 million for the first quarter, down 0.5 percent compared with sales of $29.4 million in the first quarter of fiscal 2023.
• Sales for the quarter were affected by ongoing industry demand softness, with mattress industry analysis reflecting significant contraction (10 percent in dollars, 20 percent in units) in the domestic mattress market through the first six months of calendar 2023. Notably, CHF revenue over the same general period has remained relatively flat, indicating that CHF has made gains with customers in a difficult market environment.
• Operating loss was $(1.4) million for the first quarter, a 52 percent improvement compared to the $(2.9) million operating loss in the prior-year period. Operating performance as compared to the prior-year period was positively affected by new placements priced in line with current costs, improvement in operating efficiencies, 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 of fiscal 2023.
Upholstery Fabrics Segment (“CUF”) Summary
• Sales for this segment were $27.4 million for the first quarter, down 17.4 percent compared with sales of $33.2 million in the first quarter of fiscal 2023, which was a strong quarter due to a lift in sales following pandemic-related shutdowns in China.
• Sales for CUF's residential fabric business for the quarter were affected by ongoing softness in the residential home furnishings industry, where demand remains pressured by a challenging macro-economic environment. Demand remained solid for CUF’s hospitality/contract business during the quarter, with sales for this business accounting for approximately 33 percent of CUF's total sales.
• Operating income and operating margin were $1.3 million and 4.8 percent, a 145 percent and 320 basis points improvement, respectively, compared with the prior-year period. Operating performance for the first quarter, as compared to the prior-year period, was positively affected by a higher contribution from hospitality fabrics and the Read Window business; lower costs resulting from the restructuring of CUF's cut and sew platforms during earlier periods; and a more favorable foreign exchange rate associated with CUF's operations in China, as well as other operational improvements. These factors were partially offset by lower residential fabric sales and higher SG&A during the period.
• Based on continued demand softness for residential upholstery kits, as well as the strength of CUF's Asian platform, CUF took action during the quarter to discontinue production of cut and sewn upholstery kits in Haiti. This step, which follows an earlier rationalization of this platform in fiscal 2023, resulted in $517,000 in restructuring and related charges during the quarter. CUF took this initiative to further reduce its cost structure and avoid losses that would have otherwise been incurred, while continuing to support customers through its Asian supply chain for cut and sewn kits.
Balance Sheet, Cash Flow, and Liquidity
• As of July 30, 2023, the company reported $16.8 million in total cash and no outstanding debt.
• Cash flow from operations and free cash flow were negative $(4.4) million and negative $(4.2) million, respectively, for the first three months of fiscal 2024. (See reconciliation table at the back of this press release.) The company’s cash flow from operations and free cash flow during the period were affected by operating losses and investments in working capital and capital expenditures mostly related to the CHF transformation plan.
• Capital expenditures for the first three months of fiscal 2024 were $513,000. The company continues to manage capital investments, focusing on projects that will increase efficiencies and improve quality.
• As of July 30, 2023, the company had approximately $42.3 million in liquidity, consisting of $16.8 million in total cash and $25.5 million in borrowing availability under the company's domestic credit facility.
Share Repurchases
The company did not repurchase any shares during the first quarter of fiscal 2024, leaving approximately $3.2 million available under the current share repurchase program as of July 30, 2023. Despite the current share repurchase authorization, the company does not expect to repurchase any shares during the second quarter of fiscal 2024.
Financial Outlook
• CULP achieved sequential and year-over-year improvement in its operating results for the first quarter of fiscal 2024, although as expected, sales were pressured by ongoing industry demand softness. While the current macroeconomic conditions affecting consumer spending and demand trends are likely to remain for some period, the company remains well-positioned for the long term, especially with the transformation strategy underway in its mattress fabrics division.
• Due to the continued volatility in the macro-environment, the company is providing only limited financial guidance for the second quarter of fiscal 2024. The company’s consolidated net sales for the second quarter are expected to be comparable to the second quarter of fiscal 2023, driven by further improvement in the mattress fabrics segment, but offset by lower residential upholstery fabric sales. The company expects a consolidated operating loss (loss from operations) for the second quarter of fiscal 2024 that is in the range of $(2.2) to $(2.6) million, a significant improvement compared to the $(11.9) million operating loss for the prior-year period (which included approximately $6.0 million relating to certain inventory impairment charges, losses from inventory close out sales, and greater than normal inventory markdowns).
• 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.
https://culpinc.gcs-web.com/news-releases/news-release-details/culp-announces-results-first-quarter-fiscal-2024-better-expected
