Culp Reports Challenging 2Q22 Results In Line With Early-November Pre-Release



KEY POINTS
  • Culp issued its 2Q22 earnings press release Wednesday, December 1, 2021, after the market close. Recall that about a month ago, management pre-released results, revising expectations for 2Q22. In its commentary at that time, Culp pointed to a significant shortfall in sales versus expectations (primarily in CUF, its upholstery fabric segment) caused by the COVID-induced shutdown of Vietnam during most of the quarter. We issued a note on November 8, 2021 discussing the issues affecting 2Q22 and refreshing our estimates – mostly in line with management’s revised guidance.
  • This note addresses the actual 2Q22 report and management’s commentary. Our variance analysis compares the reported results to 2Q21 and to our revised and current estimates. Management will conduct its earnings conference call at 11 am eastern on Thursday. We will refresh estimates after the call.
  • Before discussing some of the details, we provide these reflections. (1) It is unlikely that anyone should be surprised by some of the difficulties and challenges Culp faced in 2Q22. Virtually every manufacturing company’s recent earnings report has pointed to supply chain, labor, and inflation difficulties. For Culp, the Vietnam issue was an added, yet nearly unique, 2Q22 challenge. (2) Management confirmed our a priori expectation that significant challenges, uncertainties, and volatility will persist into 3Q22 and 4Q22. For that reason, it withdrew its previous full-year guidance. It did opine that it expects 3Q22 sales and operating income to be sequentially comparable to 2Q22. It also expressed the belief that 4Q22 will exhibit strong sales and operating income growth versus 3Q22 and versus 4Q21.
  • (3) Culp also remains in an excellent condition to serve its upholstery manufacturing. and mattress manufacturing customers. Its ending inventories grew by $16 million y/y to $63.8 million. This was the highest quarter-end inventory in the company’s asset-light era (since the later 1990s). Management contends that the obsolescence risk in inventories is nil, and that some of the increase reflects the supply chain challenges of its customers, delaying expected receipts. (4) Irrespective of the increased inventory investment, the company remains debt-free. It also announced a 5% increase in its quarterly cash dividend to $0.115/quarter, or $0.46 annually. This was the ninth consecutive annual dividend increase, for an indicated current yield of ~4.3%. Now for some details about the quarter, which overall were in line with Culp’s November 3rd pre-release.

KEY POINTS (CONT’D)

  • Culp reported 2Q22 consolidated sales of $74.56 million, $661,000 better than our $73.9 million estimate and 3% below 2Q21’s $76.85 million. 2Q22 sales were ~10% below those of 1Q22, and slightly better than the revised expectations.
  • Drilling down, 2Q22 mattress fabric (CHF) sales were 2.1% better than 2Q21 and $883,000 better than our estimate. Conversely, 2Q22 upholstery fabric (CUF) sales fell 8.5% y/y and 16% versus 1Q22. That said, they were modestly below our revised estimate.
  • As could be expected, the impacted profitability of 2Q22 was most clearly felt at the gross profit line. The consolidated margin fell by 417 basis points y/y and by 66 basis points versus 1Q21. Again, CUF bore the brunt of the decline in gross margin, though CHF was also down y/y.
  • Mitigating some of the challenges it faced during the quarter, management demonstrated excellent overall expense control, specifically in corporate unallocated expenses and in its CHF segment.
  • Last, we continue to see strategic strengths in Culp, with its global platform, that we believe will deliver good and sustained profitability for the long term. In its “old days” when Culp had a heavier asset and debt profile, it could not maintain profitability when macroeconomic fortunes soured. That Culp has remained profitable in the face of the current challenges is heartening.

Culp issued its 2Q22 earnings press release Wednesday, December 1, 2021, after the market close. Recall that about a month ago, management pre-released results, revising expectations for 2Q22. In its commentary at that time, Culp pointed to a significant shortfall in sales versus expectations (primarily in CUF, its upholstery fabric segment) caused by the COVID-induced shutdown of Vietnam during most of the quarter. We issued a note on November 8, 2021 discussing the issues affecting 2Q22 and refreshing our estimates – mostly in line with management’s revised guidance.

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