Updating Estimates After Pre-Release; Revenue Guidance Modestly Lower Than Prior Expectations; Inventory Write-Offs Deliver Heavy Blow; Cash Position Remains Solid



KEY POINTS
  • Culp pre-released results for its 2QFY23, in which it lowered sales guidance and warned of inventory impairment charges and a restructuring.
  • Culp said that 2Q sales would come in at about $58 million for the quarter, about 5.4% below our estimate of $61.3 million, and modestly below guidance of “slightly down” from 1Q sales of $62.6 million.
  • The revised loss from operations, GAAP, is expected to be $11.7-12.2 million. The loss includes a $5 million inventory impairment charge in the mattress fabric (CHF) segment, a $1 million inventory adjustment in the residential upholstery fabrics business, and a $700,000 restructuring charge in the upholstery fabric cut and sew operation in China. The bulk of the restructuring charge represents employee severance costs in China. Culp has not announced any terminations elsewhere in the company.
  • Net of the charges, the adjusted loss from operations will come in around $5.25 million, about $500,000 worse than our prior projection of a loss of $4.73 million. We are taking our adjusted EPS number down to a loss of $0.51. Followers of the company are aware that Culp has been recording a tax expense despite recent losses because of its complex, multi-jurisdictional tax exposure. We believe it is prudent to continue to model a tax expense, despite losses.
  • Management will provide more details on 2Q in the earnings release in the first week of December.
  • This pre-release is disappointing, but not entirely surprising considering the data we have seen on furniture, housing, mattress imports, and consumer behavior. On a positive note, the quarter-end cash balance is expected to be about $19 million, up from prior projections.
  • Diligent balance sheet management preserves the thesis that Culp offers investors a classic Dodd-Graham deep-value opportunity. Culp carries no long-term debt.
ESTIMATES

Culp pre-released results for its 2QFY23, in which it lowered sales guidance and warned of inventory impairment charges and a restructuring.

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