Culp, Inc. Common Stock 2027 Q1 Earnings Call

Please go ahead. Good morning, and welcome to the Culp conference call to review the company's results for the first quarter of its fiscal 2027 year.

As we start, let me state that this morning's call will contain forward-looking statements about the business, financial condition, and prospects of the company. Forward-looking statements are statements that include projections, expectations, or beliefs about future events or results, or otherwise are not statements of historical fact. The actual performance of the company could differ material from that indicated by the forward-looking statements because of various risks and uncertainties. These risks and uncertainties are described in our regular SEC filings, including the company's most recent filing on Form 10-K. 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.

You are cautioned to not place undue reliance on forward-looking statements made today, and each such statement speaks only as of today. We undertake no obligation to update or to revise forward-looking statements. In addition, during this call, the company will be discussing non-GAAP financial measurements. A reconciliation of these non-GAAP financial measurements to the most directly comparable GAAP financial measurements is included in the tables to the press release, included as an exhibit to the company's 8-K filed yesterday and posted on the company's website at www.culp.com. An investor relations presentation is also available on the company's website as a part of the webcast of today's call. I'll now turn the call over to Iv Culp, President and Chief Executive Officer of Culp.

Please go ahead, sir. Thank you, Theresa, and good morning, and thank you to everyone for joining us today and for your interest in our company.

With me on the call are Ken Bowling, our Chief Financial Officer, and Mary Beth Hunsberger, our Chief Operating Officer. I will begin the call with some detailed comments. As mentioned in the introduction, we have posted a slide presentation to our website that provides supplemental information for today's discussion. That slide presentation is entitled First Quarter FY 2027 Supplemental Information. Ken will then review the financial results for the quarter. After that, I'll briefly review our business outlook, and we will take some questions. We view our first quarter performance as indicative of what Culp can achieve on both the top and bottom lines, even in challenging operating environments such as those that continue across the home furnishings industry and the markets we serve.

As we stated in our release, our ability to increase overall sales and profitability year-over-year during a quarter with one less selling week and in persistently difficult industry conditions provides validation to us that our optimized platform and strategies are succeeding. We have developed valuable resiliency, and we have positioned Culp for success across a broad range of demand scenarios. I am extremely proud of all of our associates and our leadership team for guiding us through a major restructuring and now a re-energizing of the business. We have successfully executed on many difficult decisions over the last two years in the midst of a trough market, and we are now seeing some solid recovery. Our innovative products are on point. Our supply chain is balanced, and our dedicated employees are second to none.

While we are excited to forge ahead, we are particularly bullish on our prospects as and when business conditions return to greater normalcy. During the quarter, we increased gross profit by nearly 17% and generated positive adjusted EBITDA, even excluding the benefit of approximately $7 million in IEEPA tariff recoveries recognized during the quarter. This successful improvement is displayed graphically on pages 8 and 9 of the supplemental presentation. Again, these results reflect the cumulative impact of the transformation initiatives we undertook approximately two years ago when we began a comprehensive restructuring of our bedding business and then integrated our formerly separate bedding and upholstery operations into a unified platform.

Along the way, we closed and consolidated facilities, exited certain markets, expanded into others, implemented numerous cost reduction initiatives, and we fundamentally re-examined how we operate and go to market. Those efforts required tremendous execution, all while maintaining the high service levels our customers expect. While we recognize there is still work to do, and our results are not yet what we ultimately expect to achieve in a more favorable operating environment, we are encouraged by the progress reflected in our performance and truly grateful for the commitment of our global team in making this transformation successful. A summary of all these restructuring actions is covered on pages 5 through 7 of the supplemental deck. I would like to spend a moment discussing the tariff recoveries recognized during this quarter. We were pleased to realize these recoveries, particularly given the significant impact those tariffs had on prior year's results.

As Ken will discuss in more detail, we elected to deploy the full amount of these recoveries to further strengthen our balance sheet. Combined with our ongoing success in lowering and managing our inventory levels, this contributed to a significant improvement in our financial position. We ended the quarter approximately $3 million in net debt, roughly a 70% reduction from our position at the end of fiscal 2026. Looking ahead, we remain focused on disciplined working capital management and continued debt reduction, with the goal of returning to a net cash position this fiscal year. Our ability to achieve this level of progress on the balance sheet while simultaneously delivering year-over-year growth in revenue and profitability in challenging market conditions is further testament to the effectiveness of our strategic initiatives and the strong execution of our team.

Additional information regarding our balance sheet and capital structure can be found on page 10 of the supplemental presentation. Our bedding business was a major contributor to the success this quarter, growing sales by more than 13%, despite continued weakness in overall industry demand and the impact of one fewer shipping week compared to the prior year period. Based on the market data available to us, we believe our growth materially outpaced the broader industry trend from both a unit and dollar volume perspective. When compared with industry shipment data published by the International Sleep Products Association, which is included on page 20 and 21 of our presentation, our bedding top line is particularly compelling. As we look ahead, there continues to be considerable discussion across the industry about the timing and magnitude of a recovery in bedding demand following the last several years of depressed conditions.

ISPA's latest forecast continues to point to modest shipment growth beginning in calendar year 2027, and we generally share the view that the industry is at or near the point where a more normalized replacement cycle could begin to emerge. Mattress replacement activity in the U.S. has remained below historical levels for an extended period, and that's shown on page 22 of our supplemental deck. We believe that dynamic suggests there may be some pent-up demand that drives market improvement over time. However, I will note that a meaningful acceleration in unit demand will likely require stronger consumer confidence and a corresponding increase in discretionary spending to drive traffic into mattress retail stores. Against this challenging backdrop, we are particularly encouraged by the performance of our bedding business and its double-digit sales growth over the last two quarters.

We believe this reflects our strategic investments over the past several years to strengthen our U.S. manufacturing platform while also expanding the flexibility and scale of our nearshore and offshore production capabilities. This diversified global manufacturing strategy, balanced over five geographies, continues to resonate with customers as they navigate an evolving trade and tariff landscape and look for dependable sourcing solutions. We believe our broad range of manufacturing options, combined with the certainty they provide, has differentiated us in the market and positioned us for more growth as demand ultimately improves and that replacement cycle gains momentum. From a product perspective, our sewn mattress cover category remains an important growth driver during the quarter and serves as a strong example of how our product development efforts and diversified manufacturing are working together to create value.

As we have expanded beyond traditional knitted fabrics, we have simultaneously invested in the infrastructure and expertise necessary to efficiently produce other products, such as quilted sewn covers, through our nearshore and offshore platforms. This combination has helped shield us from some of the macro unit erosion and created an attractive solution for our sewn cover customers seeking both innovation and supply chain flexibility. It has also enabled us to deepen a number of strategic customer relationships and gain share with key accounts. Innovation also remains a core component of our long-term growth strategy. Performance fabrics have been a significant driver of growth within our bedding business for many years, and we continue to invest in developing differentiated products that address evolving consumer preferences. During the quarter, we completed testing on several promising new cooling technologies that we expect to incorporate into our product line in the near term.