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Bear of the Day: Culp Inc. (CULP)

Brian Hamilton

Culp Inc. (CULP), a Zacks Rank #5 (Strong Sell), manufactures, sources, markets, and sells mattress fabrics and upholstery fabrics. The Company's fabrics are used in the production of residential and commercial furniture and bedding products, including sofas, recliners, chairs, loveseats, sectionals, sofa-beds, office seating, panel systems, and mattress sets. It operates in two segments, Mattress Fabrics and Upholstery Fabrics. Culp, Inc. is headquartered in High Point, North Carolina.

Recent Earnings Data

The company reported Q4 18 results where they missed both the Zacks consensus earnings and revenue estimates.  On a year over year basis, earnings fell by -25%, while revenues grew by +1.3%.  For FY 18 net sales improved by +4.6%, mattress fabric sales grew by +1.0%, and upholstery fabric sales improved by +10.4%.  On the down side, return on capital fell from 31.6% to 25.4%, and cash flows from operations declined from $34.1 million to $27.5 million. 

Future Headwinds

Lower priced imported mattress from China have grown much more than expected in FY 17 and FY 18, but Culp did not materially feel the impact until last quarter.  Currently, management expects this headwind to remain for at least the next two quarters.  The company has significant exposure to the $1,000 and under market which is the area where there have been the most imports.  Management admitted that these imports have and are expected to have a negative impact on sales performances over the near to mid-term.  The import issue is not expected to its impact high end customers as much, but this segment only accounts for a very small portion of its sales. 

Management’s Take

According to Frank Saxon, President and CEO, “As we look ahead to fiscal 2019, we are facing a significant challenge with the growth in imported Chinese mattresses and its effect on fabric demand from many of our customers. We are aware of actions being considered by the industry to address this situation in the near term, and we are optimistic that such actions will be successful.”

Price and Earnings Consensus Graph

As you can see in the graph below, the import issue caused the stock price to significantly decline after its June 13th earnings report.

Culp, Inc. Price and Consensus

Culp, Inc. Price and Consensus | Culp, Inc. Quote

Declining Earnings Estimates

Since the earning announcement, analysts have negatively revised Q1 19, Q2 19, FY 19 and FY 20 estimates; Q1 fell from $0.47 to $0.24, Q2 dropped from $0.44 to $0.28, FY 19 was cut from $1.86 to $1.41, and FY 20 was trimmed from $1.93 to $1.67.

Bottom Line

While management is working to fix the import issue by supplying data to mattress producers for a potential anti-dumping filing with the SEC, it will take some time to settle.  Therefore, it would be best to hold off on CULP until this issue is resolved.

If you are inclined to invest in the Textile/Home Furnishing segment, you would be best served by looking into Interface Inc. (TILE) who currently carries a Zacks Rank #2 (Buy) rating.

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