Culp's Q1 2026: Contradictions Emerge on Tariff Strategies, Market Share Gains, Inventory Shifts, and Restructuring Costs

The above is the analysis of the conflicting points in this earnings call

Date of Call: September 11, 2025

Financials Results

• Revenue: $50.7M (included an extra week), down from $56.5M in the prior year
• EPS: ($0.02) per diluted share, improved from ($0.58) in the prior year
• Gross Margin: 14.3%, up from 9.0% in the prior year (up 530 bps)

Guidance:

• Sequential overall sales growth expected in Q2 and throughout FY26.
• Q2 adjusted EBITDA targeted near breakeven to slightly positive.
• Sequential improvement in operating performance and profitability expected through FY26.
• Benefits from restructuring/integration and Q2 price increases to support margins.
• Will manage liquidity and capex tightly; prioritize free cash flow while using credit facilities as needed.
• Outlook assumes no further meaningful tariff/trade disruptions.

Business Commentary:

* Bedding Segment Improvement: - Culp Home Fashions realized substantial double-digit improvement at both the gross profit and operating lines during the quarter. - The improvement was due to the successful restructuring and consolidation of their mattress fabrics business, including the closure of a long-term manufacturing facility in Canada and pivoting production to their owned U.S. facility and external strategic partners.

• Tariff Impact and Strategy:
• Residential upholstery orders and shipments were paused due to historically high tariffs on China-produced imports, which reached over 150%.

• Culp's strategy involved adjusting pricing and utilizing multiple manufacturing locations to best support customers and manage tariff fluidity, ensuring they could perform and grow margins under the current environment.

• Financial Performance and Outlook:

• Net sales for the first quarter were $50.7 million, down from $56.5 million in the prior year due to market softness and tariff-driven pauses.

• The company expects sequential overall sales growth in the second quarter and throughout fiscal '26, driven by anticipated cost and efficiency benefits from restructuring and integration initiatives, as well as price increases.

• Upholstery Segment Challenges:

• The upholstery segment's sales for the first quarter were $22.6 million, down approximately 20% from $28.5 million in the prior year.

• The decline was attributed to continued softness in the home furnishings market, weakness in the residential upholstery channel, and the lagging effects of paused residential order flow due to tariffs.

• Liquidity and Financial Management:

• Culp had $11.1 million in total cash and $18.1 million in outstanding debt at the end of the first quarter.
• The company prioritizes generating free cash flow and reducing debt, with recent initiatives including strategic borrowing opportunities in China and investing in high-yield savings accounts to cover interest costs.

Sentiment Analysis:

• Management highlighted “substantial double-digit improvement at both the gross profit and operating lines,” and bedding gross margin turned “double-digit… compared to negative gross profit” last year. They expect “sequential overall sales growth in the second quarter and throughout fiscal ’26” and Q2 adjusted EBITDA “near breakeven to slightly positive,” with continued sequential improvement in profitability.

Q&A:

• Question from Douglas Lane (Water Tower Research LLC): Have tariff impacts now been fully addressed with your cost and pricing actions, or are more steps needed?
  Response: Tariff volatility was disruptive, but pricing and supply-chain flexibility are in place; under current rates they can operate and expand margins.

• Question from Douglas Lane (Water Tower Research LLC): How elastic is pricing—are you able to push through increases?
  Response: They are passing disciplined price increases to cover tariffs and rightsize margins, supported by supply-chain optionality and customer understanding.

• Question from Douglas Lane (Water Tower Research LLC): On the $18M of initiatives, how much is realized and when is the full run-rate achieved?
  Response: $10–$11M from FY25 restructuring is fully in place for FY26; the remaining initiatives largely benefit H2 FY26, with some Q2 pricing benefits.

• Question from Douglas Lane (Water Tower Research LLC): How does the current downturn compare to the Great Recession?
  Response: This downcycle is unusually protracted since 2020; they’re restructuring to be profitable now and will be well positioned to leverage a recovery.

• Question from Douglas Lane (Water Tower Research LLC): If demand turns in 2026, can you meet it without major new spend?
  Response: Yes; capacity was preserved via a flexible global platform, enabling scalable growth with significant operating leverage on the current cost base.

• Question from Douglas Lane (Water Tower Research LLC): Clarify the real estate value and NOLs and how they help going forward.
  Response: Stokesdale real estate has ~$12M net book vs $40–$45M estimated value; $88.1M U.S. NOLs provide future tax benefits once U.S. profitability resumes.