Culp Poised To Rebound On Cost Cutting & Debt Reduction

In early September, Culp Inc. (CFI) reported results for its fiscal 1Q09, which included lower net sales of $59.3M compared to $65.2M in the year-ago period, but still managed a profit per diluted share of $0.06 ($781K) versus $0.07 ($851K) in the year-ago period. Excluding restructuring charges, 1Q09 profits were $1M or $0.08 versus $1.5M or $0.12 in the year-ago period. In mid-August, Culp acquired the knitted mattress fabrics operation of Bodet & Horst to provide the Company with improved supply logistics, vertical integration, and improved customer service. The acquisition was financed by $11M in unsecured senior notes with no principal payments due for three years.

CEO Frank Saxon commented that the retail climate and furniture industry is "as difficult as we have seen in many years," and 1Q09 results were driven by performance in the mattress fabrics (ticking) business which countered a greater than expected loss in the upholstery fabrics business. Mattress ticking sales for 1Q09 declined by 2.7% to $35.6M while upholstery fabric sales slid by 17% to $23.8M, as compared to the year-ago period. Unit sales of mattress ticking decreased 4.7%, which was partially offset by a 2.1% rise in the average selling price. The unit sales of upholstery fabrics decreased 16.9%, compared to a 3.5% increase in the average selling price.

Culp is implementing a profit improvement plan in response to the challenging retail climate and furniture industry, overall economic uncertainties, and the continued housing slump which includes the following actions: modest price increases for select upholstery fabrics during 2Q09, negotiating price concessions from suppliers for high-volume materials, a 20% cut in SG&A expenses (completed at the end of August 2008), and consolidating China manufacturing facilities to decrease excess manufacturing capacity. The last two cost-cutting initiatives are expected to save a total of $4M annually in expenses, with the reduction in manufacturing capacity being implemented over the next five months – resulting in an expected pre-tax charge of $3.2M ($2.9M non-cash) in 2Q09

Despite the current economic and furniture industry challenges, the CEO is cautiously optimistic on Culp's future prospects based on less competition (e.g. former public company Quaker Fabric went bankrupt in 2007), an expanding customer base for upholstery fabrics, operational improvements to domestic manufacturing facilities, and continued benefits from the ongoing profit improvement plan. Culp continues to focus on strengthening its balance sheet, ending 1Q09 with $6.4M in cash and $21.4M in total debt, compared to $4.9M and $38.6M, respectively, in the year-ago period. For 2Q09, Culp is expected to post net income of $0.06-$0.10, excluding restructuring costs of about 15 cents per diluted share.

The accompanying all-data stock price chart from 1989 to present illustrates that Culp (green line) traded with a high degree of correlation and even outpaced the Russell 2000 Small-Cap Index (red line) until early 1998 when the stock began a massive 3-year decline, erasing gains of nearly 400%. Since the 2000-2002 all-time stock price lows, Culp has staged three sharp, short-term rebounds of at least 100% (indicated by bold arrows on the chart), including the most dramatic rise of over 8-fold from around 2 bucks in November 2001 to over 17 bucks in July 2002. Culp is currently trading around $2.80 per share with a market cap below $36M as it has lost over two-thirds of its market value in the past year, compared to a 40% decline for the SPDR S&P Retail ETF (XRT), a 39% decline for the Homebuilders ETF (XHB), a 42% decline for Ethan Allen Interiors (ETH), a 53% decline for Furniture Brands (FBN), and a 28% decline for the iShares Russell 2000 Small-Cap Value Index (IWN).

With 12.65M shares outstanding and extensive insider + institutional ownership, Culp has a very low float which leads to the extreme stock price swings illustrated in the chart. However, enough shares still trade for the average retail investor to patiently establish a position over time with limit orders as the average volume is about 20,000 shares per day, and I think that now is a good time to start accumulating shares in anticipation of another major rebound in the stock price. As Culp continues to cut costs and shed debt during these lean times, the Company will emerge as a survivor poised to profit from the inevitable recovery in the economy and return to growth.