Culp Gross Margin Jumps 37% in Fiscal Q1

Key Points

• Gross margin improved by 530 basis points to 14.3% in Q1 FY2026 as restructuring cost savings took effect.

• Upholstery segment sales dropped 20%, primarily due to tariff-driven export disruptions from China.

• Free cash flow turned positive at $0.3 million, aided by non-core asset sales rather than improved core operations.

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Culp (NYSE:CULP), a textile manufacturer specializing in mattress and upholstery fabrics, reported its results for the first quarter of fiscal 2026 on September 10, 2025. The key development was a substantial improvement in gross margin and operating income, despite a double-digit sales decline. Management credited cost savings and restructuring actions, especially in its bedding segment, while ongoing trade tariffs weighed heavily on upholstery segment revenue. The quarter showed notable progress toward profitability, but the top line remains weak and the company leans on non-operating items for bottom-line recovery.

Business Overview and Strategic Focus

Culp designs, manufactures, and markets mattress fabrics and upholstery fabrics for home furniture manufacturers. It operates two main business segments: Bedding, which produces mattress fabrics and sewn covers, and Upholstery, which makes woven and knit fabrics for sofas, chairs, and other seating. Its major customers include bedding manufacturer Serta-Simmons and furniture group La-Z-Boy.

The company has recently focused on restructuring and cost reduction. It consolidated production facilities, cut redundant costs, and shifted more fabric sourcing to lower-cost partners in Turkey and Asia. Culp’s key success factors today include efficient supply chain management, innovative fabric design, and strong relationships with large customers. The company aims to adapt quickly to shifting trade policies, input costs, and consumer preferences across both segments.

Quarterly Performance Highlights

The first quarter of fiscal 2026 was shaped by both structural shifts and market pressures. Revenue fell 10.3% to $50.7 million, as persistent weakness in mattress and furniture demand continued. This downturn was even steeper considering the current quarter had an extra week of sales compared to the same period last year. Segment results painted a split picture: Bedding sales held steady at $28.0 million, but Upholstery reported a sharp drop to $22.6 million. Upholstery’s decline, at 20%, was mostly attributed to a five-week halt in residential fabric orders related to high tariffs on China-produced goods. Past management commentary had cautioned on a tough upholstery comparison after a significant customer front-loaded orders last year, but actual results indicated even greater pressure from tariffs and market uncertainty.

Gross profit improved sharply on both an absolute and percentage basis, increasing to $7.2 million, or 14.3% of sales. The 530 basis point jump in margin was credited to last year’s cost-cutting and process streamlining in bedding fabric operations, “driven by the cost and efficiency gains from restructuring initiatives in the bedding segment completed last year.” Bedding’s gross margin swung from negative to positive, while Upholstery’s margin held up well despite reduced volumes. Operating income rebounded from a loss the previous year to a modest profit of $1.6 million; however, this included a significant $3.5 million restructuring credit, mainly from the sale of a facility in Canada. Adjusting for one-off items, the non-GAAP operating result was a loss of $1.9 million, a marked improvement but not yet breakeven.

Net income was near zero at a loss of $231 thousand, substantially better than the $7.3 million loss a year ago, though this was aided by the one-time restructuring credit. Adjusted EBITDA, which strips out some non-cash and exceptional items, was negative at $1.1 million, improving by $1.6 million compared to Q1 FY2025. Free cash flow turned positive at $0.3 million, mainly due to asset sales rather than stronger underlying business operations. On the balance sheet, cash stood at $11.1 million with debt rising to $18.1 million, putting the company in a net debt position. This reflected increased borrowing, partly to support working capital during ongoing restructuring and to take advantage of lower borrowing costs in China. The company maintained a $28.7 million liquidity pool.

Key accounts such as Serta-Simmons and La-Z-Boy remained important sales drivers, even as both mattress and upholstery sectors faced ongoing end-market strain. Inventory levels increased, and capital spending was tightly curtailed, with the company using sale proceeds from assets to bolster cash flow and maintain financial flexibility.

Looking Ahead: Management Outlook and Key Watchpoints

For the remainder of the year, management expects sequential sales growth as integration and cost initiatives continue to yield savings. However, it cautions that the environment for home furnishings demand will likely remain soft. Leadership forecasts that restructuring moves, together with price increases intended to offset higher tariffs, will drive adjusted EBITDA results in a range from near breakeven to slightly positive for the next quarter, and for operating performance and profitability to improve sequentially throughout the remainder of the year, according to management. Management did not provide specific revenue or profit guidance, citing ongoing trade uncertainties and limited visibility into consumer demand recovery.

With higher net debt on the balance sheet and most of the cash flow improvement coming from asset disposals, the company’s financial position is more fragile than in previous years.

Revenue and net income presented using U.S. generally accepted accounting principles (GAAP) unless otherwise noted.

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