Culp (CULP) Fiscal Q1 2027 Earnings Call: Bedding Growth, Debt Reduction

Key Takeaways

• Culp, Inc. reported fiscal Q1 2027 net sales of $54.0 million, up from $50.7 million despite one fewer selling week. Bedding sales increased 13.2% to $31.8 million.
• Reported gross profit rose to $15.4 million, or 28.5% of sales, including approximately $7 million of IEPA tariff recoveries. Excluding those recoveries, gross profit was $8.4 million, or 15.6% of sales, approximately 17% above the prior-year period.
• Net income was $6.0 million, or $0.47 per diluted share, compared with a net loss of $231,000, or $0.02 per diluted share, a year earlier.
• Adjusted EBITDA excluding the tariff recovery and other specified items improved to $566,000 from negative $938,000, reflecting higher bedding sales and restructuring-related efficiencies.
• Net debt declined approximately 70% from the end of fiscal 2026 to $3.1 million. Management’s priority is to reach a net cash position during fiscal 2027.
• For fiscal Q2 2027, management expects sequentially consistent sales volumes, year-over-year sales growth, break-even operating income and accelerating adjusted EBITDA.

Key Financial Data

At quarter-end, Culp held $10.2 million in cash and $13.3 million of debt, resulting in net debt of $3.1 million. All outstanding debt was under Chinese credit facilities after the company repaid its higher-cost U.S. debt. Total liquidity was $29.4 million, including $19.2 million of borrowing availability.

Business and Operating Performance

Bedding

Bedding sales rose 13.2% to $31.8 million from $28.0 million. Management said the increase included both pricing and unit growth, with expanded programs and greater share among existing major customers.

Segment gross profit increased to $4.3 million, or 13.6% of sales, from $2.9 million, or 10.5%. The segment received no allocation of the quarter’s tariff recoveries, making the improvement primarily attributable to higher sales and manufacturing efficiencies.

Sewn mattress covers remained an important growth driver. These products generally carry higher selling prices than standard knitted fabric and have helped reduce exposure to weak industry unit demand. Culp also completed testing of new cooling and temperature-management technologies, with introductions planned later in calendar 2026 ahead of mattress-line launches in the new year.

Management believes its manufacturing footprint across five geographies provides sourcing flexibility amid changing trade policies. The company also said existing capacity could support higher volumes with relatively modest incremental costs, potentially improving operating leverage if demand recovers.

Upholstery

Upholstery sales were $22.2 million, compared with $22.6 million a year earlier. Management characterized sales as broadly comparable after accounting for the shorter selling period.

Segment gross profit was $4.1 million, or 18.6% of sales, versus $4.3 million, or 18.9%. The company attributed the relative margin stability to cost reductions and the integration of its bedding and upholstery operations.

Residential furniture demand remained soft, but hospitality and commercial upholstery fabrics delivered year-over-year growth. Management also said performance products already exceed its 40% target threshold, while hospitality and contract business currently exceeds the 30% threshold cited in its investor presentation.

Restructuring and Leadership

The major financial and physical components of Culp’s restructuring and Project Blaze integration are substantially complete. Management continues to target process harmonization, machine efficiency and lower off-quality production costs.

Mary Beth Hunsberger will become Chief Financial Officer effective September 14, 2026, while retaining operational oversight. She succeeds Ken Bolling, who will support the transition through December and then remain in a consulting capacity through the end of the calendar year.

Management Guidance

Culp provided limited guidance because of macroeconomic uncertainty and the changing global trade environment.

For fiscal Q2 2027, management expects:

• Sequentially consistent sales volumes, with some growth over the prior-year period.
• Continued outperformance relative to bedding industry revenue trends.
• Break-even operating income, supported by integration benefits, platform optimization, pricing and strategic actions.
• Accelerating adjusted EBITDA.
• Further improvement in net debt through free cash flow generation and disciplined working capital management.

Fiscal 2027 capital expenditures are expected to be approximately $2.5 million. Management intends to retain some low-cost Chinese borrowings for financial flexibility while measuring progress primarily against its net cash objective.

Risks and Points to Watch

• Home furnishings demand remains pressured by weak consumer spending and housing-market conditions.
• Management said a meaningful acceleration in mattress unit demand would likely require stronger consumer confidence and greater discretionary spending.
• Residential upholstery demand remains sensitive to housing activity, mortgage rates and consumers’ ability to defer furniture purchases.
• Trade and tariff policy remains dynamic and could disrupt costs or sourcing, although management believes current pricing is aligned with the existing tariff environment.
• The approximately $7 million tariff recovery was a one-time benefit. The company said it has received what it believed was due and is not currently focused on additional recoveries.

Analyst Q&A Highlights

Management said bedding growth was not solely price-driven. Unit growth, expanded customer programs and higher-value sewn mattress covers also contributed. Growth is primarily coming from new products and increased share with existing large customers rather than from entirely new accounts.

On margins, management described the underlying improvement as sustainable and said further gains could come from process synergies, machine efficiency and reduced off-quality production, particularly in bedding.

Working capital, inventory and capital spending remain under close review. The company’s immediate capital-allocation priority is reaching a net cash position. Management said dividends, share repurchases and strategic growth could eventually be considered, but they are not the current focus.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Good day and welcome to the Culp, Inc. First Quarter Fiscal 2027 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Teresa Moore with FIN Partners. Please go ahead.

Unknown Speaker

Good morning and welcome to the Culp, Inc. 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 materially 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 Robert Culp, President and Chief Executive Officer of Culp, Inc.. Please go ahead, sir.

Robert Culp

Thank you, Teresa, and good morning, and thank you to everyone for joining us today for your interest in our company. With me on the call are Ken Bolling, our Chief Financial Officer, and Mary Beth Hunsberger, our Chief Operating Officer. I will begin the call with some detailed comments, and as mentioned in the introduction, we have posted a slide presentation to our website that provides a list of the resources that supplemental information for today's discussion. That slide presentation is entitled First Quarter FY '27 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, Inc. 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 1 less selling week and 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, Inc. for success across a broad range of demand scenarios. I'm 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 2 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 IEPA 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 2 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 reexamined 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'd 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 '26. 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 1 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. And we believe that 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 draft traffic into mattress retail stores. Against this challenging backdrop, we are particularly encouraged by the performance of our betting business and its double-digit sales growth over the last 2 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 near-shore and offshore production capabilities. This diversified global manufacturing strategy, balanced over 5 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 near-shore and offshore platforms. This combination has helped shield us from some of the macro unit erosion and created an attractive solution for our sown cover customers, both innovation and supply chain flexibility. And 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.

We look forward to introducing these new developments later this year and anticipate strong customer interest as the market continues to emphasize products that combine comfort, performance, and temperature management benefits. For additional context, we have included a timeline highlighting our key product innovation milestones over many years on page 17 of the supplemental presentation. Overall, we remain encouraged by the trajectory of our bedding business and the progress we have made since implementing our restructuring initiatives. We believe the business is well positioned to benefit from an eventual improvement in macroeconomic conditions and a normalization of industry demand trends. Importantly, our current manufacturing footprint provides meaningful capacity for growth, and we believe we can support higher unit volumes with relatively modest incremental costs. As a result, we expect future revenue growth to translate into enhanced operating leverage and improved profitability. Turning to our upholstery business, we were encouraged by our performance during the quarter.

Sales were largely comparable to the prior year period, despite a shorter selling period and continued softness within residential furniture, which remains the largest end market for our upholstery business. Equally important, we were able to maintain relatively stable gross profit margins despite the challenging demand environment. We believe this reflects the benefits of the actions we took last year to streamline our cost structure and integrate our operations, which have enhanced the consistency of our upholstery business in a manner similar to bedding. In the residential channel, we are pleased with our placement rates, but we believe a sustained recovery there will depend on broader improvement in macroeconomic conditions. Trends in housing activity and mortgage rates remain particularly important variables, given their influence on consumer confidence and discretionary spending on home-related purchases like furniture. We have included some macro trend data that we believe impacts our upholstery business in the posted presentations on pages 23 through 27. From a diversification perspective, we continue to invest in expanding our customer relationships in Asia and other international markets.

While these regions currently represent a relatively modest portion of our upholstery business, we believe they offer attractive long-term opportunities. Our established manufacturing platform in China, combined with our operational capabilities in Vietnam and our global sourcing network, provides us with the flexibility to serve customers across multiple geographies. Over time, we believe these capabilities can help diversify our upholstery revenue and create additional growth opportunities. We were also pleased to see improving conditions in our hospitality and commercial upholstery fabric markets during the quarter. with both verticals delivering year-over-year growth. We believe these areas present attractive opportunities as we move through the year, and we're looking forward to seeing you there. especially as travel activity, hospitality spending, and commercial project development continue to normalize. An important aspect of these markets is that many customers operate under established brand and performance standards. suppliers must meet to qualify. Those qualification requirements can create meaningful competitive advantages for Culp, Inc. and support longer-term customer relationships.

As a result, we remain focused on supplying both fabric and window treatment products to these end markets. Product innovation is also a key long-term growth factor for our upholstery strategy. Performance fabrics continue to be an essential component of any comprehensive upholstery line. and we are committed to staying ahead of emerging trends in technology in this category. In connection with Project Blaze and the integration of our formerly separate divisions into a unified Culp, Inc. branded platform, 1 of our objectives has been to more efficiently and effectively leverage the brand equity we have built through decades of product innovation, quality, and customer service. Our LiveSmart technology used in upholstery fabric is a good example of how we have successfully created brand recognition. with customers through differentiated performance benefits. Building on that success, we are currently developing a broader family of branded performance products designed to strengthen customer and consumer awareness and loyalty across our upholstery and bedding businesses. While we are not yet ready to share all the details, we believe these initiatives represent a meaningful opportunity to further differentiate and streamline our product portfolio. enhance the value of the Culp, Inc. brand, and drive long-term growth.

We look forward to providing additional updates as these programs progress. As a final comment on our overall business. We are optimistic about our momentum entering the second quarter and believe our lower cost structure and global footprint position us for continued success in this low demand environment. supporting acceleration and profitability as conditions improve. In addition, we believe our pricing is currently aligned with the tariff environment, and we are confident in our commercial growth strategies under the leadership of our Consolidated Chief Commercial Officer, Tommy Bruno. However, the trade landscape remains dynamic and can change quickly. As a result, we expect tariff-related trade policy to remain an important market consideration and a potential source of disruption going forward. Before I turn the call over to Ken, I want to update you on our succession plans for his Chief Financial Officer role.

As we announced back in January, Ken has been planning to retire from his CFO role, but kindly offered to stay with us during 2026 to facilitate an effective transition of his responsibilities to a successor we may identify. I want to again extend our gratitude to Ken for all he has achieved throughout his almost 30 years of Culp, Inc. and for both his leadership and loyalty throughout his tenure. Ken leave some big shoes to fill, and we're grateful he has agreed to stay with Culp, Inc. through December. help with a smooth transition to his successor. Who I'm excited to announce is Mary Beth Hunsberger, who is with us on the call today. Many of you will recall that when we were digesting Ken's decision to retire earlier this year, we began to focus on our Chief Financial Officer role in the context of our Project Blaze integration initiative and its emphasis on change across our company intended to drive efficiencies where practical. Through that lens, we established a plan for Mary Beth to begin working closely with Ken with the goal of immediately taking a more active role in some of the operational and FP&A functions of the CFO role. Based on the success of that collaboration, as well as Mary Beth Hunsberger's invaluable knowledge of our business, we're excited to take the next step of appointing Mary Beth Hunsberger to succeed Ken as our Chief Financial Officer, effective September 14, 2026.

Mary Beth Hunsberger will also retain the operational oversight responsibilities of her current role with us. Mary Beth Hunsberger joined us at Culp, Inc. several years ago as president of what was then our Culp Upholstery Division. subsequently moved into the Chief Operating Officer role in May '25. Before Culp, Inc., she spent substantial time in financial leadership roles, including several years with Tempur-Sealy, a key customer of ours now known as SomniGroup, and a variety of accounting and executive roles, including CFO, COO, and president of multinational furniture companies. We are very excited to have Mary Beth Hunsberger take on this financial leadership role and also continue to drive operational excellence across our global platform. We believe it is a natural fit for her skill set and experience, and she will help drive even greater connectivity amongst our executive team. role through this official transition and to stay on in the consulting capacity through the end of the calendar year. Lastly, as a final note to our celebration of all these moves, I would like to wish Ken a happy birthday. And with that, I'll turn the call over to Ken.

Robert Culp

Thanks for the kind words, I appreciate that. Thank you for your leadership and support. On a personal note, this is my 78th earnings call, spanning almost 20 years as Culp, Inc. CFO. It has certainly been an honor and a privilege to serve as CFO during that time. Admittedly, it has been an eventful ride with good and rewarding times, but also times when we had to overcome some significant headwinds. Thank you. Looking ahead, I have never been more confident in Culp, Inc.'s future, and I'm excited for Mary Beth Hunsberger as she takes on the CFO role. I know she will do a great job, and I'm totally committed to supporting her and the full executive team in this transition.

Now on to the financial highlights for the first quarter. Net sales for the first quarter, which as Robert Culp mentioned, included 1 last week this time around, were $54 million compared to $50.7 million in the prior year period. The increase was driven primarily by the double-digit sales growth in our betting segment. for the quarter was $15.4 million or 28.5% of sales compared to prior year period gross profit of $7.2 million or 14.3% of sales. A key driver in the improvement were the 1-time benefits from the IEPA tariff expense recoveries, but the refunds were certainly not the whole story. Higher sales and the cost and efficiency benefits flowing from our recently completed restructuring and integration actions were also significant contributing factors. Excluding the tariff recoveries, gross profit for the first quarter was $8.4 million, or 15.6% of sales, which is an approximately 17% increase. increase over the prior year period. SG&A expenses for the first quarter were favorably down to $8.7 million, or 16.1% of sales, compared to $9.1 million, or 18% of sales in the prior year period, reflecting the benefits of our restructuring actions.

Operating income for the quarter was $6.7 million or 12.4% of sales, compared with operating income of $1.6 million or 3.2% of sales in the prior year period. with tariff recoveries, higher sales, and better operating leverage from lower costs and enhanced efficiencies driving the improvement. Excluding tariff recoveries, non-GAAP operating loss for the quarter was $271,000, a significant improvement from a non-GAAP operating loss of $1.9 million in the prior year period. Net income for the first quarter was $6 million, or $0.47 per diluted share, compared with a net loss of $231,000, or a negative $0.02 per diluted share in the prior year period. EBITDA adjusted for the impacts of stock-based compensation, non-cash foreign exchange charges, certain insurance and legal recovery proceeds and the benefit of the tariff expense recovery was $566,000 for the first quarter compared to a negative $938,000 in the prior year period. This year-over-year increase reflects our improved operating performance during the quarter, driven mostly from continuing momentum in our betting segment. Our effective income tax rate for the first quarter was 12.7%. paired with 120.3% for the same period a year ago and was impacted by our mix of earnings between the U.S., which benefited from the tariff expense recovery, and our foreign subsidiaries. Notably, last year's 120% tax rate was due to significantly lower as compared to this fiscal year, consolidated pre-tax income of $1.1 million generated from the sale of our Canadian facility. partially offset by U.S. pre-tax loss derived in large part from our restructuring actions.

Importantly, as of the end of the last fiscal year, we had approximately $95 million in U.S. federal net operating loss carry-forwards with related future income tax benefits of approximately $20 million. Now turning to our reporting segments. For the betting segment, sales for the first quarter were $31.8 million. up 13.2% compared with last year's first quarter sales of $28 million, despite having 1 less week of selling activity this time around. As Robert Culp spoke to earlier, our betting markets continue to be pressured by low industry demand and challenges from consumer spending and housing market trends. So we were pleased to be able to continue our trend of winning share in key target areas and achieve this level of top-line growth in our betting business. Our restructured betting manufacturing platform drove gross profit of $4.3 million or 13.6% of sales, which is a lot of money. This is a significant improvement from the prior year period's gross profit of $2.9 million or 10.5% of sales.

This increase was primarily driven by higher sales and efficiency gains. Notably, the bedding segment gross profit improvement does not factor in the benefit of any tariff expense recoveries allocated to this segment. For the upholstery segment, sales for the first quarter were $22.2 million, down slightly from the $22.6 million in the prior year period. But when you consider the shorter quarter and selling period this time around, upholstery sales were generally comparable year over year. Our upholstery markets continue to be pressured by softness and home furnishings industry, and corresponding weakness in the residential upholstery channel. Gross profit in the upholstery segment was $4.1 million, or 18.6% of sales, compared with gross profit of $4.3 million, or 18.9% of sales in the prior year period. On a positive note, the slight decline was driven largely by comparable sales, and we're encouraged to see fairly consistent upholstery margins despite the industry's softness.

Now, let me turn to the balance sheet. We reported $10.2 million in total cash and $13.3 million in outstanding debt as of the end of the first quarter, which equates to a net debt position of $3.1 million. This is roughly a 70% reduction in net debt compared to a $10.9 million as of the end of the last fiscal year. and was driven primarily by our decision to utilize the full amount of tariff recoveries received during the quarter to reduce our U.S. debt, along with the success of our efforts to reduce inventory levels in recent periods. We are extremely encouraged by our progress and strength in our balance sheet in recent periods. And I'd like to thank the team for all the great work done in this effort. As we'll touch on more in a moment, we plan to continue to prioritize debt reduction and our focus on potentially eliminating all debt entirely over other than the amount of. borrowing to take advantage of opportunities at preferred rates in China and to maintain flexibility in managing our worldwide cash position amongst volatile macro trends. Liquidity breakdown and other supporting information are covered on page 10 in our investor presentation.

Cash flow from operations increased to $8.1 million for the first quarter from cash used in operations to $695,000 in the prior year period. with the improvement primarily driven by the tariff expense recovery, operating cost efficiencies, as well as favorable working capital trends. Free cash flow increased to $7.8 million for the first quarter compared to negative free cash flow of $874,000 in the prior year period. Adjusted for capital expenditures and other items, free cash flow increased to $8 million for the first quarter from $311,000 in the prior year period. For some time now, generating free cash flow has been among our highest priorities, along with reducing debt and a key focus throughout all areas of our company, and we're pleased to see the substantial progress in this area. Capital expenditures were $314,000 for the first quarter, up slightly from $179,000 in the prior year period as we continue to closely manage capital spending on projects targeting operating efficiency gains. We expect capital spending for Fiscal 2027 to be in the $2.5 million range as we continue to spend only as necessary. Our liquidity as of the end of the first quarter was $29.4 million, consisting of $10.2 million in cash and $19.2 million in borrowing availability under our U.S. and China credit facilities.

Additionally, with respect to liquidity, I note that we own our U.S. manufacturing and distribution hub in Stokesdale, North Carolina, and the And that book value for the land, building, and building improvements comprising that asset as of the end of the first quarter was approximately $12 million, with an estimated market value of around $40 million. Our net book value per share as of August 2nd, 2026 was $4.26. And our tangible book value per share as of August 2nd, 2026 was $4.24. Finally, before I turn the call over to Robert Culp 1 last time to discuss our updated outlook, I'd like to extend a sincere thank you to all my friends and colleagues at Culp, Inc. and adjacent to Culp, Inc., both past and present, over the last almost 30 years. It's been a true pleasure to work with such a wonderful group of people and to serve such a great organization. I'll miss you all in my retirement, but Culp, Inc. will be in great hands going forward with Mary Beth Hunsberger. With that, I'll turn it back over to Robert Culp.

Robert Culp

Thank you, Ken. We certainly wish you all the best, and you will truly be missed. As we indicate in our press release, due to the macroeconomic uncertainty, global trade environment and related matters we continue to see. We are providing only limited forward guidance at this time. Please note that our guidance is based on information available as of today and reflects certain assumptions regarding our business. We do expect to see consistent sequential sales volumes in the second quarter with some growth over the prior year period. and to continue to outpace bedding industry revenue trends in what we anticipate to remain a pressured demand environment for home furnishings. We also expect the operational benefits of our recent integration and platform optimization initiatives, along with our recent pricing and strategic actions. to drive break-even operating income for the second quarter, which would be a significant improvement from the comparable year period. what remains tough operating conditions. We also expect accelerating adjusted EBITDA results for the second quarter.

As Ken indicated, we will continue to prioritize debt reduction and free cash flow generation and expect to continue improving our net debt position throughout the second quarter, while maintaining some strategic borrowings under our China credit facilities to both maintain flexibility and leverage preferred interest rates. With that, we will now take your questions.

Operator

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw the question, please press star then 2. Our first question comes from Linda Bolton-Weiser with Water Tower Research. Please go ahead.

Unknown Speaker

Well, congratulations to Ken on a long and terrific career. And best of luck to you in your retirement. And congratulations to Mary Beth Hunsberger on her new role. And happy birthday, Ken, as well.

Robert Culp

Thank you. I appreciate that. Thank you very much.

Unknown Speaker

Um, actually, maybe I could start out with a question for Mary Beth Hunsberger because I know that she spearheaded the integration of your 2 segments and all of the restructuring that was done. Maybe she could comment on if there's any any substantial actions still to go here in FY '27, or if pretty much all the substantial actions were completed in FY '26, and then maybe her view on how the restructuring has contributed to the competitiveness of the company. Thanks.

Unknown Speaker

Hey, Linda, great questions. Thank you for those and happy birthday to Ken. Throw that in there 1 more time. Yes, I've definitely been working hard along with our teams on the restructuring the last year or 2. initiatives are much completed, there is plenty of opportunity for continuing to harmonize processes, procedures, you know, really fine-tuning and honing in on some of our efficiencies. So, yes, while the bulk of the financial and physical changes are done, there are still improvements to be made, and we'll continue to work on those. And I would say the Blaze initiatives, as we called it internally, really has helped us become very nimble. I would say between myself and our Chief Commercial Officer, Tommy Bruno, we have a really tight connection between our sales and operations teams. And that really allows us to meet our customers' needs very nimbly, I'm really pleased about that.

Robert Culp

Linda, if I could just tack on to Mary Beth Hunsberger's comments, I think it really good question you asked her and I'm so encouraged by her answer and just how we think about the business, her taking the step of having oversight of the CFO and then also maintain oversight of operations is really a natural fit and all the things she's talking about are so encouraging to us because we can drive it from the top through the operations and support the commercial strategy. So it really has streamlined our business and we just have a lot of, while she's right, the platform restructuring is finished, there's so much left for us to do. So that was a good question and good feedback.

Unknown Speaker

Great. Thank you. Also, in terms of your commentary on each of the businesses, I I guess it was interesting to hear about some cooling innovation, some technology or something coming in bedding. Um, so that sounds kind of exciting. Can you give a little more information on that? And what can you give the timing, the rough timing as when we might see new products in that area?

Robert Culp

Yes, certainly I'm happy to take that 1. And as we've been through the tough demand cycle that we harp on so frequently and that the industry continues to talk about, the way we're finding opportunities to grow our business is through some innovation and not being so focused on volume, low-end units, thinking about performance and functions of fabrics and end uses that will drive consumer interest. So in bedding, for a long time, the story's been cooling. And temperature management is just important to a good night's sleep. And we see that across the industry. We've always done it. And it's part of our mix, but I think we have some new technologies with some key players that are going to really drive some success. So, we're not ready to launch it, but it's this calendar year, Linda.

So fall towards towards winter, towards a early launch for a mattress line in the new year. So it's around the corner, and we'll be excited to share more about that as we know it. But just the backdrop of that question is performance features are table stakes for fabrics these days whether it's batting or upholstery so we're constantly looking for innovative stories that will help drive market growth.

Unknown Speaker

Great, thank you. And, um, just in terms of your top line performance in the quarter, I mean, really, it was quite impressive on both in both segments. I think with batting, we kind of understand that it's maybe a little closer to the macro recovery cycle. but I'm curious in upholstery, you know, it was sort of like flattish, I guess you said, adjusting for the week issue, the 1 last week. How sustainable do you think that is in upholstery? I mean, do you think that can continue to be flat to up or or is it still going to be kind of choppy on the upholstery side.

Robert Culp

Well, we look at, you had a good question there. You're thinking about the businesses in the right way. We look at them slightly different on the macro trend side. I know your question is mostly about upholstery, but I'll just say for bedding, when you're When you say the macro recovery is closer, I'll clean that up just a little bit and say trends are not supportive of the business. The macro trends are not helping, but there is, people want to sleep better and they want to feel better when they wake up. So there's a more natural replacement cycle that we believe is active in that segment. It's been a long time that replacement cycle is due.

So while the macro trends aren't helping, I think there is some replacement trend and I think our position in that space is strong. And I think we have good strategies and we're winning share in that segment. So that's what's supporting our growth. On the upholstery side, it's a much more fragmented market. It's a big space. Furniture can be more deferrable, in my view, than mattress, and so consumer confidence trends and housing starts and any kind of housing data is going to hold back furniture in our view. But again, we're doing the right things. We're innovating the right performance products. to sell the top players in the business.

Our placement rate is strong. And so I feel good about residential to be relatively consistent. The other kind of secret weapon we have within upholstery and is a really good hospitality and commercial fabric business. So we're not tied only to residential. We can also do things across that spectrum. and we just design for both industries and believe it gives us a good chance some hedge, 1 can support the other. And so I feel consistent about upholstery. I'm looking for better growth in bedding, but I feel consistent about our upholstery trends as well. So that's generally positive.

Unknown Speaker

Yes, thank you, very helpful. So just moving to margins a little bit, your gross margin in the quarter was up both year over year and sequentially, excluding the tariff refund. So really nice gross margin. How should we think about the sustainability of that margin?

Robert Culp

margin, growth margin going forward in each of the 2 businesses? Yes, good question, Linda. I'm so proud of our improvements on growth margin, particularly on the betting side, and they are largely the result of the initiatives we've discussed at length over the last few calls. Linda, thank you for the question. I'm going to pivot that 1 to Mary Beth Hunsberger also to answer that.

Unknown Speaker

sustainable and as we mentioned in your first question we continue to work on synergies efficiencies We continue to work on machine efficiency, off-quality results, um, all sorts of metrics that we're measuring to continue to expand that margin into the future, particularly on the bedding. Um, so we're, you know, we're feeling very strong, and we know that that's a really important part of our return to a greater profitability. level.

Unknown Speaker

Okay. Great. And then, you know, your cash flow was very strong in the quarter, again, even excluding the tariff refund aspect of it. And your inventory was down both sequentially, I think, and year over year. What is the outlook for kind of just general working capital projects? performance going forward and inventory in particular and how that contributes to cash flow performance.

Robert Culp

Yes, hey, Linda, this is Ken. You're right. The first quarter was very strong. I mean, the team did a great job on inventory reduction. We had a little bit of offset on some lower AP, but all in all, great reduction there. And so going forward, we're going to, as we said in our prepared remarks, we're going to keep a laser focused on working capital, AR, AP, inventory and try to generate as much cash flow as we can, you know, keeping that in check. We've talked about capital expenditures spending, controlling that.

You know, the main focus is, as Robert Culp said, we're going to do everything we can to get our net debt down, to continue to get it as close, or maybe to a net cash positive, later on in the year. And so that's going to be our total focus, but we're, you know, we're, every area is under scrutiny. You know, operations, working capital, every to get to that goal of getting to an ultimate net cash positive position.

Unknown Speaker

Okay. And then I think you commented on, you know, keeping, you some of your Chinese debt because of the attractive interest rates. Is that debt we're seeing at the end of the first quarter, is that all of the Chinese debt, or is there still a little bit of domestic that you still might pay down in future quarters?

Robert Culp

Yes. No, we were able to pay down all of our U.S. debt in the first quarter, which was at a higher interest rate. And so, as we said, you know, we're maintaining a certain level of China debt because just giving us the flexibility. The interest rate is extremely low, and we've got several banks in China that we work with, and so that gives us that flexibility to renew the agreement as needed and just be able to protect the bank line in the U.S. But no, the $13.3 million is all China.

Robert Culp

Linda, I've been really proud of Ken's management of our financial stability and maintaining that China debt while we don't need it and probably won't need it as we look ahead, it just feels smart to us to keep it in the macro volatility in the world. I mean, we have some global cash flow needs as we transition from our different operating geographies and have a very low cash flow. interest rate borrowings that are actually have positive arbitrage for us. just seem smart. So our focus is going to be on net cash.

We won't be on out of debt, won't be as important to us because we want that strategic debt, but net cash position should be the metric we'll be driving at.

Unknown Speaker

Thanks, that makes sense. Um, and then finally, I guess, you know, Just kind of thinking out a little bit, you know, assuming we get some recovery in sort of the housing and other macro-related factors, and you've got your new cost structure, lower cost structure, you're going to get some very good leverage, good earnings, really much better even cash flow in future years. Have you thought about how you might put to use that free cash flow that you might see in the out years? Are your thoughts towards share repurchase or maybe reinstating a dividend? Maybe you could give us your thoughts on that.

Robert Culp

Yes, that's a good question, Linda. We think about it all the time, and I can't wait to have that decision to make, because it would be that if you look at our history of our company over many years, many years, we've had, we've done all those things. We've purchased stock when it makes sense. We've had dividends for periods of time. We've looked at strategic ways to grow the business. All those would be in scope for us at the right time. But we just, you know, not to sound like a basketball coach or something, we just keep on our head on the next game and we want to just get out of this any net debt position.

Our #1 goal is to get to net cash. And when we have a better situation to think about the things you mentioned, all of them will be on the table. So I'm just not ready to get there yet, but it's in the back of our heads for sure.

Unknown Speaker

Okay, that makes sense. Well, that's all the questions I had. Thank you very much for letting me ask all those questions.

Robert Culp

Thank you, Linda. Appreciate you.

Operator

Our next question comes from Anthony Lebedzinski with Sidoti and Company. Please go ahead.

Question-and-Answer Session

Anthony Lebiedzinski

Good morning. Thank you for taking the questions. Certainly great to see the improved top and bottom line results. And let me echo Linda's comments with the best wishes for you, Ken, and Mary Beth Hunsberger. And happy birthday as well to you, Ken, also.

Robert Culp

Thank you, Andy. I appreciate that.

Anthony Lebiedzinski

Sure enough. All right. So I do realize that there was 1 less week of revenue, so there was a little bit of noise in the quarter, I guess. But can you just talk about pricing and unit volumes in both segments and how they impacted the reported revenue? Sure.

Robert Culp

Yes, Anthony, good question. I think Mary Beth Hunsberger would be the best 1 to talk about that a little bit, but you're hitting on the 2 main things. I mean, for us to get the improving GPE is coming from the operational improvements and from very strategic pricing. And we've said for a long time... we needed to get pricing to match the cost level. And that sounds funny, it sounds obvious, and why wouldn't you do that? But with the volatility that's been in the market over tariffs and the trade landscape, and just how much pressure, almost in a haphazard manner, was coming at us every day, it took us a minute to get the pricing normalized. So now I feel like, I don't know if we can put a percentage to it, Mary Beth Hunsberger, if it's how much is operational improvement and how much is pricing, but both have mattered extensively to the recovery. Appreciate it.

Unknown Speaker

Sure, and as we think about top line, especially in bedding, I can assure you that a 13% increase over prior year isn't all price. There is a definite unit component to that. We've seen expansion of a number of programs that we service. And so it is a blend of both. So don't have exact figures off the cuff here, but what we're pleased to know is that while, yes, we have right-sized our price, we're a lot of our quarterly performance was unit driven as well.

Robert Culp

And we did note, Anthony, in the prepared remarks, no 1 should sleep on the fact, no pun intended, that our mattress cover business is really a nice add to our bedding segment. Covers, while may not be as many units as a pure knit fabric, come with generally a higher price than a standard knit, and we're really doing well with a lot of nice cover placements. So that's given us some shield to the macro trend as well.

Anthony Lebiedzinski

Mm-hmm. That's very helpful, Caller. And just wondering if you've picked up some meaningful new customers or is the growth more or less coming from existing customers? How do I think about that?

Robert Culp

You know, Anthony, if you think about the betting segment, it's pretty consolidated and maybe getting more so. So there's not – there aren't a lot of customers that we don't know of that we can go win new business. But for sure, it's winning – better placements with those winning customers or a new new part of their business. So I would say it's it's new products with existing customers would be the best way I would speak to We sort of know the market upwards and backwards, and there's nothing really new that we need to go chase. We just like to have more share with the with the biggest players. That's kind of how we have to think about it.

Anthony Lebiedzinski

That makes sense. Okay. And then just looking at your slide deck, slide 16, you talk about the upholstery business. You're targeting performance products to be about 40% of total, and you're targeting hospitality to be about 30% of total. So where are you now? in terms of that penetration for both of those metrics and what's the timeframe as to when you think you can get to those numbers?

Robert Culp

Yes, Anthony, I would say those are sort of minimum thresholds for us. The first part, the 40% of performance products, and I mentioned, and maybe I was talking with Linda earlier, or maybe some prepared remarks, performance fabrics are table stakes, and that's just part of the business. So I would say we've already met the threshold there and would expect performance features and upholstery to be even more fair than that. And on the hospitality contract side, we're over that threshold. Okay. You know, if residential were to get better, the percentages would work itself differently. But today, we're striding even higher than that target in the hospitality contract view. So we're beating both those metrics today.

Anthony Lebiedzinski

That's great to hear. Okay. And lastly, for me, do you expect to get any additional tariff refunds or do you think this is it for now?

Robert Culp

You know, Anthony, we have received what we thought we were due. And you know, there's more litigation on some of the recent round of tariffs. To me, that's a little bit of noise. I've already stated that I think we have our pricing in line with current costs, and that includes current tariffs. We don't have any active litigation or any significant focus, but call me tomorrow and the answer might be different. So we just wait to see the rules of the game, and I think we're playing the game better than we have in a long time. So um we're pretty.

Anthony Lebiedzinski

encouraged about that understood well thank you very much and best of luck.

Operator

Thank you, Anthony. This concludes our question and answer session. I would like to turn the conference back over to Robert Culp for any closing remarks.

Robert Culp

Thank you, Bailey. And again, thank you to everyone for your participation and your interest in Culp, Inc. We look forward to updating you on our progress next quarter. Have a great day.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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