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Water Tower Research is a leading equity research firm that provides research on micro, small and mid cap companies.

Water Tower Research was founded by Wall Street veterans after witnessing a fundamental shift in the investment research industry with the result being a declining knowledge base among investors, a lack of awareness and a shrinking pool of fundamental research being conducted on companies across the small-cap and micro-cap spectrum. The same issues are now increasingly occurring in the mid-cap space. This sea change within the investment community is impacting not only the companies themselves but also current shareholders and potential investors. With significantly less active sell-side sponsorship by Wall Street, a substantial information gap has developed between companies and various constituents in the financial community. The net result is fewer channels for insight and information to flow between companies and investors.

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<h3>KEY POINTS</h3>
<ul>
<li>Culp Inc. reported 2QFY23 earnings after the close on December 7, in line with revised guidance issued on November 22. A conference call is scheduled for today at 11:00 am ET.</li>
<li>In a very difficult economic and market environment for the furnishings business, the company reported revenue of $58.4 million, just above guidance, and a GAAP loss of $12.2 million, or $0.99 per share. The GAAP losses include a little more than $6.7 million in one-time charges for inventory write-downs, inventory clearance, and restructuring costs.</li>
<li>While the company did not report adjusted earnings, our adjustments for one-time items result in a loss of $5.5 million, or $0.44 per share. Because of the complexity of Culp’s multi-jurisdictional tax exposure, we have no visibility into the tax effects of those charges and have not tax-effected the adjustments.</li>
<li>The results were slightly better than our estimates of $58 million in revenue, $1.05 in GAAP loss, and a $0.51 adjusted loss. See the summary results table below.</li>
<li>Importantly, the company’s liquidity position improved, with $19 million in cash and no outstanding debt at the end of the quarter. Culp remained cash flow positive in 2Q, despite the losses, accomplished principally by liquidating inventory. The company also announced it had secured a $40 million credit facility.</li>
<li>As further cost-savings efforts, the company announced the closure of domestic cut-and-sew operations, saving $2 million annually. Most of the ~40 affected employees have been reassigned. Closure costs are negligible.</li>
<li>Maintaining a strong liquidity position in the face of such a challenging operating environment is admirable. That said, preserving cash through inventory liquidations has limits. Limited guidance offered glimmers of demand improvement.</li>
</ul>
<h3>COMPANY OVERVIEW</h3>
<div></div>
<p>Founded in 1972 and headquartered in High Point, North Carolina, Culp, Inc. manufactures, markets, and supplies a wide range of mattress and upholstery fabrics in the US and across the globe. Today Culp has manufacturing and sourcing capabilities in the US, Canada, China, Haiti, Vietnam, and Turkey.</p>
<p>Culp reports operations in these segments: (1) mattress fabrics, known as Culp Home Fashions (CHF), and (2) upholstery fabrics, known as Culp Upholstery Fabrics (CUF). Each is a leader in its respective markets.</p>
<p>Robert. G. Culp IV (Iv) became CEO in January 2020. He joined the company in 1998 and for 15 years led Culp’s mattress fabric segment. Culp’s innovation reinforces the market leadership that it enjoys in each of its two reporting segments.</p>
<h3>DISCLOSURES</h3>
<div></div>
<p>Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.<br><br>WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.<br><br>Budd Bugatch and Rex Henderson, CFA who are the writers of this report, covers the Consumer Hardlines sector for WTR. Mr. Bugatch and Mr. Henderson, CFA including members of their household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.<br><br>Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.<br><br>WTR is being compensated for its research by the company which is the subject of this report. WTR receives no more than a maximum of $10,500 per month from a given client and is required to have at least a 6-month commitment. None of the earned fees are contingent on, and WTR’s client agreements are not cancellable for the content of its reports. WTR does not accept any compensation in the form of warrants or stock options or other equity instruments that could increase in value based on positive coverage in its reports.<br><br>WTR or an affiliate may seek to receive compensation for non-research services to covered companies, such as charges for presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services that WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly-written compliance guidelines.<br><br>The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors, agents or affiliate shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.<br><br>All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.</p>

KEY POINTS

Culp Inc. reported 2QFY23 earnings after the close on December 7, in line with revised guidance issued on November 22. A conference call is scheduled for today at 11:00 am ET.
In a very difficult economic and market environment for the furnishings business, the company reported revenue of $58.4 million, just above guidance, and a GAAP loss of $12.2 million, or $0.99 per share. The GAAP losses include a little more than $6.7 million in one-time charges for inventory write-downs, inventory clearance, and restructuring costs.
While the company did not report adjusted earnings, our adjustments for one-time items result in a loss of $5.5 million, or $0.44 per share. Because of the complexity of Culp’s multi-jurisdictional tax exposure, we have no visibility into the tax effects of those charges and have not tax-effected the adjustments.
The results were slightly better than our estimates of $58 million in revenue, $1.05 in GAAP loss, and a $0.51 adjusted loss. See the summary results table below.
Importantly, the company’s liquidity position improved, with $19 million in cash and no outstanding debt at the end of the quarter. Culp remained cash flow positive in 2Q, despite the losses, accomplished principally by liquidating inventory. The company also announced it had secured a $40 million credit facility.
As further cost-savings efforts, the company announced the closure of domestic cut-and-sew operations, saving $2 million annually. Most of the ~40 affected employees have been reassigned. Closure costs are negligible.
Maintaining a strong liquidity position in the face of such a challenging operating environment is admirable. That said, preserving cash through inventory liquidations has limits. Limited guidance offered glimmers of demand improvement.

COMPANY OVERVIEW

Founded in 1972 and headquartered in High Point, North Carolina, Culp, Inc. manufactures, markets, and supplies a wide range of mattress and upholstery fabrics in the US and across the globe. Today Culp has manufacturing and sourcing capabilities in the US, Canada, China, Haiti, Vietnam, and Turkey.
Culp reports operations in these segments: (1) mattress fabrics, known as Culp Home Fashions (CHF), and (2) upholstery fabrics, known as Culp Upholstery Fabrics (CUF). Each is a leader in its respective markets.
Robert. G. Culp IV (Iv) became CEO in January 2020. He joined the company in 1998 and for 15 years led Culp’s mattress fabric segment. Culp’s innovation reinforces the market leadership that it enjoys in each of its two reporting segments.
DISCLOSURES

Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.  WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.  Budd Bugatch and Rex Henderson, CFA who are the writers of this report, covers the Consumer Hardlines sector for WTR. Mr. Bugatch and Mr. Henderson, CFA including members of their household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.  Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.  WTR is being compensated for its research by the company which is the subject of this report. WTR receives no more than a maximum of $10,500 per month from a given client and is required to have at least a 6-month commitment. None of the earned fees are contingent on, and WTR’s client agreements are not cancellable for the content of its reports. WTR does not accept any compensation in the form of warrants or stock options or other equity instruments that could increase in value based on positive coverage in its reports.  WTR or an affiliate may seek to receive compensation for non-research services to covered companies, such as charges for presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services that WTR or an affiliate might offer to clients.  The manner of WTR’s research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly-written compliance guidelines.  The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors, agents or affiliate shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.  All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.

2QFY23 Results; As Expected, Culp Reports Significant Losses, Slightly Better than Our Revised Estimate; Liquidity Strengthened by Inventory Liquidations and New Credit Facility