Tuesday, May 19, 2020


Culp Inc. sells mattress and furniture fabrics to mattress and furniture makers. The stock has taken an absolute nosedive, down almost 90% since its 2016 high, and also down 55% since the beginning of the year. With these numbers, it's behaving like a risky, over-levered bit player, but nothing could be further from the truth.

Culp trades for $70 million, with net cash of over $30 million as of its latest quarterly report. Ignoring intangible write-downs/ups, the company has generated operating income of $9 million in the first three quarter of its fiscal year. It is a market leader in North America in selling mattress fabrics to companies like Serta-Simmons and Temper+Sealy. In addition to its manufacturing facilities in North America, Culp makes its products in low-cost jurisdictions such as China, Vietnam and Haiti as well.

Profits over the last couple of years have been depressed as a result of low-cost imports from China disrupting American mattress sales. Last year, the US imposed anti-dumping duties on these, but there was an inventory build-up in anticipation of these duties, and so the industry has been working that off.

Now the Covid-19 crisis has made things even worse for the company, obviously. Culp has furloughed a bunch of employees as a result, and has shifted some manufacturing towards making masks and gowns.

At the current price, Culp is priced for disaster, but with its strong balance sheet, Culp should be able to stick around to when business conditions improve. Furthermore, it expects to be able to compete better with low-cost imports with its own low-cost imports thanks to recent expansions of its low-cost manufacturing facilities.

Fairfax Financial recently added shares of this company as well.

Disclosure: Author has a long position in shares of CULP


Anonymous said...

Some figures different from this article on SeekingAlpha posted yesterday:

"The company ended its third quarter with $32.4M in cash and short-term investments. If we subtract the $20M from their recent revolver withdrawal, the company has a net cash position of $10.4M against a market cap of $69M, Culp has total current assets of $210M, compared total liabilities of $70.2M (including the revolver). They also generate healthy amounts of operating cash flows. For 2019, they generated $14M."

Saj Karsan said...

Hi Anon, the revolver withdrawal would increase debt but also cash, so it's a wash when it comes to the net debt situation. That said, it's hard to say what will happen to cash this quarter, which will be interesting to find out!

misterkrusty said...

why not give us the TTM operating income? Is this business seasonal, or can we just multiply $9m by 4/3 to annualize?

Saj Karsan said...

If there are items that are meaningful to you (TTM operating income, seasonality), I encourage you to look it up yourself.