Annual Report for Fiscal Year Ending May 3, 2026 (Form 10-K)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We have prepared this Management's Discussion and Analysis of Financial Condition and Results of Operations as an aid to understanding our financial results. It should be read in conjunction with the consolidated financial statements and notes and other exhibits included elsewhere in this report. It also includes management's analysis of past financial results and certain potential risk factors that may affect future results, as well as approaches that may be used to manage those risks. See "Cautionary Note Regarding Forward-Looking Statements" at the beginning of this report, together with the section of this report titled "Item 1A. RISK FACTORS," for a discussion of factors that may cause results to differ materially.

General

Our fiscal year is the 52 or 53-week period ending on the Sunday closest to April 30. Fiscal 2026, 2025, and 2024 comprised 53-week, 52-week, and 52-week periods, respectively. We refer to the year ended May 3, 2026 as "fiscal 2026," the year ended April 27, 2025 as "fiscal 2025" and the year ended April 28, 2024 as "fiscal 2024."

Our operations are classified into two reportable segments: bedding and upholstery.

On April 24, 2025, the company announced a strategic transformation of its operating model to combine certain activities within the bedding and upholstery segments and create one integrated Culp-branded business. This strategic transformation was completed by the end of fiscal 2026.

Bedding

The bedding segment manufactures, sources, and sells fabrics and mattress covers primarily to bedding manufacturers. Currently, we have a bedding manufacturing operation located in Stokesdale, North Carolina, and a sewn mattress cover operation located in Ouanaminthe, Haiti.

In the first quarter of fiscal 2025, our board of directors made a decision to: (1) consolidate the company's North American bedding operations, including the closure and sale of the company's manufacturing facility and related land (collectively referred to as the "Property") located in Quebec, Canada; (2) move a portion of the knitting and finishing capacity from the company's Property located in Quebec, Canada to the company's manufacturing facility located in Stokesdale, North Carolina; (3) transition the bedding segment's weaving operation to a strategic sourcing model through the company's long-standing supply partners; and (4) consolidate the company's sewn mattress cover operation located in Ouanaminthe, Haiti, from two leased facilities into one building and reduce other operating expenses at this location. See Note 10 to the consolidated financial statements for further details regarding these restructuring activities.

All the above restructuring activities were completed as of April 30, 2025. See Notes 7 and 8 to the consolidated financial statements for further details regarding the sale of the Property and determination of fair value.

Upholstery

The upholstery segment develops, sources, manufactures, and sells fabrics primarily to residential, commercial, and hospitality furniture manufacturers. As of May 3, 2026, we had upholstery operations located in Stokesdale, North Carolina, and Shanghai, China, as well as a wholly-owned subsidiary, Culp Fabrics Vietnam Limited, which has an administrative office and showroom located in Ho Chi Minh City, Vietnam. Our Vietnam office enhances our strategic sourcing capabilities and further diversifies our supply chain in Asia, while our recently added showroom facilitates better product exposure with our growing customer base there.

During fiscal 2026, as part of the strategic transformation noted above, we closed a leased upholstery facility located in Burlington, North Carolina, and transitioned its distribution activities to a shared management model within our owned facility located in Stokesdale, North Carolina. Our Stokesdale, North Carolina facility had historically been operated solely by our bedding segment. See Note 10 of the consolidated financial statements for further details regarding this restructuring activity.

Additionally, the upholstery segment includes Read Window Products, LLC ("Read"), a wholly owned subsidiary that provides window treatments and sourcing of upholstery fabrics and other products, as well as related measuring and installation services, to customers in the hospitality and commercial markets. Read also supplies soft goods such as decorative top sheets, coverlets, duvet covers, bed skirts, bolsters, and pillows. Read's operations were previously conducted at a leased facility in Knoxville, Tennessee, and also within a leased upholstery facility in Burlington, North Carolina, but these operations were moved to our Stokesdale, North Carolina, facility in fiscal 2026 as part of the strategic transformation noted above.

Executive Summary

Consolidated Results of Operations

Net Sales

Our consolidated net sales decreased by 4.6% in fiscal 2026 compared with a year ago, with bedding net sales increasing 2.4% and upholstery net sales decreasing 12.5%.

The increase in net sales in our bedding business was driven by higher demand for our products in the fourth quarter, particularly for sewn mattress covers. Higher sales for the year were partially offset by lower sales for the first nine months of fiscal 2026 due to muted demand across the bedding industry and related challenges from weaker consumer spending and broader macroeconomic pressures. Despite the market headwinds, we continue to see customers recognize the strategic value of our global footprint and strong U.S. manufacturing capabilities, particularly as the current trade and tariff environment drives increased scrutiny of supply chain cost structure and reliability.

The decline in net sales in our upholstery business primarily reflects softness in the home furnishings market and its impact on residential upholstery demand, driven largely by depressed housing market trends. In addition, broader macroeconomic pressures have dampened project activity in the commercial and hospitality fabric markets we serve. These factors, as well as incremental pressure on customer demand resulting from ongoing tariff volatility and rising oil prices, affected upholstery sales in fiscal 2026.

While the markets we serve continue to face near-term challenges, we believe we are well positioned for future growth. The recent restructuring of our bedding platform, along with the completion of several additional initiatives in our upholstery segment during the second half of fiscal 2026 (including the integration of our U.S. upholstery distribution and window treatment operations and the consolidation of our production footprint in China), is expected to strengthen our market position and operating foundation.

Gross Profit

Our consolidated gross profit was flat in fiscal 2026 compared with a year ago, with bedding gross profit increasing by 34.9% and upholstery gross profit decreasing by 17.9%. Gross profit margin improved 60 basis points, from 11.8% in fiscal 2025 to 12.4% in fiscal 2026.

Overall gross profitability for the year benefited from the efficiencies and cost reductions we have generated from completion of our fiscal 2025 restructuring and fiscal 2026 integration initiatives, but was adversely affected by lower sales volumes and unfavorable foreign exchange impacts related to our China upholstery operations.

See the Segment Analysis located in the Results of Operations section below for further details.

Loss Before Income Taxes

Overall, our consolidated loss before income taxes was $8.3 million for fiscal 2026, compared with a loss before income taxes of $18.7 million for the same period a year ago.

Operating performance for fiscal 2026, as compared to the prior year, improved as a result of lower restructuring and restructuring-related expenses in fiscal 2026, with a $1.4 million restructuring credit in fiscal 2026, as compared to $9.4 million in restructuring and

restructuring-related expenses in fiscal 2025. The restructuring and restructuring-related charges in fiscal 2025 were driven by the fiscal 2025 restructuring primarily associated with our bedding segment, while the restructuring credit in fiscal 2026 was driven by a gain on sale in connection with the sale of our Canadian property as part of the fiscal 2025 restructuring. The restructuring credit in fiscal 2026 was partially offset by restructuring and restructuring related charges associated with our fiscal 2026 integration initiatives.

Beyond the positive impact from lower restructuring and restructuring-related charges, lower sales and other factors adversely affected our operating performance during fiscal 2026, but we benefited throughout the year from the lower costs and efficiencies resulting from our recently restructured bedding manufacturing platform. Our operating performance also benefited from our additional actions to reduce selling, general and administrative expenses and implement price increases to mitigate tariff impacts. Further, the integration of our domestic upholstery distribution and Read window treatment operations into our owned North Carolina facility, along with the reduction of our facility footprint in China, began to yield some benefits during the second half of fiscal 2026.

See the "Segment Analysis" located in the Results of Operations section below for further details.

Income Taxes

We recorded income tax expense of $1.9 million, or (23.2)% of loss before income taxes, for fiscal 2026, compared with income tax expense of $392,000, or (2.1)% of loss before income taxes, for fiscal 2025.

Our consolidated effective income tax rates during fiscal 2026 and fiscal 2025 were adversely affected by the mix of earnings between our U.S. operations and foreign subsidiaries. During fiscal 2026, our taxable income stemmed from our operations located in China and a gain on sale of Property located in Canada during fiscal 2026 (see Notes 8 and 10 of the consolidated financial statements for further details), which jurisdictions have higher income tax rates than the U.S. During fiscal 2025, our taxable income stemmed from our operations located in China, partially offset by a pre-tax loss incurred in Canada due to our restructuring activities during fiscal 2025. In addition, we applied a full valuation allowance against our U.S. deferred income tax assets during both fiscal 2026 and fiscal 2025, respectively. Consequently, an income tax benefit was not recognized for the pre-tax losses associated with our U.S. operations totaling $(15.1) million and $(18.4) million that were incurred during fiscal 2026 and fiscal 2025, respectively. Lastly, our consolidated effective income tax rates in fiscal 2026 and 2025 were also adversely affected by pre-tax losses associated with our Haitian operations, which are not currently subject to income tax. As a result, an income benefit was not recognized for the pre-tax losses associated with our Haitian operations totaling $(804,000) and $(1.6) million that were incurred during fiscal 2026 and fiscal 2025, respectively.

During fiscal 2026, we incurred a consolidated pre-tax loss of $(8.3) million, compared with a significantly higher pre-tax loss of $(18.7) million incurred during fiscal 2025. As a result, the principal differences between income tax expense at the U.S. federal income tax rate and the effective income tax rate reflected in the consolidated financial statements were more pronounced during fiscal 2026, as compared with fiscal 2025.

During fiscal 2026 and fiscal 2025, we had income tax payments totaling $3.6 million and $2.3 million, respectively, which consist of income tax payments associated with the U.S. federal transition tax associated with the 2017 Tax Cuts and Jobs Act ("TCJA") and our operations located in China and Canada.

Refer to Note 12 of the consolidated financial statements for further details regarding our provision for income taxes.

Liquidity

As of May 3, 2026, our cash and cash equivalents ("cash") totaled $8.3 million, an increase of $2.7 million compared with cash of $5.6 million as of April 27, 2025. This increase was mostly due to: (i) net borrowings on lines of credit totaling $5.7 million; and (ii) proceeds from notes receivable and the sale of property, plant, and equipment totaling $6.2 million, which mostly relates to the sale of Property located in Quebec, Canada, partially offset by net cash used in operating activities of $(9.4) million.

Our net cash used in operating activities was $(9.4) million during fiscal 2026, an improvement of $8.3 million compared with net cash used in operating activities of $(17.7) million during fiscal 2025. This trend mostly reflects: (i) a decrease in cash losses due to savings associated with our restructuring activities; (ii) an increase in cash flow from accounts receivable due to faster payment trends with key bedding customers that had shorter credit terms and utilized more discounts, as well as a substantial payment from a significant customer within the upholstery segment during the fourth quarter of fiscal 2026, which payment did not occur during the fourth quarter of fiscal 2025; (iii) an increase in cash flow from a reduction of inventory purchases due to improved alignment with current customer demand trends; partially offset by a decrease in cash flow from: (i) a decrease in accounts payable from a reduction of inventory purchases due to improved alignment with current customer demand trends and (ii) an increase in income tax payments stemming from the gain on the sale of Property located in Quebec, Canada during fiscal 2026.

As of May 3, 2026, we had outstanding borrowings totaling $19.1 million under our line of credit agreements, of which $12.1 million and $7.0 million were reported in lines of credit-current and lines of credit-long term, respectively, within the May 3, 2026, Consolidated Balance Sheet.

For further discussion, see "-Liquidity and Capital Resources," below.

Results of Operations

The following table sets forth certain items in our Consolidated Statements of Net Loss as a percentage of net sales.

* Calculated as a percentage of loss before income taxes.

2026 compared with 2025

Segment Analysis

Our Chief Operating Decision Maker ("CODM") is our Chief Executive Officer ("CEO"), who regularly reviews the financial results of the company on a consolidated and segment basis for the purpose of evaluating financial and operating performance and allocation of resources to the individual segments noted above. Beginning in the first quarter of fiscal 2026, our CODM decided to use net sales and gross profit, excluding items that are not expected to occur on a regular basis (e.g., restructuring activities), as the primary measure of segment profit or loss. Previously, segment performance was primarily evaluated based on net sales and income (loss) from operations before unallocated corporate expenses and other items that are not expected to occur on a regular basis (e.g., restructuring activities). This change was made to align with internal management reporting and the decision-making processes affected by the strategic transformation of the company's operating model announced on April 24, 2025, which combined certain activities within the bedding and upholstery segments and created one integrated Culp-branded business. The CODM evaluates segment performance based on: (i) net sales, (ii) cost of sales, (iii) gross profit excluding items that are not expected to occur on a regular basis (i.e., restructuring related charges and credits), (iv) assets used in operations, which generally include accounts receivable, inventory, property, plant, and equipment, right of use assets, and assets held for sale; and (v) capital spending.

Cost of sales for each segment includes costs to develop, manufacture, or source our products, including costs such as raw material and finished goods purchases, direct and indirect labor, overhead, and incoming freight charges. Intangible assets are not included in segment assets, as these assets are not used by the CODM to evaluate the respective segment's operating performance and allocate resources to the individual segments.

Bedding Segment

Net Sales

Bedding sales increased by 2.4% in fiscal 2026 compared to the prior year. This increase in net sales was driven by higher demand for our products in the fourth quarter, particularly for sewn mattress covers, partially offset by lower sales for the first nine months of fiscal 2026 due to muted demand across the bedding industry and related challenges from weaker consumer spending and broader macroeconomic pressures. Despite the continued market headwinds, we secured new programs with major customers across all product categories and expanded our share of available business in targeted channels in fiscal 2026.

Looking ahead, we see encouraging indications that the bedding market may be stabilizing to a degree, with potential demand improvement driven by product replacement cycles. We remain focused on expanding placements with key customers and increasing market share to drive revenue growth, while continuing to navigate sales pressure stemming from the current macroeconomic environment. We believe that meaningful future sales growth will depend on a broader industry recovery, improved economic conditions, and greater global trade stability. Ongoing geopolitical risks, including conflicts in Ukraine and the Middle East, also have the potential to disrupt global markets and adversely affect sales.

Gross Profit

Bedding gross profit increased by 34.9% in fiscal 2026 compared to the prior year. The improvement in gross profit was due primarily to cost reductions and efficiency gains achieved through the restructuring of our bedding segment in fiscal 2025, as well as higher sales, pricing actions, and improved selling margins.

Segment Assets

Segment assets consist of accounts receivable, inventory, property, plant, and equipment, right of use assets, and assets held for sale.

Refer to Note 19 of the consolidated financial statements for disclosures regarding determination of our segment assets.

Accounts Receivable

Accounts receivable was relatively flat as of May 3, 2026, compared with April 27, 2025. This trend represents an increase in net sales of 12.5% during the fourth quarter of fiscal 2026, as compared with the fourth quarter of fiscal 2025, offset by faster payment trends with key bedding customers that had shorter credit terms and utilized more discounts during the fourth quarter of fiscal 2026, compared with the same period a year ago. Accordingly, days' sales outstanding was 32 days during the fourth quarter of fiscal 2026, compared with 35 days during the fourth quarter of fiscal 2025.

Inventory

As of May 3, 2026, inventory decreased 4.6% compared with April 27, 2025. This decrease was primarily due to improved alignment of inventory purchases with current customer demand trends and a strategic focus on reducing aged inventory. Also, this trend reflects an increase in consumer demand during the fourth quarter of fiscal 2026, which led to a 12.5% increase in net sales during the fourth

quarter of fiscal 2026, as compared with the same period a year ago. Inventory turns were 3.3 for the fourth quarter of fiscal 2026, compared with 2.9 for the fourth quarter of fiscal 2025.

Property, Plant, & Equipment

Property, plant, and equipment has steadily decreased due to reduced capital spending stemming from current unfavorable macroeconomic conditions within the home furnishings and bedding industries, as well as restructuring initiatives commencing at the beginning of fiscal 2025 and continuing through the end of fiscal 2026. See Note 10 to the consolidated financial statements for further details and description of our restructuring activities.

The $19.8 million as of May 3, 2026, represents property, plant, and equipment of $18.9 million and $825,000 located in the U.S. and Haiti, respectively. The $23.3 million as of April 27, 2025, represents property, plant, and equipment of $22.3 million and $955,000 located in the U.S. and Haiti, respectively.

Assets Held for Sale

As of April 27, 2025, we classified certain assets as held for sale totaling $2.2 million, which mostly related to the Property associated with the closure of our operation located in Quebec, Canada.

During the first quarter of fiscal 2026, we sold the Property and recognized a gain from this sale totaling $4.0 million that was classified within restructuring credit in the fiscal 2026 Consolidated Statement of Net Loss. As a result, the bedding segment did not have any assets classified as held for sale as of May 3, 2026.

Refer to Note 8 of the consolidated financial statements for further details.

Right of Use Assets

Right of use assets have steadily decreased due to the restructuring initiatives announced on May 1, 2024, which continued through the end of fiscal 2026. In connection with these restructuring initiatives, right of use assets decreased due mostly to the termination of an agreement to lease a facility located in Ouanaminthe, Haiti, in fiscal 2025, and the closure of two leased facilities located in Quebec, Canada, in fiscal 2026.

The $125,000 as of April 27, 2025, represents right of use assets located in Haiti.

Upholstery Segment

Net Sales

Upholstery net sales decreased by 12.5% in fiscal 2026 compared to the prior year.

Macro conditions in the upholstery market remain unsettled, with depressed housing market trends driving continued softness in the home furnishing market and adversely affecting demand in the company's residential fabric business. In addition, broader macroeconomic pressures have dampened project activity in the commercial and hospitality fabric markets we serve, including in our Read business, where sales for fiscal 2026 declined by $5.4 million as compared to the prior year. The decline in upholstery sales for fiscal 2026, as compared to fiscal 2025, reflects these factors as well as incremental pressure on customer demand resulting from ongoing tariff volatility and rising oil prices.

Looking forward, we expect conditions in the home furnishings market to remain uncertain in the near term. However, we believe the recent scale and efficiency enhancements resulting from the completion of integration initiatives within our upholstery segment, coupled with our product innovation capabilities and multi-location manufacturing and sourcing platform, position our upholstery segment to accelerate sales growth if and when demand stabilizes.

The potential impact of ongoing geopolitical developments, including conflicts in Ukraine and the Middle East, remains uncertain and depends on factors outside our control. At this time, we cannot reasonably estimate the effect of these events on the upholstery segment. However, an escalation of geopolitical tensions, including potential shipping disruptions related to conflicts in the Middle East, could

adversely affect our operations, as well as those of our suppliers and customers, and could negatively impact the global economy and our financial performance.

Gross Profit

Upholstery gross profit decreased by 17.9% in fiscal 2026 compared to the prior year.

The decline in gross profit within our upholstery segment during fiscal 2026, as compared to fiscal 2025, was primarily attributable to lower comparable sales, as well as unfavorable foreign exchange impacts associated with our operations in China. This was partially offset by our improving cost structure, which allowed us to maintain solid gross margins despite challenging market conditions affecting the home furnishings industry, including both residential and commercial upholstery channels.

The residential home furnishings market continues to experience reduced demand driven by shifts in consumer spending patterns, volatility related to global trade and tariffs, inflationary pressures, lower home sales activity, and other macroeconomic factors affecting discretionary consumer purchases. Demand also remains soft in the commercial and hospitality markets as a result of macroeconomic pressures that continue to challenge travel and leisure spending and delay project activity. As a result, we expect the current low-demand environment for both residential and commercial / hospitality upholstery fabrics to continue to adversely affect gross profit until market conditions improve.

During the second half of fiscal 2026, we completed the integration of our U.S. upholstery distribution and window treatment operations into our owned facility in Stokesdale, North Carolina, which is expected to enhance operating efficiency and improve this segment's profitability profile. In addition, we implemented further cost-reduction and efficiency initiatives in fiscal 2026, including the rationalization of our production and distribution footprint in China. We continue to monitor demand trends closely and remain prepared to implement additional operational adjustments as necessary to align our cost structure in this segment with market conditions, while continuing to provide consistent service levels to customers.

Segment Assets

Segment assets consist of accounts receivable, inventory, property, plant, and equipment, and right of use assets.

Accounts Receivable

As of May 3, 2026, accounts receivable decreased by 13.8% compared with April 27, 2025. This decrease mostly represents a substantial payment from a significant customer during the fourth quarter of fiscal 2026, which payment did not occur during the fourth quarter of fiscal 2025. Accordingly, days' sales outstanding decreased to 41 days during the fourth quarter of fiscal 2026, compared with 46 days during the fourth quarter of fiscal 2025. In addition, this decrease is attributable to a 2.5% decline in net sales during the fourth quarter of fiscal 2026, compared with the fourth quarter fiscal 2025.

Inventory

As of May 3, 2026, inventory slightly decreased by 1.7% during fiscal 2026, as compared with fiscal 2025. This decrease in inventory was primarily due to improved alignment of inventory purchases with current customer demand trends and a strategic focus on reducing aged inventory. Inventory turns were 4.3 during the fourth quarter of fiscal 2026, compared with 4.0 during the fourth quarter of fiscal 2025.

Property, Plant, & Equipment

Property, plant, and equipment has steadily decreased due to reduced capital spending stemming from current unfavorable macroeconomic conditions within the home furnishings and residential furniture industries, as well as from our restructuring activities announced on April 24, 2025. See Note 10 of the consolidated financial statements for further details and description of our restructuring activities.

The $708,000 as of May 3, 2026, represents property, plant, and equipment of $642,000, $37,000, and $29,000 located in the U.S., Vietnam, and Haiti, respectively. The $1.0 million as of April 27, 2025, represents property, plant, and equipment of $940,000 and $70,000 located in the U.S. and China, respectively.

Right of Use Assets

Right of use assets have steadily decreased due to the restructuring initiatives announced on April 24, 2025, which were completed by the end of fiscal 2026. In connection with these restructuring initiatives, right of use assets decreased due mostly to the termination of lease agreements associated with upholstery facilities located in Burlington, North Carolina, and Knoxville, Tennessee, as well as one facility located in Shanghai, China.

The $496,000 as of May 3, 2026, represents right of use assets of $421,000 and $75,000 located in China and the U.S., respectively. The $2.7 million as of April 27, 2025, represents right of use assets of $1.7 million and $1.0 million located in China and the U.S., respectively.

Other Consolidated Income Statement Categories

Selling, General, and Administrative Expenses

The decrease in selling, general, and administrative expenses during fiscal 2026, as compared with fiscal 2025, was primarily due to the cost reduction initiatives in connection with our restructuring activities in fiscal 2025 and fiscal 2026. Also, additional SG&A expenses were incurred during fiscal 2026, as compared with fiscal 2025, as fiscal 2026 and 2025 represented 53-week and 52-week periods, respectively.

Restructuring Activities

Restructuring Activities Announced May 1, 2024

In the first quarter of fiscal 2025, our board of directors made a decision to: (1) consolidate the company's North American bedding operations, including the closure and sale of the Property located in Quebec, Canada; (2) move a portion of the knitting and finishing capacity from the company's Property located in Quebec, Canada to the company's manufacturing facility located in Stokesdale, North Carolina; (3) transition the bedding segment's weaving operation to a strategic sourcing model through the company's long-standing supply partners; (4) consolidate the company's sewn mattress cover operation located in Ouanaminthe, Haiti, from two leased facilities into one building and reduce other operating expenses at this location; as well as (5) reduce unallocated corporate and shared service expenses.

These restructuring activities were completed by the end of the second quarter of fiscal 2026, including the sale of Property located in Quebec, Canada. Accordingly, we recorded a gain from the sale of this Property totaling $4.0 million that was classified within restructuring credit in the fiscal 2026 Consolidated Statement of Net Loss. See Notes 7 and 8 of the consolidated financial statements for further details regarding the Sales Agreement associated with the sale of Property and determination of fair value.

Since the inception of this restructuring initiative, we have incurred cumulative restructuring and restructuring related charges totaling $5.3 million, most of which is related to the bedding segment. This total $5.3 million consists of a $7.2 million cash restructuring charge, offset by a $(1.9) million non-cash restructuring credit.

Restructuring Activities Announced April 24, 2025

On April 24, 2025 (fourth quarter of fiscal 2025), the company announced a strategic transformation of its operating model that combined certain activities within the bedding and upholstery segments and created one integrated Culp-branded business. As part of this strategic transformation, we closed a leased facility located in Burlington, North Carolina and a leased facility located in Knoxville, Tennessee, and we transitioned their production and distribution activities to a shared management model within our owned facility located in Stokesdale, North Carolina, which had historically been operated solely by our bedding segment.

These restructuring activities were completed by the end of the fourth quarter of fiscal 2026. Since the inception of this restructuring initiative, we have incurred restructuring and restructuring related charges totaling $2.7 million, of which $1.4 million represents a cash restructuring and related charge and $1.3 million represents a non-cash restructuring charge.

The following summarizes restructuring (credit) expense and restructuring related charges associated with the restructuring activities described above during fiscal years 2026 and 2025:

(1) Of the total $(1.4) million net restructuring credit, a $(2.3) million credit and a $931,000 charge were classified within restructuring credit and cost of sales, respectively, in the fiscal 2026 Consolidated Statement of Net Loss. Of the total $(1.4) million net restructuring credit and restructuring related charge, a credit of $(3.1) million and a charge of $1.7 million related to bedding and upholstery segments, respectively. Of the total $(1.4) million net restructuring credit and restructuring related charge, a credit of $(3.4) million and a charge of $2.0 million related to the restructuring activities announced on May 1, 2024, and April 24, 2025, respectively.

(2) Of the total $9.4 million restructuring and restructuring related charge, $7.7 million and $1.6 million were classified within restructuring expense and cost of sales, respectively, in the fiscal 2025 Consolidated Statement of Net Loss. Of the $9.4 million restructuring and restructuring related charge, $8.5 million, $540,000, and $290,000 related to the bedding segment, unallocated corporate, and the upholstery segment, respectively. Of the total $9.3 million restructuring and restructuring related charge, $8.7 million and $676,000 related to restructuring activities announced on May 1, 2024, and April 24, 2025, respectively.

Interest Expense

The increase in interest expense during fiscal 2026, compared with fiscal 2025, reflects increased borrowings under line of credit agreements associated with our operations located in the U.S. and China.

Interest Income

The increase in interest income during fiscal 2026, as compared with fiscal 2025, reflects interest income earned from a note receivable associated with the sale of Property that occurred at the beginning of the first quarter of fiscal 2026. During fiscal 2026, interest income of $375,000 was earned from this note receivable, which was not earned during fiscal 2025. Interest income was partially offset by lower average cash balances during fiscal 2026, as compared fiscal 2025.

Refer to Notes 7 and 10 of the consolidated financial statements for further details regarding our note receivable and our restructuring activities announced on May 1, 2024.

Other Expense, Net

The increase in other expense, net mostly represents less favorable foreign currency exchange rates experienced during fiscal 2026, resulting in a foreign exchange rate loss of $1.3 million, compared with a foreign currency exchange rate gain of $(117,000) during the

same period a year ago. The $1.3 million foreign exchange rate loss incurred during fiscal 2026 was partially offset by $1.0 million in cash proceeds in connection with a resolution of a legal matter.

Management is required to assess certain economic factors to determine the currency of the primary economic environment in which our foreign subsidiaries operate. Based on our assessments, the U.S. dollar was determined to be the functional currency of our operations located in China, Canada, and Vietnam.

During fiscal 2026, we incurred a foreign currency exchange rate loss of $1.4 million that was associated with our operations located in China. This $1.4 million stems from less favorable foreign currency exchange rates applied against our balance sheet accounts denominated in Chinese Renminbi to determine the corresponding U.S. dollar financial reporting amounts. The foreign exchange rate loss of $1.4 million described above was mostly non-cash and was partially offset by an income tax benefit of $1.2 million. This income tax benefit of $1.2 million was associated with taxable foreign exchange rate losses based on less favorable foreign currency exchange rates applied against balance sheet accounts denominated in U.S. dollars to determine the corresponding Chinese Renminbi local currency amounts. The foreign exchange rate loss derived from our U.S. dollar denominated balance sheet accounts is considered tax deductible, as we incur income tax expense and pay income taxes in China's local currency.

Income Taxes

We recorded income tax expense of $1.9 million, or (23.2)% of loss before income taxes, during fiscal 2026, compared with income tax expense of $392,000, or (2.1)% of loss before income taxes, during fiscal 2025. Our consolidated effective income tax rates during fiscal 2026 and 2025 were adversely affected by the mix of earnings between our U.S. operations and foreign subsidiaries. During fiscal 2026, our taxable income stemmed from our operations located in China and a gain on sale of Property located in Canada during fiscal 2026 (See Notes 8 and 10 of the consolidated financial statements for further details), which jurisdictions have higher income tax rates than the U.S. During fiscal 2025, our taxable income stemmed from our operations located in China (which have higher income tax rates than the U.S.), partially offset by a pre-tax loss incurred in Canada due to our restructuring activities during fiscal 2025. In addition, we applied a full valuation allowance against our U.S. deferred income tax assets during fiscal 2026 and 2025, respectively. Consequently, an income tax benefit was not recognized for the pre-tax losses associated with our U.S. operations totaling $(15.1) million and $(18.4) million that were incurred during fiscal 2026 and 2025, respectively. Lastly, our consolidated effective income tax rates in fiscal 2026 and 2025 were also adversely affected by pre-tax losses associated with our Haitian operations, which are not subject to income tax. Our Haitian operations are located in an economic zone that permits a 0% income tax rate for the first fifteen years of operations, for which we have six years remaining. As a result of the 0% income tax rate, an income tax benefit was not recognized for the pre-tax losses associated with our Haitian operations totaling $(804,000) and $(1.6) million that were incurred during fiscal 2026 and 2025, respectively. Refer to Note 12 of the consolidated financial statements for additional disclosures regarding our income taxes, including, without limitation, (i) the principal differences between income tax expense at the federal income tax rate and the effective income tax rate reflected in the consolidated financial statements; (ii) the valuation allowance against our U.S. net deferred income taxes; (iii) our uncertain income tax positions, and (iv) our income taxes paid (refunded) by jurisdiction for fiscal 2026 and 2025.

2025 compared with 2024

For a comparison of our results of operations for the fiscal years ended April 27, 2025, and April 28, 2024, see "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year ended April 27, 2025, filed with the SEC on July 11, 2025.

Liquidity and Capital Resources

Overall

Currently, our sources of liquidity include cash, cash flow from operations, and amounts available under our lines of credit. As of May 3, 2026, we believe: (i) our cash of $8.3 million, (ii) improvement in cash flow from operations stemming from expected cash savings from our recent restructuring activities, and (iii) the current availability under our lines of credit totaling $15.9 million, including $14.5 million in available borrowings under the ABL Facility and additional availability under our China credit agreements (Refer to Note 11 of the consolidated financial statements for further details regarding our financing arrangements) will be sufficient to fund our foreseeable business needs, capital expenditures, commitments, contractual obligations, and income tax payments.

As of May 3, 2026, our cash totaled $8.3 million, an increase of $2.7 million compared with cash of $5.6 million as of April 27, 2025. This increase was mostly due to: (i) net borrowings on lines of credit totaling $5.7 million; and (ii) proceeds from notes receivable and the sale of property, plant, and equipment totaling $6.2 million, which mostly relates to the sale of Property located in Quebec, Canada, partially offset by net cash used in operating activities of $(9.4) million.

Our net cash used in operating activities was $(9.4) million during fiscal 2026, an improvement of $8.3 million compared with net cash used in operating activities of $(17.7) million during fiscal 2025. This trend mostly reflects: (i) a decrease in cash losses from savings associated with our restructuring activities announced on May 1, 2024, and April 24, 2025 (refer to the section titled "-- Segment Analysis -- Consolidated Other Income Statement Categories -- Restructuring Activities" for further details regarding our restructuring initiatives); (ii) an increase in cash flow from accounts receivable due to faster payment trends with key bedding customers that had shorter credit terms and utilized more discounts, as well as a substantial payment from a significant customer within the upholstery segment during the fourth quarter of fiscal 2026, which payment did not occur during the fourth quarter of fiscal 2025; and (iii) an increase in cash flow from a reduction of inventory purchases due to improved alignment with current customer demand trends; partially offset by a decrease in cash flow from: (i) a decrease in accounts payable from a reduction of inventory purchases due to improved alignment with current customer demand trends and (ii) an increase in income tax payments stemming from the gain on the sale of Property located in Quebec, Canada, during fiscal 2026.

As of May 3, 2026, we had outstanding borrowings totaling $19.1 million under our line of credit agreements, of which $12.1 million and $7.0 million were reported in lines of credit-current and line of credit-long term, respectively, on the May 3, 2026, Consolidated Balance Sheet.

Our cash balance may be adversely affected by factors beyond our control, such as: (i) recent customer demand trends affecting net sales; (ii) increased tariffs or other changes in U.S. trade policy related to imported products; (iii) supply chain disruptions; (iv) rising interest rates and inflation; and (v) geopolitical events (including conflicts in Ukraine and the Middle East). These factors could cause delays in receipt of payment on accounts receivable and could increase cash disbursements due to rising prices.

By Geographic Area

A summary of our cash by geographic area follows:

Common Stock Repurchase Program

In March 2020, our board of directors approved an authorization for us to acquire up to $5.0 million of our common stock. Under the common stock repurchase program, shares may be repurchased from time to time in open market transactions, block trades, through plans established under the Securities Exchange Act Rule 10b5-1, or otherwise. The number of shares purchased and the timing of such purchases are based on working capital requirements, market and general business conditions, and other factors.

During fiscal 2026 and fiscal 2025, we did not repurchase any shares of our common stock. As of May 3, 2026, $3.2 million was available for additional repurchases of our common stock. Despite the current share repurchase authorization, the company does not expect to repurchase any shares through at least the first quarter of fiscal 2027.

Dividend Program

On June 29, 2022, our board of directors announced the decision to suspend the company's quarterly cash dividend. We believed that preserving capital and managing our liquidity was in the company's best interest to support future growth and the long-term interests of our shareholders. Accordingly, we did not make any dividend payments during fiscal 2026 or fiscal 2025.

Tariffs

Beginning in early 2025, the U.S. government imposed tariffs under the International Emergency Economic Powers Act ("IEEPA"). In February 2026, the U.S. Supreme Court invalidated certain tariffs imposed under IEEPA, and we filed a claim seeking reimbursement for approximately $7.0 million that we had paid under the invalidated tariffs. We received payment for the full amount claimed during the first quarter of fiscal 2027. See Note 14 of the consolidated financial statements for further details.

Working Capital

Operating Working Capital

Operating working capital (the total of accounts receivable and inventories, less deferred revenue, less accounts payable-trade, and less accounts payable-capital expenditures) was $41.6 million as of May 3, 2026, compared with $43.4 million as of April 27, 2025. Operating working capital turnover was 4.9 during the fourth quarter of fiscal 2026, compared with 5.7 during the fourth quarter fiscal 2025.

Accounts Receivable

Accounts receivable was $20.4 million as of May 3, 2026, a decrease of $1.5 million, or 6.8%, compared with $21.8 million as of April 27, 2025. This decrease primarily reflects faster payment trends with key bedding customers that had shorter credit terms and utilized more discounts, as well as a substantial payment from a significant customer in the upholstery segment during the fourth quarter of fiscal 2026, which payment did not occur during the fourth quarter of fiscal 2025. Accordingly, days' sales outstanding decreased to 35 days for the fourth quarter of fiscal 2026, from 40 days for the fourth quarter of fiscal 2025.

Inventory

Inventory was $47.5 million as of May 3, 2026, a decrease of $1.8 million, or 3.7%, compared with $49.3 million as of April 27, 2025. This decrease was primarily due to improved alignment of inventory purchases with current customer demand trends and a strategic focus on reducing aged inventory. Inventory turns were 3.7 for the fourth quarter of fiscal 2026, as compared with 3.3 for the fourth quarter of fiscal 2025.

Accounts Payable-Trade

Accounts payable - trade was $25.7 million as of May 3, 2026, a decrease of $1.6 million, or 5.8%, compared with $27.3 million as of April 27, 2025. This trend stems from a decrease in inventory purchases during the fourth quarter of fiscal 2026, as compared with the fourth quarter of 2025, driven by improved alignment of inventory purchases with current customer demand trends, as well as our cost reduction initiatives in connection with our restructuring activities announced on April 24, 2025 (see Note 10 of the consolidated financial statements for further details).

Financing Arrangements, Commitments and Contingencies, and Contractual Obligations

Line of Credit Agreements - Overview

Currently, we have line of credit agreements with banks related to our U.S. parent company and our operations located in China. We had outstanding borrowings associated with our line of credit agreements totaling $19.1 million as of May 3, 2026, of which $12.1 million and $7.0 million were reported in lines of credit-current and lines of credit-long-term, respectively, in the Consolidated Balance Sheet. Our loan agreements require, among other things that we maintain compliance with certain financial covenants. As of May 3, 2026, we were in compliance with these financial covenants. Refer to Note 11 of the consolidated financial statements for further disclosures regarding our line of credit agreements, which includes a Third Amendment and Fourth Amendment to our U.S. revolving credit agreement effective June 12, 2025.

Revolving Credit Agreement - United States

On June 12, 2025, Culp, Inc., as borrower, and Read and Culp Fabrics Global, LLC, each a wholly-owned domestic subsidiary of the company, as guarantors (collectively, the "Guarantors"), entered into a Third Amendment to the Second Amended and Restated Credit Agreement (the "Third Amendment"), by and among the company, the Guarantors and Wells Fargo Bank, National Association, as lender (the "Lender"). The Third Amendment amended the Second Amended and Restated Credit Agreement dated as of January 19, 2023, (as amended, restated, supplemented, or otherwise modified from time to time, the "Credit Agreement"), an asset-based revolving credit facility (the "ABL Facility"). Proceeds from the ABL Facility may be used to pay fees and expenses related to the ABL Facility and to provide funding for ongoing working capital and general corporate purposes. Pursuant to the Third Amendment, the term of the ABL Facility was extended for three years and matures on June 12, 2028.

The ABL Facility may be used for revolving credit loans and letters of credit from time to time up to a maximum principal amount of $30.0 million, which may be increased upon mutual agreement by up to $10.0 million via an accordion feature, subject to the limitations described below. The Fourth Amendment to the Second Amended and Restated Credit Agreement, dated November 4, 2025, increased the aggregate amount of letters of credit that could be issued by the company under the ABL Facility from $2.0 million to $3.0 million.

The amount available under the ABL Facility is limited by a borrowing base consisting of certain eligible accounts receivable and inventory, reduced by specified reserves, as follows:

i) the sum of:

In each case, the net-orderly-liquidation value is calculated based on the lower of (i) a first-in first-out basis and (ii) market value, and is (A) net of intercompany profits, (B) net of write-ups and write-downs in value with respect to currency exchange rates and (C) consistent with most recent appraisals received and acceptable to Lender.

ii) $20.0 million; and

iii) An amount equal to 200% of eligible accounts receivable.

The ABL Facility permits both base rate borrowings and borrowings that bear interest at annual rate equal to daily simple SOFR (the secured overnight financing rate administered by the Federal Reserve Bank of New York (or its successor)), in each case, plus an Applicable Margin equal to: (i) 75 basis points for base rate borrowings and 175 basis points for SOFR-based borrowings (if the average monthly excess availability under the ABL Facility is greater than 66 2/3%), (ii) 100 basis points for base rate borrowings and 200 basis points for SOFR-based borrowings (if the average monthly excess availability under the ABL Facility is less than or equal to 66 2/3% and greater than 33 1/3%), or (iii) 125 basis points for base rate borrowings and 225 basis points for SOFR-based borrowings (if the average monthly excess availability under the ABL Facility is less than or equal to 33 1/3%), as applicable, with a fee on unutilized commitments at an annual rate of 37.5 basis points (if usage is equal to or greater than 50% of the maximum credit available under the ABL Facility) or 50 basis points (if usage is less than 50% of the maximum credit available under the ABL Facility).

Outstanding balances associated with the ABL Facility may be prepaid from time to time, in whole or in part, without a prepayment penalty or premium. In addition, customary mandatory prepayments of the loans under the ABL Facility are required upon the occurrence of certain events including, without limitation, outstanding borrowing exposures exceeding the borrowing base and certain dispositions of assets outside of the ordinary course of business. Accrued interest is payable monthly in arrears.

The company's obligations under the ABL Facility (and certain related obligations) are: (a) guaranteed by the Guarantors and each of the company's future domestic subsidiaries is required to guarantee the ABL Facility on a senior secured basis (such guarantors and the company, the "Loan Parties") and (b) secured by all assets of the Loan Parties, subject to certain exceptions. The liens and other security interests granted by the Loan Parties on the collateral for the benefit of the Lender under the ABL Facility are, subject to certain permitted liens, first-priority.

Cash Dominion. Under the terms of the ABL Facility, if: (i) an event of default has occurred or (ii) excess borrowing availability under the ABL Facility (based on the lesser of $30.0 million and the borrowing base) (the "Excess Availability") falls below $6.0 million at such time, the Loan Parties will become subject to cash dominion, which will require prepayment of loans under the ABL Facility with the cash deposited in certain deposit accounts of the Loan Parties, including a concentration account, and will restrict the Loan Parties' ability to transfer cash from their concentration account. Such cash dominion period shall end when Excess Availability shall be equal to or greater than $6.0 million for a period of 60 consecutive days and no event of default is continuing.

Financial Covenants. The ABL Facility contains a springing covenant requiring that the company's fixed charge coverage ratio be no less than 1.10 to 1.00 during any period that: (i) an event of default has occurred or (ii) Excess Availability under the ABL Facility falls

below $4.5 million at such time. Such compliance period shall end when Excess Availability shall be equal to or greater than $4.5 million for a period of 60 consecutive days and no event of default is continuing.

Affirmative and Restrictive Covenants. The Credit Agreement governing the ABL Facility contains customary representations and warranties, affirmative and negative covenants (subject, in each case, to exceptions and qualifications) and events of defaults, including covenants that limit the company's ability to, among other things:

The applicable interest rate under the ABL Facility was 5.64% and 5.78% as of May 3, 2026, and April 27, 2025, respectively.

There were $2.8 million, and $925,000 of outstanding letters of credit provided by the ABL Facility as of May 3, 2026, and April 27, 2025, respectively. As of May 3, 2026, we had $225,000 remaining for the issuance of additional letters of credit, based on an aggregate letters of credit amount not to exceed $3 million as stated in the Credit Agreement.

As of May 3, 2026, and April 27, 2025, the outstanding balances under the Credit Agreement were $7.0 million and $4.6 million, respectively, and were classified as line of credit - long-term within the Consolidated Balance Sheets.

As of May 3, 2026, our available borrowings calculated under the provisions of the Credit Agreement totaled $14.5 million.

Credit Agreements - China Operations

Agricultural Bank of China ("ABC") Agreements

Supplier Financing Arrangements

Based on the company's request, certain suppliers entered into supply chain financing arrangements during fiscal 2026 and 2025. As a result, we were able to extend our payment terms beyond those that are normal and customary. The suppliers that entered into these supply chain financing arrangements assigned their receivables due from the company to ABC, under a reverse factoring agreement with no recourse, and, in turn, received payments from ABC under terms that are normal and customary. Interest was charged at a fixed rate of 2.42% and 2.72% for supply chain arrangements that were entered into during fiscal 2026 and fiscal 2025, respectively. The outstanding balances of $1.9 million and $2.8 million USD were recorded within lines of credit-current in the Consolidated Balance Sheet as of May 3, 2026 and April 27, 2025, respectively.

The following summarizes the activity associated with our supply chain financing arrangements for the years ended May 3, 2026, and April 27, 2025:

ABC - Working Capital Loans

Executed May 2025

During the first quarter of fiscal 2026, we entered into unsecured loan agreements totaling 21.0 million RMB ($3.1 million USD as of

May 3, 2026), which agreements expired on dates ranging from May 7, 2026, through May 25, 2026 and were paid in full. Interest charged under these agreements was based on rates determined by ABC (applicable interest rates ranged from 2.5% to 2.6% as of May 3, 2026). The outstanding balance associated with these agreements was $3.1 million USD and was classified as lines of credit - current within the Consolidated Balance Sheet as of May 3, 2026.

During the first quarter of fiscal 2027, we entered into new unsecured agreements totaling 21.0 million RMB ($3.1 million USD as of borrowing dates ranging from May 21, 2026 through May 26, 2026), and which agreements expire on dates ranging from May 20, 2027, through May 25, 2027. Currently, interest charged under these agreements is based on an applicable interest rate of 2.3%.

Effective March 2026

Effective March 3, 2026, we entered into an additional unsecured loan agreement totaling 29 million RMB ($4.2 million USD as of May 3, 2026), which agreement is set to expire on March 1, 2027. Interest charged under this agreement is based on an applicable interest rate of 2.4%. The outstanding balance under this agreement was $4.2 million USD and was classified as lines of credit - current within the Consolidated Balance Sheet as of May 3, 2026.

Unsecured Credit Agreement

Effective March 5, 2025, we entered into an unsecured credit agreement that provided for a line of credit up to 29.0 million RMB ($4.0 million USD on March 5, 2025) that expired and was paid in full on March 3, 2026. Interest charged under this agreement was based on an applicable interest rate of 2.6%. This agreement did not have an outstanding balance as of May 3, 2026, and had a balance of $4.0 million as of April 27, 2025, which was classified within lines of credit-current in the respective Consolidated Balance Sheet.

Bank of China ("BOC") - Credit Agreements

Effective November 5, 2024, we entered into a credit agreement that provided for a 10.0 million RMB ($1.4 million USD as of November 5, 2024) unsecured working capital loan and 25.0 million RMB ($3.5 million USD as of November 5, 2024) for letters of credit, guarantees, and other financing arrangements secured by trade accounts receivable associated with the company's operations located in China. The working capital loan and letters of credit expired on November 6, 2025. Interest charged under this agreement was 2.6%.

On November 6, 2025, (third quarter of fiscal 2026), we paid in full the outstanding balance of the 10.0 million RMB ($1.4 million USD) due pursuant to the above unsecured working capital loan. Effective November 7, 2025, we entered into a new credit agreement that provides for a 10.0 million RMB ($1.5 million USD as of May 3, 2026) unsecured working capital loan and 25.0 million RMB ($3.7 million USD as of May 3, 2026) for letters of credit, guarantees, and other financing arrangements secured by trade accounts receivable associated with the company's operations located in China. The working capital loan and letters of credit expire on November 11, 2026. Interest is charged based on a fixed rate of 2.5%. The outstanding balance under these agreements was $1.5 million and $1.4 million USD and were classified as lines of credit-current within the Consolidated Balance Sheets as of May 3, 2026 and April 27, 2025, respectively. In addition, as of May 3, 2026, there were no outstanding letters of credit under this agreement.

China Construction Bank Corporation ("CCB") - Credit Agreement

During the third quarter of fiscal 2026, CCB approved total borrowings of 30.0 million RMB ($4.4 million USD as of May 3, 2026), which includes 20.0 million RMB ($2.9 million USD as of May 3, 2026) that can be used in the form of a working capital loan and supplier financing agreements, as well as a 10.0 million RMB ($1.5 million USD as of May 3, 2026) for letters of credit. Effective March 17, 2026, we borrowed 10.0 million RMB ($1.4 million USD as of March 17, 2026), which borrowing incurs interest based on a fixed rate of 2.3%, with the balance due on March 16, 2027. The outstanding balance under this agreement was $1.5 million as of May 3, 2026, which was classified as lines of credit - current within the Consolidated Balance Sheet.

Leases

Refer to Note 13 of the consolidated financial statements for disclosure of our lease obligations, which includes a five-year maturity schedule.

Capital Expenditures

As of May 3, 2026, and April 27, 2025, we had total amounts due regarding capital expenditures totaling $236,000 and $23,000, respectively, which pertained to outstanding vendor invoices, none of which were financed.

As of May 3, 2026, we had open purchase commitments to acquire equipment for our bedding operations totaling $352,000.

Uncertain Income Tax Positions

As of May 3, 2026, we had $983,000 of total gross unrecognized tax benefits, which primarily relate to taxation under applicable income tax treaties with foreign tax jurisdictions. The outcome of these income tax uncertainties is dependent upon various matters including tax examinations, legal proceedings, competent authority proceedings, changes in regulatory tax laws, or interpretations of those tax laws, or expiration of statutes of limitation. As a result of these inherent uncertainties, we cannot reasonably estimate the timing of payment on this amount, if any.

Capital Expenditures and Depreciation Expense

Capital expenditures on a cash basis totaled $596,000 for fiscal 2026 and $2.9 million for fiscal 2025. Our decision to reduce our level of capital expenditures is due to the current unfavorable macroeconomic conditions within the home furnishings and bedding industries.

During fiscal 2026, we reported depreciation expense of $4.1 million, compared with $5.4 million for the same period a year ago, which was mostly related to our bedding segment for both periods. In addition, during fiscal 2026 we reported accelerated depreciation of $112,000 that was classified within restructuring credit in the fiscal 2026 Consolidated Statement of Net loss. The $112,000 of accelerated depreciation related to the shortening of useful lives of equipment associated with the consolidation of distribution activities from our Burlington, North Carolina, facility to our manufacturing and distribution center located in Stokesdale, North Carolina. Furthermore, during fiscal 2025, we reported accelerated depreciation of $1.3 million that was classified within restructuring expense in the fiscal 2025 Consolidated Statement of Net Loss. This $1.3 million of accelerated depreciation related to the shortening of useful lives of equipment associated with the closure of our operations located in Quebec, Canada. See Note 10 of the consolidated financial statements for further details and descriptions of our restructuring activities announced on May 1, 2024 and April 24, 2025.

The level of capital spending for fiscal 2027 will be determined based on the current macroeconomic conditions associated with the home furnishings and bedding industries. We currently expect capital spending for fiscal 2027 to be in line with fiscal 2026, and will center on capital projects that increase efficiencies, improve the quality of our products, and facilitate future growth. Funding for capital expenditures is expected to be from cash provided primarily by operating activities and, as needed, availability under our lines of credit.

Handling Costs

We record warehousing costs in SG&A expenses. Handling costs were $4.2 million and $4.6 million during fiscal 2026 and fiscal 2025, respectively. Warehousing costs include the operating expenses of our various finished goods distribution centers, such as personnel costs, utilities, building rent, material handling equipment, and lease expense. Had these costs been included in cost of sales, gross profit would have been $20.9 million, or 10.3% of net sales, during fiscal 2026, and $20.4 million, or 9.6% of net sales, during fiscal 2025.

Inflation

A meaningful rise in raw material, utility, energy or other costs, as well as broader economic inflation, could materially and adversely affect our operating results. Competitive market dynamics have traditionally constrained our ability to fully offset such cost increases through price adjustments to customers.

In fiscal 2023 and 2024, raw material prices declined, primarily due to lower oil prices and softening global demand. However, both years were marked by persistent challenges associated with elevated labor costs and limited labor availability. While raw material and labor costs stabilized through fiscal 2024 and the first half of fiscal 2025, recent developments such as global trade negotiations and the implementation of new tariffs and import restrictions beginning in the fourth quarter of fiscal 2025, as well as rising oil prices beginning in the fourth quarter of fiscal 2026, have influenced industry pricing structures and supply chain patterns. These evolving conditions are expected to continue placing upward pressure on our raw material costs. In addition, energy prices have demonstrated substantial volatility in recent fiscal years and continue to represent an unpredictable element of our cost structure.

In recent periods, we implemented price increases designed to mitigate the impacts of recent tariff actions affecting products imported into the U.S., including those imported from China, as well as additional surcharges in response to new tariffs on imports from Haiti, Turkey, and elsewhere. The majority of these price increases began to phase in and become effective as of the second quarter of fiscal 2026, and we believe that our current pricing strategies position us to effectively absorb the additional costs flowing from applicable tariffs. However, the above-referenced dynamics may ultimately lead to higher input costs, with potential adverse implications for our financial performance.

Additionally, we implemented price increases designed to mitigate the impacts of rising oil and other petrochemical costs during the fourth quarter of fiscal 2026. However, ongoing conflicts in the Middle East and other factors may lead to additional costs arising from

increases in oil and other petrochemical prices, which may harm our results of operations if we are unable to pass along such additional costs.

Finally, persistent inflationary pressures significantly curtailed consumer spending during fiscal 2023, with effects extending through fiscal 2026. This economic environment contributed to a broader slowdown in both the mattress and residential home furnishings markets, leading to lower demand from home furnishings manufacturers for our bedding and residential upholstery across this period. The duration and future impact of these trends remain uncertain, and it is difficult to predict how inflationary conditions may continue to influence consumer behavior and the broader economic cycle for home furnishings products over the near and long term.

Critical Accounting Estimates

U.S. generally accepted accounting principles require us to make estimates and assumptions that affect our reported amounts in the consolidated financial statements and accompanying notes. Our estimates are based on: (i) currently known facts and circumstances, (ii) prior experience, (iii) assessments of probability, (iv) forecasted financial information, and (v) assumptions that management believes to be reasonable but that are inherently uncertain and unpredictable. We use our best judgment when measuring these estimates, and if warranted, use external advice. Due to the uncertain and unpredictable nature of our estimates, actual results could differ from the estimates that were previously reported in our consolidated financial statements.

As of May 3, 2026, we believe the following list represents our critical accounting estimates that have or are reasonably likely to have a material effect on our financial condition or results of operations. Refer to Note 1 of the consolidated financial statements for discussion of all of our significant accounting policies, including our critical accounting policies.

Inventory Valuation

We operate as a "make-to-order" and "make-to-stock" business. Although management closely monitors demand for each product category to decide which patterns and styles to hold in inventory, the availability of low-cost imported products, shifts in consumer preferences and styles, and increased tariffs or other changes in U.S. trade policy related to imported products subject the company to markdowns of inventory.

Management continually examines inventory to determine if there are indicators that the carrying value exceeds its net realizable value. Historical experience has shown that the most significant indicators that would require inventory markdowns are the age of the inventory and the planned discontinuance of certain fabric patterns. As a result, we provide inventory valuation markdowns based upon established percentages associated with the age of inventory that are continually evaluated and determined based on historical experience and judgment. Also, we provide inventory valuation markdowns associated with restructuring activities and on the planned discontinuance of certain patterns based on the current market values at that time of assessment as compared to their current carrying values. While management believes that adequate markdowns for inventory have been made in the consolidated financial statements, significant unanticipated changes in demand or changes in consumer tastes and preferences could result in additional inventory markdowns in the future.

As of May 3, 2026, we assessed the percentages associated with the age of our inventory and the related aging categories. Based on this assessment, we determined that no changes to our percentages associated with the age of our inventory and the related aging categories were necessary. During the fourth quarter of fiscal 2025, we performed an assessment based on the change in current market trends related to extended life cycles for finished goods inventory. As a result of our assessment, we recorded a non-cash inventory credit of $1.7 million due to a change in accounting estimate related to the finished goods inventory markdown reserve. This $1.7 million non-cash inventory credit was recorded within cost of sales in our fiscal 2025 Consolidated Statement of Net Loss.

Based on the above policy, we recorded a non-cash inventory charge of $2.1 million and a non-cash inventory credit of $(2.4) million, respectively, within the fiscal 2026 and fiscal 2025 Consolidated Statements of Net Loss. As of May 3, 2026, and April 27, 2025, the reserve for inventory markdowns was $8.0 million and $7.8 million, respectively.

Income Taxes - Valuation Allowance

We evaluate the realizability of our deferred income taxes to determine if a valuation allowance is required. We are required to assess whether a valuation allowance should be established based on the consideration of all available evidence using a "more-likely-than-not" standard, with significant weight being given to evidence that can be objectively verified. Since the company operates in multiple jurisdictions, we assess the need for a valuation allowance on a jurisdiction-by-jurisdiction basis, considering the effects of local tax law.

To determine if a valuation allowance is required or needs to be subsequently reversed, we use significant judgment when considering the effect of all positive and negative evidence identified and giving weight to that evidence. The weight given to the potential effect of positive and negative evidence is based on the extent to which it can be objectively verified. Our judgments are often based on estimates that are derived from (i) forecasted financial information, (ii) assumptions on when certain taxable or deductible events will occur, and (iii) interpretation of complex income tax laws and regulations.

As of May 3, 2026, we recorded a full valuation allowance against all our U.S. net deferred income tax assets totaling $28.7 million.

Refer to Note 12 of the consolidated financial statements for additional disclosures regarding our assessments and conclusions reached regarding our valuation allowance as of May 3, 2026.

Stock-Based Compensation

We are required to recognize compensation expense based on the fair value on the date the respective stock award is granted.

Compensation expense for performance-based restricted stock units is recognized based on an assessment each reporting period of the probability of whether or not certain performance targets will be met and how many shares are expected to be earned as of the end of the vesting period. If certain targets are not expected to be achieved, compensation expense will not be recorded, and any previously recognized compensation expense will be reversed. Determining the probability of the vesting of our performance-based restricted stock units requires judgment, including assumptions used to forecast future financial results. While our forecasts of future financial results represent management's best estimates, these forecasts involve inherent uncertainties. As a result, if we revised our assumptions and estimates during the vesting period, our stock-based compensation expense could be materially different than previously expected.

During fiscal 2026, the company granted performance-based restricted stock units that did not have any market conditions (i.e., no TSR moderator). During fiscal 2025, the company granted performance-based restricted units that had a market condition (i.e., a TSR moderator), and accordingly, we estimated the fair value of such performance-based restricted stock units using a Monte Carlo valuation model. The Monte Carlo valuation model incorporates inputs and complex assumptions that include: (i) the closing price of our common stock at the respective grant date, (ii) expected volatility of our common stock, (iii) expected volatility and correlation coefficient of our peer companies that are approved by the Compensation Committee of our board of directors, (iv) risk-free interest rate, and (v) dividend yield. The determination of these inputs, complex assumptions used, and the application of the Monte Carlo valuation model, requires significant judgment by management and advice from an external advisor.

We recorded $625,000 and $650,000 of compensation expense within selling, general, and administrative expense for our equity-based awards in fiscal 2026 and 2025, respectively.

Adoption of New Accounting Pronouncements

Refer to Note 1 of the consolidated financial statements for recently adopted accounting pronouncements for fiscal 2026.

Recently Issued Accounting Standards

Refer to Note 1 of the consolidated financial statements for recently issued accounting pronouncements for fiscal 2026 and beyond.