Earnings call transcript: Karat Packaging Q2 2025 beats estimates, stock dips

Karat Packaging Inc. reported its second-quarter earnings for 2025, surpassing both earnings per share (EPS) and revenue forecasts. The company posted an EPS of $0.57, narrowly beating the forecast of $0.56. Revenue reached $124 million, slightly above the $123.97 million estimate. Despite these positive results, Karat Packaging’s stock fell 0.82% in after-hours trading, closing at $26.74, as investors digested the broader market context and future guidance. According to InvestingPro analysis, the stock appears slightly undervalued based on its Fair Value calculation, with analysts setting a target price of $35.

Key Takeaways

• Karat Packaging’s Q2 2025 EPS and revenue exceeded analyst expectations.
• Stock price fell by 0.82% in after-hours trading.
• The company saw a 10.1% year-over-year increase in net sales.
• Strategic initiatives include reducing reliance on China and expanding e-commerce.
• Future guidance remains optimistic with anticipated double-digit sales growth.

Company Performance

Karat Packaging demonstrated robust performance in Q2 2025, with net sales climbing 10.1% year-over-year to $124 million. The company’s net income rose by 19.8%, reflecting strong operational efficiency and effective cost management. This performance is particularly notable given the challenging economic environment and competitive pressures within the packaging industry. InvestingPro data shows the company maintains strong financial health with a current ratio of 2.86 and operates with a moderate debt level, as highlighted in their comprehensive Pro Research Report, available to subscribers.

Financial Highlights

• Revenue: $124 million, up 10.1% year-over-year
• Earnings per share: $0.57, above the forecast of $0.56
• Net income: $11.1 million, a 19.8% increase from the previous year
• Adjusted EBITDA: $17.7 million, representing a 14.3% margin

Earnings vs. Forecast

Karat Packaging’s EPS of $0.57 surpassed the forecasted $0.56, marking a 1.79% surprise. Revenue also slightly exceeded expectations, coming in at $124 million against a $123.97 million forecast. This positive earnings surprise is consistent with the company’s historical trend of outperforming expectations, albeit the margin of the beat was modest compared to previous quarters.

Market Reaction

Despite exceeding earnings and revenue forecasts, Karat Packaging’s stock declined by 0.82% in after-hours trading, closing at $26.74. This movement may reflect broader market conditions or investor caution regarding future growth prospects. The stock remains within its 52-week range of $23 to $33.89, indicating potential volatility ahead.

Outlook & Guidance

Looking forward, Karat Packaging expects Q3 2025 net sales to increase by 9-10%, with gross margins projected in the low-to-mid 30% range. The company maintains its full-year 2025 guidance, anticipating double-digit sales growth and new business wins from national chains. These projections underscore the company’s confidence in sustaining growth through strategic initiatives. InvestingPro subscribers can access additional insights, including 8 more ProTips and detailed financial metrics that show the company’s impressive 5-year revenue CAGR of 13% and consistent dividend growth over the past three years. The Pro Research Report provides comprehensive analysis of KRT’s growth trajectory and competitive position.

Executive Commentary

CEO Alan Yu emphasized the company’s strategic shift in sourcing, stating, "We are swiftly diversifying our sourcing footprint, reducing reliance on China to just 10% in the second quarter." He also highlighted the importance of mergers and acquisitions, noting, "Our goal with M&A is basically strategically, it has to be either location or client base or item that we do not currently carry."

Risks and Challenges

• Supply Chain: Continued diversification is crucial to mitigate risks associated with reliance on China.
• Market Saturation: Intensifying competition could pressure margins and growth.
• Economic Conditions: Macro-economic pressures may affect consumer demand and pricing power.
• Regulatory Changes: Potential changes in trade policies could impact sourcing strategies.
• E-commerce Transition: Shifting to own platforms requires significant investment and operational adjustments.

Q&A

During the earnings call, analysts inquired about pricing strategies and online sales growth. CEO Alan Yu addressed these concerns, indicating that pricing is expected to be breakeven in the second half, while online sales are projected to continue their upward trajectory.

Full transcript - Karat Packaging Inc (KRT) Q2 2025:

Conference Call Operator: Good afternoon, everyone, and welcome to the Carrot Packaging Inc. Second Quarter twenty twenty five Earnings Conference Call. All participants will be in a listen only mode. Please also note today’s event is being recorded. At this time, I’d like to turn the floor over to Roger Pondell.

Sir, please go ahead.

Roger Pondell, Investor Relations Representative, Pondell Wilkinson: Good afternoon, everyone, and welcome to Carrot Packaging’s twenty twenty five second quarter conference call. I’m Roger Pondell with Pondell Wilkinson, Care Packaging’s Investor Relations firm. It will be my pleasure momentarily to introduce the company’s Chief Executive Officer, Alan Yu and its Chief Financial Officer, Jan Go. Before I turn the call over to Alan, I want to remind our listeners that today’s call may include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward looking statements are subject to numerous conditions, many of which are beyond the company’s control, including those set forth in the Risk Factors section of Kerris’ most recent Form 10 ks as filed with the Securities and Exchange Commission, copies of which are available on the SEC’s website at www.sec.gov, along with other company filings made with the SEC from time to time.

Actual results could differ materially from these forward looking statements and Carrot Packaging undertakes no obligation to update any forward looking statements except as required by law. Please also note that during today’s call, we will be discussing adjusted EBITDA, adjusted EBITDA margin, adjusted diluted earnings per share and free cash flow, which are non GAAP financial measures as defined by SEC Regulation G. A reconciliation of the most recently comparable GAAP measures to the non GAAP financial measures is included in today’s press release, which is now posted on the company’s website. And with that, I will turn the call over to CEO, Alan Yu. Alan?

Alan Yu, Chief Executive Officer, Carrot Packaging: Thank you, Roger. Good afternoon, everyone. We achieved a record second quarter performance marked by a 13% increase in sales volume, 10% growth in net sales and 20% growth in net income year over year. Despite a significant foreign currency headwind due to sudden substantial weakening in the U. S.

Dollar against New Taiwan dollar. Heading into the third quarter, we continue to diversify our global sourcing and expanding to new countries and geographies. And we see the currency pressure starting to ease. Our record quarter performance is a testimony to Cara’s nimble business model and resilient global supply chain, which allow us to early success in navigating the supply chain disruption and trade uncertainties. We are swiftly diversifying our sourcing footprint, reducing reliance on China to just 10% in the second quarter, while implementing plans to further expand our sourcing across other Asian countries and Latin America to enhance supply chain resilience and flexibilities.

In addition to the sourcing diversification, Carrot’s ability to quickly ramp up existing domestic manufacturing operations enable us to respond rapidly to customers’ needs. Together, these action have further enhanced our agility and competitiveness, and are helping us to secure new business and position the company well for sustained growth in a challenging external environment. Business trend remains strong. As we proceed to the third quarters and the remainder of the 2025 and continued double digit sales growth across of our major markets, including California further, with the new business wins from a number of large national chains are scheduled to begin shipping in the third and fourth quarters. Our new distribution center near our Chino headquarters is now fully operational, significantly strengthening our logistic capabilities and enabling even faster delivery time.

This facility also supported inventory buildup during the second quarter, positioning us well to accommodate our anticipated growth in the second half of the year. As previously announced, we implemented price increases for select products on April 1, followed by broader price adjustment across most of our product lines in late May. We continue to assess the impact of these changes along with potential effects from the new tariffs effective in August. Carrot remains focused on accelerating top line growth and profitability through product innovation, strategic expansion and a track record of being a dependable supplier to our customers. At the same time, we continue to drive operational efficiencies through disciplined cost management.

In the second quarter, we improved our operating cost leverage saving $1,000,000 in online shipping and marketing by switching provider even as shipping volume increase. We also shifted our online sales focus from third party platform fulfillment to our own ecommerce storefronts, lowering online selling cost and more effectively utilizing online marketing dollars. These efforts reflect our ongoing focus on balancing growth with profitability and building long term operational resilience. We believe Carrot is well positioned for continued profitable growth. And I will now turn the call over to Jan Guo, our Chief Financial Officer, to discuss the company’s financial results in greater detail.

Jan?

Jan Go/Jan Guo, Chief Financial Officer, Carrot Packaging: Thank you, Alan. I’ll begin with a summary of our Q2 performance, followed by an update on our guidance. Net sales for twenty twenty five second quarter were $124,000,000 up 10.1% from $112,600,000 in the prior year quarter. The increase was primarily driven by year over year volume growth of 13%, partially offset by 3,300,000 in unfavorable pricing as chains and distributors growth outpaced online and retail channels. Sales to chain accounts and distributors were up by 11.4%.

Online sales increased 6.8% over the prior year quarter, reflecting our continued focus on expanding this high margin category. Sales to the retail channel turned positive with an increase of 1.9%. Cost of goods sold for the twenty twenty five second quarter was $74,900,000 compared with $69,200,000 in the twenty twenty four second quarter. The increase primarily reflected $4,000,000 of higher product costs resulting from increased sales volume. This was partially offset by more favorable vendor pricing and product mix.

Additionally, ocean freight and duty costs rose by $2,100,000 due to higher import duty costs impacted by the recent tariffs, coupled with an increase in import volume of 37% as we increased inventory ahead of expected business expansion during the 2025. At the same time, average ocean container rates during the twenty twenty five second quarter decreased four point zero percent year over year. Gross profit for the twenty twenty five second quarter increased 13.1% to $49,100,000 from $43,400,000 in the prior year quarter. Gross margin increased 110 basis points to 39.6 compared with 38.5% in the prior year quarter. Gross margin benefited from lower product costs as a percentage of net sales, mainly due to more favorable vendor pricing and product mix and reduction in depreciation expense as a percentage of net sales.

These improvements were partially offset by higher ocean freight and duty costs as a percentage of net sales increased to 9.5% during the twenty twenty five second quarter versus 8.6% during the twenty twenty four second quarter. Operating expenses for the twenty twenty five second quarter were $32,600,000 compared with $32,300,000 in the prior year quarter. The increase was mainly due to higher shipping and transportation costs for offline orders from increased shipping volume, increased rent and higher salaries and benefits. These increases were partially offset by a decrease in shipping costs for online orders despite the increase in online orders shipped, online platform fees, lower marketing expense, stock based compensation and a gain recognized from disposal of machinery and equipment. Operating income in the twenty twenty five second quarter increased 48.9 percent to $16,600,000 from $11,100,000 in the prior year quarter.

Total other expense net was $2,000,000 for the twenty twenty five second quarter compared with other income net of $1,000,000 in the prior year quarter. The difference was primarily due to a loss on foreign currency transactions of $2,900,000 compared with a gain of $300,000 during the twenty twenty four second quarter. Net income for the twenty twenty five second quarter increased 19.8 to $11,100,000 from $9,200,000 for the prior year quarter. Net income margin was 8.9% in the twenty twenty five second quarter compared with 8.2% a year ago. Net income attributable to Carrot for the twenty twenty five second quarter was $10,900,000 or $0.54 per diluted share compared with $9,100,000 or $0.45 per diluted share in the prior year quarter.

Adjusted EBITDA for the twenty twenty five second quarter was 17,700,000 compared with $15,700,000 for the prior year quarter. Adjusted EBITDA margin was 14.3% of net sales for the twenty twenty five second quarter compared with 13.9% for the prior year quarter. Adjusted diluted earnings per common share was $0.57 for the twenty twenty five second quarter compared with $0.49 for the same quarter last year. We generated operating cash flow of $9,800,000 in the second quarter and ended the quarter with $116,800,000 in working capital. Our free cash flow was $9,600,000 in the second quarter.

As of 06/30/2025, we had financial liquidity of $44,700,000 with another $26,400,000 in short term investments. On 08/05/2025, our Board of Directors approved a quarterly dividend of $0.45 per share, payable 08/27/2025 to stockholders of record as of 08/20/2025. Looking ahead, we expect net sales for the twenty twenty five third quarter to increase by approximately 9% to 10% over the prior year quarter. We expect our gross margin for the twenty twenty five third quarter to be in the low to mid-30s and adjusted EBITDA margin to be within 10 to 12% as our cost of goods sold have begun to reflect inventory brought in with the elevated tariff. Currently, we are maintaining our full year 2025 guidance for net sales, gross margin and adjusted EBITDA margin pending potential impact related to additional tariff changes.

Alan and I now will be happy to answer your questions. And I’ll turn the call back to the operator.

Conference Call Operator: Ladies and gentlemen, at this time, we’ll begin the question and answer

Josh Axel, Analyst, UBS: session.

Conference Call Operator: Our first question today comes from Michael Francis from William Blair. Please go ahead with your question.

Michael Francis/Mike, Analyst, William Blair: Hi, guys. This is Mike on for Ryan. Nice quarter. I wanted to unpack some stuff on the guide, but first I want to start with prices. Was surprised to see price was negative on the quarter, especially with some of the tariff price increases.

So I guess two parts. Why was price negative on the quarter? And then what should we be expecting from the impact of price in the second half?

Alan Yu, Chief Executive Officer, Carrot Packaging: We are currently holding on to the pricing with some minor increases in certain categories. That’s it. Because we’re seeing that there’s more visibility in terms of every country that we import now on the pricing. And also one of the things is that we mitigate it, we will be starting to mitigate our costs by moving some of the products that we source from certain countries from Taiwan into other Asian and Latin America country with lower tariff, as well as the cost of goods purchase has been reducing. So we have some new vendors and vendors that we work with looking to reduce our costs, and that’s going to help us in terms of mitigating any potential tariff increase impact.

Michael Francis/Mike, Analyst, William Blair: Okay, so if I think about that right, with your second half guide that you referred to, Should I be thinking sort of a similar volume growth and price impact that we saw in this quarter and in the third quarter?

Alan Yu, Chief Executive Officer, Carrot Packaging: Jen, would you be able to answer that question?

Jan Go/Jan Guo, Chief Financial Officer, Carrot Packaging: Yes. So to answer your question, Michael, going forward, second half of the year, we do expect pricing to be close to breakeven compared to about a negative three in this quarter.

Michael Francis/Mike, Analyst, William Blair: Okay, understood. And then with that, I noticed that there’s an embedded in the guide, there’s a sequential decline in gross margin. So I wanted to know what the puts and takes of that is. Is it tariffs coming through the P and L? Is it just forward profitability sourcing from other countries?

Just would love to unpack that.

Alan Yu, Chief Executive Officer, Carrot Packaging: Well, currently I would say that the impact, the positive impact of the new sourcing will be hitting, will be actually receiving that impact in the fourth quarter. So right now, third quarter, we are still seeing that some of the tariffs that we brought in quarter, in the second quarters, we’re seeing that with a higher tariff cost. And that should be mitigated in the fourth quarters. So right now we’re trying to see where the how much impact it will be. That’s why we mentioned in the second first quarter, during our first quarter earnings conference call, mentioned that the product brought in in the second quarter will be sold in the third quarters.

So second quarter will have a higher gross margin and third quarter will have a lower gross margin. Also the bigger impact was because many of the products we source from Taiwan had a currency FX loss in terms of devaluation into US dollars that’s causing the increase in some of the cost of goods sold decrease our gross margin as well.

Michael Francis/Mike, Analyst, William Blair: Okay. So if I’m understanding you right, it should be down in the third quarter, but then gross margin should recover some in fourth quarter?

Alan Yu, Chief Executive Officer, Carrot Packaging: Yes, that is my understanding.

Michael Francis/Mike, Analyst, William Blair: Okay. And then last one for me. I just wanted to know what you’re seeing on July trends? And have you seen any sort of free buy from your customers ahead of the August tariffs?

Alan Yu, Chief Executive Officer, Carrot Packaging: We are seeing, especially from some of our national chain account, their sales in July has been very strong. And we have, due to the tariff, we’ve seen several, many of our smaller importer competitors gone, reduced their inventory, and our volume has increased in terms of a certain category that people were sourcing from overseas. So we’re seeing strong demand in terms of July, especially in California. We’re seeing more than double digit sales increase in California market. It started in June and July was basically it followed the trend.

So we’re pretty we we believe that the the revenue volume double digit is very it’s something that we’re, you know, that we’re we know that we can definitely beat it.

Michael Francis/Mike, Analyst, William Blair: Okay. I’ll pass it on. Thanks, guys.

Conference Call Operator: And our next question comes from Josh Axel from UBS. Please go ahead with your question.

Josh Axel, Analyst, UBS: Hi, guys. Hope all is well today.

Alan Yu, Chief Executive Officer, Carrot Packaging: Hi, Josh.

Josh Axel, Analyst, UBS: Hi. Question for you on the online sales. Can you give a little guidance on what you’re thinking for the second half of the year as far as online sales, the kind of growth you’re you’re targeting and what you’re seeing in that area? And then I have one one more question for you.

Alan Yu, Chief Executive Officer, Carrot Packaging: Sure. No problem. We believe online sales will continue to grow, especially we just added a new platform called Cisco Marketplace. That seemed to be doing quite well for us, and it’s basically fulfilled by our own logistic warehouse. We’ve moved away from Amazon FBA fulfillment by third party because the cost was just too high and, there’s a lot of issues in terms of inventory reconciliation.

And by moving away from Amazon FBA, our revenue dropped a little bit, but our margin has gained a lot in terms of margin wise. And, we have better controls of the inventory as well. So we do see, our online sales to grow, continuously, just like we have been in the past month, years.

Josh Axel, Analyst, UBS: Do you think you can get back to double digit, online growth in the second half of the year? Or with losing Amazon, is that going to be a little more difficult?

Alan Yu, Chief Executive Officer, Carrot Packaging: I would think that in the fourth quarter, because we’re the, the Cisco marketplace, we started it just about, three months ago, and it has built a lot of momentum. And we’re adding, we were, we probably had about 500 SKU in the Cisco marketplace, and we’re looking to add another, 750 SKU, this month. So these, definitely will turn into revenue. So we believe that in the fourth quarters, online revenue should be able to go back to double digit growth. Yes.

Josh Axel, Analyst, UBS: Okay, great. And then last question, can you just comment, Alan, on what you’re seeing in the M and A landscape? If you’re looking at anything and if so, what or if maybe prices attractive or just where you are? Thanks.

Alan Yu, Chief Executive Officer, Carrot Packaging: Yes. We have we are still looking at M and A and also we analyzed the current the previous past six months. There has been some a couple of M and merger and acquisition in our packaging space and it seems like the sellers were not getting as much as they were hoping for. But the price is still, I believe, it’s not sure where we believe it should be. And also, of our competitors who bought these acquired the Acquire e, were just to gain the product line and market shares, which we can basically increase our, bring in new SKUs and that we can do it ourselves.

Our goal with M and A is basically strategically, it has to be either location or client base or item that we do not currently carry. So we are still looking at that segment. And also, of course, adding new product lines, that’s what we’ve been doing. In the past, month, we’ve, looking to partnership with other peoples. Discussion has been going on for over, several months in the past with different kind of vendors that we have, to see if there’s any potential that we can work together in terms just like we had in the past with the Burgos manufacturer joint ventures.

So these are the things that we’re looking at. So we’re not just saying that we’re just at one segment. We’re looking at it in different areas.

Josh Axel, Analyst, UBS: Great. Thank you very much, guys.

Alan Yu, Chief Executive Officer, Carrot Packaging: Thank you, Josh.

Conference Call Operator: And with that, ladies and gentlemen, we’ll be concluding today’s question and answer session. I’d like to turn the conference call back over to Alan Yu for any closing comments.

Alan Yu, Chief Executive Officer, Carrot Packaging: Thank you everyone for joining our Care Packaging second quarter earnings conference call. And I would like to say thank you all and have a nice day. Bye bye.

Conference Call Operator: Ladies and gentlemen, with that, we’ll conclude today’s conference call and presentation. We do thank you for joining. You may now disconnect your lines.

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