Earnings call transcript: Karat Packaging Q3 2025 beats earnings expectations

Karat Packaging Inc. reported its Q3 2025 earnings, surpassing analyst expectations with an earnings per share (EPS) of $0.37, compared to the forecasted $0.36. The company also reported a revenue of $124.5 million, slightly above the $124 million forecast. Despite these positive results, Karat Packaging’s stock closed down 5.36% at $25.36 in after-hours trading, reflecting investor concerns over challenges such as increased import costs and a decline in gross margin.

Key Takeaways

• Karat Packaging’s Q3 2025 EPS of $0.37 exceeded forecasts by 2.78%.
• Revenue reached $124.5 million, a 10.4% increase year-over-year.
• Gross margin fell to 34.5% from 38.6% in the previous year.
• Stock price dropped 5.36% in after-hours trading.
• The company is expanding its paperback product line, aiming for significant revenue growth.

Company Performance

Karat Packaging demonstrated robust performance in Q3 2025, driven by a 10.4% year-over-year increase in net sales. The company has been focusing on increasing domestic sourcing and reducing reliance on imports, which have been affected by higher duties and tariffs. Despite these efforts, the gross margin decreased due to these cost pressures. The company remains a leader in the disposable foodservice products market, with a strong presence in the emerging paperback segment.

Financial Highlights

• Revenue: $124.5 million, up 10.4% year-over-year
• Earnings per share: $0.37, a 2.78% surprise over the forecast
• Gross margin: 34.5%, down from 38.6% in the prior year
• Net income: $7.6 million
• Adjusted EBITDA: $13.1 million, representing 10.5% of net sales

Earnings vs. Forecast

Karat Packaging’s actual EPS of $0.37 surpassed the forecasted $0.36, marking a 2.78% positive surprise. Revenue also exceeded expectations, coming in at $124.5 million compared to the anticipated $124 million. This performance reflects the company’s successful pricing strategies and product mix improvements, despite facing higher import costs.

Market Reaction

Following the earnings announcement, Karat Packaging’s stock fell 5.36% in after-hours trading, closing at $25.36. The stock’s decline may be attributed to investor concerns over the company’s reduced gross margin and ongoing cost challenges. The stock remains within its 52-week range, with a high of $33.89 and a low of $22.96.

Outlook & Guidance

For Q4 2025, Karat Packaging anticipates net sales growth of 10-14%, with a projected gross margin between 33-35%. The company is optimistic about its new business pipeline for 2026 and aims to scale its paperback business to generate over $100 million in additional annual revenue.

Executive Commentary

CEO Alan Yu emphasized the company’s strategic focus on expanding its paperback product line, stating, "We aim to scale our paperback business to more than $100 million in additional annual revenue." CFO Jian Guo highlighted the company’s capital allocation strategy, noting, "Our strategy is that if we have more than $20 million in short-term deposit, we can allocate it to dividend, special dividend, or other investments."

Risks and Challenges

• Increased import costs and tariffs impacting profitability
• Decline in gross margin due to cost pressures
• Dependence on market trends for sustainable, eco-friendly products
• Competition in the disposable foodservice products market
• Potential supply chain disruptions

Q&A

During the earnings call, analysts inquired about the potential of the paperback market, gross margin challenges, and the company’s capital allocation strategy. Executives provided insights into their approach to managing costs and enhancing shareholder returns, while also addressing concerns over debt and cash management.

Full transcript - Karat Packaging Inc (KRT) Q3 2025:

Conference Operator: Good day, and welcome to the Karat Packaging Q3 2025 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialists by pressing the star key followed by zero. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Mr. Roger Pondel. Please go ahead, sir.

Roger Pondel, Investor Relations, Pondel Wilkinson: Thank you, Operator. Good afternoon, everyone, and welcome to Karat Packaging’s Q2. Q3 conference call. I’m Roger Pondel with Pondel Wilkinson, Karat Packaging’s investor relations firm. It will be my pleasure momentarily to introduce the company’s Chief Executive Officer, Alan Yu, and his Chief Financial Officer, Jian Guo. 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 factor section of the company’s most recent Form 10-K 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 Karat Packaging undertakes no obligation to update any forward-looking statements except as required by law. Please also note that during this 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 directly 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. With that, I will turn the call over to CEO Alan Yu. Alan.

Alan Yu, Chief Executive Officer, Karat Packaging: Thank you, Roger. Good afternoon, everyone. Despite ongoing trade volatility, Karat achieved another quarter of record net sales, up over 10% year-over-year, fueled by solid volume expansion, a favorable product mix, and effective pricing initiatives. We’ve experienced double-digit growth across all major markets, especially in Texas and California. Even with significantly higher import costs due to increased duties and tariffs, we successfully sustained a gross margin of 34.5% for the Q3. We remain committed to our sourcing diversification strategy, and our nimble and flexible operating model continues to enable us to effectively manage ongoing supply chain challenges. During the Q3, we increased domestic sourcing to approximately 20% from about 15% in the Q2, and we reduced imports from Taiwan to approximately 42% from 58%.

We continue to closely monitor tariff developments and are ready to quickly adjust our sourcing strategy accordingly, as we have done in the past, to maintain Karat’s competitive advantage. Additionally, foreign currency exchange rates between the US dollar and the New Taiwan dollar have shown increased stability since August, which is expected to help improve our operating outperformance for the current quarter. Earlier this year, we secured a major add-on of business to supply Paperback, a new product category for Karat, to one of our largest national chain accounts. Initial shipments to select distribution centers started in the Q3, and we expect the volume to accelerate in the Q4. With fulfillment expected during Q1 of 2026, this new category of business with this chain account is for a two-year term and expected to contribute approximately $20 million in additional annual revenue.

Over the next two to three years, we aim to scale our paperback business to more than $100 million in additional annual revenue. The anticipated growth from this new category is being driven by national and regional restaurant chains that are transitioning to paperbacks from plastic bags. This shift is influenced by evolving state and municipal regulations, as well as a growing emphasis on enhancing customer experience and brand images. We expect continued market share growth in this segment, further solidifying our position as a leader in providing sustainable, eco-friendly disposable foodservice products. In late May and June this year, we implemented broad pricing increases across most product lines to offset rising import costs. Heading into the Q4 and 2026, business trends remain strong. We continue to maintain a disciplined pricing approach and partner with our customers while focusing on operating efficiencies.

We are actively integrating several meaningful new customer accounts and focusing on increasing online marketing, which will strengthen our 2026 pipeline, building a strong foundation for what we expect to be another record-setting year in sales. Karat announced a first-ever stock repurchase program this week, in addition to the regular quarterly dividends. The announcement underscores our broad confidence in the company’s future growth prospects and financial strength. I will now turn the call over to Jian Guo, our Chief Financial Officer, to discuss the company’s financial results in greater detail. Jian?

Jian Guo, Chief Financial Officer, Karat Packaging: Thank you, Alan. I’ll begin with a summary of our Q3 performance, followed by an update on our guidance. Net sales for the Q2, Q4 were $124.5 million, up 10.4% from $112.8 million in the prior year quarter. The increase was primarily driven by an increase of $9.4 million in volume and a $3.5 million favorable impact from product mix, partially offset by a $0.7 million unfavorable year-over-year pricing comparison. Sales to chain accounts and distributors were up by 13.7%. Online sales increased 3.1% over the prior year quarter, and sales to the retail channel were down 12.5% over the prior year quarter, reflecting the softness of the overall retail sector. Cost of goods sold for the Q2, Q4 increased 17.8% to $81.6 million from $69.3 million in the prior year quarter. Product costs increased $5.0 million due to sales growth, partially offset by more favorable vendor pricing and product mix.

Additionally, import costs increased $8.2 million due to higher import duty and tariffs, coupled with a 21.0% increase in import volume as we purchased more inventory ahead of expected business expansion, partially offset by a 13.4% decrease in average freight container rates. Gross profit for the Q2. Q4 was $42.9 million, compared with $43.5 million in the prior year quarter. Gross margin for the Q2. Q4 was 34.5%, compared with 38.6% in the prior year quarter. Gross margin was negatively impacted by higher import costs, which, as a percentage of net sales, increased to 14.4%, compared with 8.6% in the prior year quarter. The decrease in margin was partially offset by a decrease in product costs, as a percentage of net sales, due to more favorable vendor pricing and product mix, as well as a reduction in inventory write-offs and adjustments as a percentage of net sales.

Operating expenses in the Q2. Q4 were $34.3 million, compared with $32.2 million in the prior year quarter. The increase was mainly driven by $2.1 million of higher shipping costs due to higher sales volume, $0.7 million of higher rent expense due to a higher rate on our Chino, California facility lease extension, plus the opening of a new Chino distribution center, and $0.6 million of higher salaries and benefit expenses. These increases were partially offset by a $1.4 million reduction in online platform fees. Operating income in the Q2. Q4 was $8.6 million versus $11.3 million in the prior year quarter. Total other income net was $1.3 million for the Q2. Q4 compared with $0.6 million in the prior year quarter. The increase was primarily from foreign currency transaction gain of $0.7 million.

Driven by the strengthening of the United States dollar against the New Taiwan dollar during the Q2. Q4, compared with a loss of $0.3 million on foreign currency transactions during the Q2. Q4. Net income for the Q2. Q4 was $7.6 million, compared with $9.3 million for the prior year quarter. Net income margin was 6.1% in the Q2. Q4 compared with 8.2% in the prior year quarter. Net income attributable to Karat for the Q2. Q4 was $7.3 million, $0.36 per diluted share, compared with $9.1 million, or $0.45 per diluted share in the prior year quarter. Adjusted EBITDA for the Q2. Q4 was $13.1 million, compared with $14.7 million for the prior year quarter. Adjusted EBITDA margin was 10.5% of net sales for the Q2. Q4 compared with 13.0% for the prior year quarter. Adjusted diluted earnings per common share was $0.37 for the Q2.

Q4 compared with $0.47 for the prior year quarter. We generated operating cash flow of $1.0 million in the Q2 compared with $19.5 million in the prior year quarter. Duty and tariff payments, as well as the inventory purchase payments, increased. However, such increases were offset by strong collections, as you will see described in the Form 10Q filed tomorrow. Despite the significant cash outlays for operations and a $3.5 million early loan repayment on one of our consolidated variable interest entities’ term loans, we ended the quarter with $91.1 million in working capital. As of September 30, 2025, we maintained financial liquidity of $34.7 million with another $19.9 million in short-term investments. As of September 30, 2025, we reclassified one of our consolidated variable interest entities’ term loans into current liabilities as the maturity is within 12 months, totaling $20.4 million.

We intend to pay down the loan upon maturity with our cash on hand. On November 4, 2025, our Board of Directors approved the quarterly dividend of $0.45 per share, payable November 28, 2025, to stockholders of record as of November 21, 2025. Additionally, our Board of Directors approved our first-ever share repurchase program of up to $15.0 million, under which Karat is authorized to repurchase shares of its outstanding common stock from time to time through open market purchases. Looking ahead to the Q2-Q4, we expect net sales to increase by approximately 10%-14% over the prior year quarter, with gross margin projected to be within 33%-35% and adjusted EBITDA margin to be within 8%-10%. As Alan mentioned earlier, our new business pipeline for 2026 is robust, supported by the new paperback category offering and the addition of several key customer accounts.

We remain focused on accelerating top-line growth with disciplined pricing while continuing to enhance operational efficiency and cost management. Alan and I will now be happy to answer your questions, and I’ll turn the call back to the operator.

Conference Operator: Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your touch-tone phone. If you’re using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we’ll pause momentarily to assemble our roster. The first question will come from Michael Francis with William Blair. Please go ahead.

Michael Francis, Analyst, William Blair: Hey, Alan. Jian Guo, Mike on for Ryan. Nice quarter. I wanted to start on paperbacks. Did I hear you right? That you aim to scale that to $100 million over the next two years?

Alan Yu, Chief Executive Officer, Karat Packaging: Yes, that is correct.

Michael Francis, Analyst, William Blair: What gives you confidence in that number?

Alan Yu, Chief Executive Officer, Karat Packaging: It’s because there’s a lot of chains that are moving away from plastic back into paperback. This is a segment that we’re seeing that it’s, as one of the large chains in the U.S. moves towards this area, more and more similar chains will follow through that. Basically, we feel that there is an organic growth in that segment. Also, at the same time, it is not just the paperback that was handled. There are different types of bags. There are SOS bags, which every fast food restaurant will need. With the growth of the fast food chain that is growing, the number of stores that is growing, we feel that we can be competitive enough to gain market share in that segment as more and more people are looking toward that area. Also, there are other bakery bags as well.

There’s just too many items in that segment that make us feel that we can grow immediately. I mean, as I said, we mentioned in our announcement that one chain. The annual sales of that number would be $20-$25 million per year just for one chain. And we do have two or three other chains already working in testing our paperback and SOS bag. That’s why we feel confident that this will grow quickly into annual sales of an additional $100 million a year.

Michael Francis, Analyst, William Blair: That’s all good to hear. I wanted to ask on gross margins. Went lower, I think, as we were expecting, and forward views a little lower than we were expecting. We’d like to know. Longer term, do you think that there’s an opportunity for you to get back into that high 30% range on the gross margin number, or is that going to be difficult while tariffs are in the market?

Alan Yu, Chief Executive Officer, Karat Packaging: We’re trying to be conservative right now at this point because there’s still uncertainty. The good thing is we feel that there’s a tailwind. One of the issues that reduces our gross margins drastically in the second quarter was the sudden increase in the New Taiwan dollar versus the US dollar, that it was a drop of 11% in just three days alone. That 11% has come back to just about an increase of 4.5%-5%. Basically, it’s more of a stabilization in the US dollar against Asian currencies. This is actually enabling us to go back to our vendors to negotiate better pricing this past two months, basically. We’re seeing that there’s more tailwind in terms of the gross margin.

We do want to be conservative in terms of how we look at in terms of the numbers in September. Giving us the number that we see in October, we already seen some improvement in October versus September. September was better than August. We want to see more of the positive trend before we can issue a higher increase in our gross margin numbers, basically.

Michael Francis, Analyst, William Blair: Okay. Lastly, for me, it’s good to see the share buybacks. Would love to get an update on your capital allocation priorities between debt paydown, buybacks, and the dividend, and any potential M&A.

Alan Yu, Chief Executive Officer, Karat Packaging: Our strategy is that if we have more than $20 million in a short-term deposit, that we can allocate it to the dividend, special dividend, regular dividend, or use it for other investments. At this point, even with the increase in tariffs, increase in inventory-wise in the second quarters, our deposit amount is still the same, remains the same. We are still strong in cash. Lately, we are seeing that we have been bringing down our inventory to reduce our liability, reduce our costs in terms of the tariffs as well as importation costs. We are seeing cash flowing back into our accounts. That is why we feel like it is good for us to do some type of a stock repurchase while our stock is kind of low right now. I think it is a value to repurchase share back.

At the same time, we are still looking to merger and acquisition. We do have a few in the pipeline: investment, partnership, joint venture, and also acquisition. We don’t feel that this will deter us in terms of moving toward this direction.

Michael Francis, Analyst, William Blair: Okay. All good to hear. I’ll pass it on.

Alan Yu, Chief Executive Officer, Karat Packaging: Thank you, Michael.

Conference Operator: The next question will come from George Staffos with Bank of America. Please go ahead.

George Staffos, Analyst, Bank of America: Hi, everyone. Good afternoon. Thanks for taking my question. Can you hear me okay, Alan?

Alan Yu, Chief Executive Officer, Karat Packaging: Yes, I can, George.

George Staffos, Analyst, Bank of America: Hey, how are you? So listen, maybe piggybacking on the question on capital allocation, I want to take it from a different approach. I mean, your dividend basically represents the majority of your earnings per share. Why would you consider or contemplate doing more buyback? In light of that, would you consider borrowing to buy back more stock? It would seem like deleveraging and taking care of your incoming debt paydown needs would be probably more prudent. How do you think about that?

Alan Yu, Chief Executive Officer, Karat Packaging: Here’s the thing. We don’t have any debt on our book right now at this point. The debt that you’re seeing is the VIE. That’s on the real estate side of the ventures.

George Staffos, Analyst, Bank of America: That $20 million, that current liability, you said you’re going to pay that down in the upcoming year?

Alan Yu, Chief Executive Officer, Karat Packaging: We can pay it down. We can pay either with our current CD that we have in our short-term deposit to utilize some of the cash on that. At the same time, we can have third-party, we can also continue to borrow with different banks. It depends on what the cash flow situation is, if there’s a need to do that. Right now, like I said, we don’t have any debt in our Lolli Cup or Karat Packaging book right now. This is one of the things that we still have time to think what we want to do, allocate our capitals. If there’s other things that we can do better, then we will do that. At this currently, the rate of CD income is dropping as the interest rate reduces. We have to figure out which is better.

If we were to pay down the debt, we actually will be generating additional income. It’ll be an intercompany loan to the VIE company in paying down that debt. It wouldn’t be like really just paying; it’ll be paying down the debt for the VIE company. At the same time, for Lolli Cup, it’ll be income, additional income. Instead of.

George Staffos, Analyst, Bank of America: Gotcha.

Alan Yu, Chief Executive Officer, Karat Packaging: Getting us from deposit from, yeah, deposit from the bank, it’ll be actually more income from the VIE company.

Jian Guo, Chief Financial Officer, Karat Packaging: George, this is Jian. I just wanted to add. Hi, George. I just wanted to add on to what Alan was talking about. To answer your question, the main purpose really is to have one additional tool in our toolbox to further enhance our shareholder return while we continue to focus on growing the company either organically or inorganically. As we previously announced, as you probably saw yesterday in the announcement, the total amount the board approved of the share repurchase program is $15 million. It is a fairly small program at management’s total discretion. This will be something that management will continue to evaluate in terms of a lot of the different factors, right? The pricing, the performance, the liquidity, the strength of the balance sheet, quite a few factors, just another tool in our toolbox to further enhance our shareholder return. You’re right.

I mean, obviously, our dividend yield is already pretty rich. So that definitely is something that we consider. As we move forward with the potential execution under this program as well.

George Staffos, Analyst, Bank of America: Okay. I appreciate the thoughts on that. Thanks for the reminder on the VIE. One question back to the question I think Mike teed up on the bag business. Let’s assume you have perfect accuracy on the revenue side on bags, and that’s $100 million in whatever time period you’d said. What kind of margin do you think you’re going to get on that business? You’re already starting to see some of that show up in the fourth quarter, you said, correct? Two questions there.

Alan Yu, Chief Executive Officer, Karat Packaging: It’ll be more of a mixed margin. The higher volume would be in the high teens on margin size, and the SOS bag could be in the high 30%. It depends on the product line. There are also bakery bags that could be in the high 50%. At the same time, we are selling online on these new bags that we’re bringing in. The online will be even in a higher margin range. It’ll be more of a balancing mixture of each, just like we are doing right now. We are actually working heavily toward getting our bags to manufacture more efficiently to increase margin from there, better sourcing on raw material from our vendors, and also shifting the manufacturing site locations, potentially moving some into domestic U.S. production. That might save some costs, even enhancing more margin.

These are the things that we can do once as a volume increase in the next 12 months.

George Staffos, Analyst, Bank of America: All right. Two quickies for me, and I’ll turn it over to Alan. With that being the case, and we’re already in November, almost halfway through the quarter, the range on revenue growth, the range on margin is fairly wide. I realize you’re trying to be prudent. I realize there are a lot of vagaries in the market, especially with tariffs and sourcing. I find the range is maybe a little bit wider than I would expect at this juncture in the year. What’s giving you pause in terms of maybe perhaps having a little bit narrower both growth rate range and margin range for the quarter? Did I hear you say, and my last question, I’ll turn it over, did you say there was an inventory write-off? I apologize.

I’m on the road right now, so I don’t have your materials in front of me.

Alan Yu, Chief Executive Officer, Karat Packaging: I’m not sure what the inventory write-off was, but I know that we’re reducing inventory at this currently toward the year-end. Actually, our sales have been very robust. As you’ve said, we are in the middle of the fourth quarter already. We’re seeing our sales almost in the mid-teen range, but we just want to be conservative. Basically, at the mid-teen range, this is a sales increase organically that we haven’t seen actually for the past three years.

George Staffos, Analyst, Bank of America: Okay. So you’re in the mid-.

Alan Yu, Chief Executive Officer, Karat Packaging: We’re saying that 12-14, but we are seeing numbers very close to the mid-teens. We just want to be prudent in terms of 12-14. That’s what we’re trying to do. This is what we’re being conservative, but we’re seeing in the mid-teens right now in the growth numbers, actually the sales numbers. Basically, in our industry, this is kind of a very good number in terms of well above our industry right now.

George Staffos, Analyst, Bank of America: Understood. Understood. Thanks, Al. I’ll turn it over. Thank you, Jen.

Alan Yu, Chief Executive Officer, Karat Packaging: Thank you.

Conference Operator: This will conclude our question and answer session. I would like to turn the conference back over to Mr. Alan Yu, CEO, for any closing remarks. Please go ahead.

Alan Yu, Chief Executive Officer, Karat Packaging: Thank you. Thank you, everyone, for joining our third quarter Karat Packaging earnings conference call. I’d like to say thank you again and have a nice day. Goodbye.

Conference Operator: The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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