Karat Packaging (NASDAQ:KRT) reported record second-quarter net sales of $136.3 million, up 9.9% from $124.0 million a year earlier, as growth in its online business and customer demand helped offset higher product and import costs.
Chief Executive Officer Alan Yu said the company added four new chain accounts during the quarter, expanding its sales pipeline and creating potential revenue opportunities. He said Karat expects to begin shipping products to those accounts in the fourth quarter after building inventory over the next two to three months.
Tariff Refunds Lift Margins and Earnings
Second-quarter profitability was significantly affected by $25.8 million in refunds related to IEEPA tariffs, which reflected higher tariff costs the company had absorbed in prior periods.
Gross profit increased to $77.2 million from $49.1 million a year earlier, while gross margin rose to 56.6% from 39.6%. The tariff refunds contributed 1,890 basis points to gross margin, according to Chief Financial Officer Jian Guo. Excluding the refund contribution, Guo said gross margin would have been 37.7%.
Cost of goods sold declined 21% to $59.1 million despite higher product costs and import expenses. Product costs increased by $6.9 million, while import costs rose $3.5 million, including an 8.9% increase in average container rates and a 4.3% increase in imported containers.
Operating income climbed 127.2% to $37.6 million. Net income increased 168.3% to $29.6 million, and net income attributable to Karat was $29.3 million, or $1.46 per diluted share, compared with $10.9 million, or $0.54 per diluted share, in the prior-year quarter. The company said tariff refunds accounted for approximately $1 per diluted share.
Adjusted EBITDA rose to $41.6 million from $17.7 million, while adjusted EBITDA margin reached 30.5%, including the tariff-refund benefit. Adjusted diluted earnings per share were $1.48, compared with $0.57 a year earlier.
Sales Mix and Sourcing Strategy
Sales growth was driven primarily by $13.1 million in volume growth and product mix, plus a $0.4 million favorable pricing impact. Those gains were partly offset by a $1.1 million decrease in shipping and logistics revenue.
- Sales to channel accounts and distributors increased 9.0%.
- Online sales increased 23.6%.
- Retail-channel sales declined 23.4%, primarily because of lower shipping and logistics revenue.
Eco-friendly products represented 33.8% of total sales, up from 31.8% in the prior-year quarter, supported by additional stock-keeping units and growth in paper-based categories.
Yu said Karat’s sourcing diversification continued to support product availability and cost competitiveness. Domestic purchases accounted for nearly 20% of total sourcing during the quarter, while Taiwan represented 46%, China represented 11%, and Indonesia, Singapore and South America collectively represented 12%.
Costs, Logistics and Distribution Expansion
Operating expenses increased to $39.6 million from $32.6 million. The increase included $3.1 million in higher shipping and transportation costs, as well as increases in online-platform, marketing, salaries and benefits, bad-debt and warehouse expenses.
Guo said the company is focused on reducing shipping costs by using its internal fleet more efficiently for local deliveries and inter-warehouse inventory transfers. Karat also is pursuing savings on e-commerce delivery costs through its carrier arrangements.
Yu said fuel costs were elevated during the second quarter amid the Middle East crisis but had declined in the third quarter. He cited diesel prices that had fallen from about $5.40 per gallon in the second quarter to “four something” in the third quarter, alongside lower carrier fuel surcharges.
Karat is finalizing a lease for a 47,000-square-foot distribution center in Orlando, Florida, expected to be operational in the third quarter. Yu said the facility is intended to improve service in the Southeast, where Orlando is the company’s fourth-largest online customer base. The facility is expected to shorten delivery times for customers currently served from South Carolina and Houston.
The company is also evaluating potential logistics support in Colorado to serve Utah and is considering opportunities in Vancouver and Toronto, Yu said.
Outlook, Cash Flow and Capital Returns
For the third quarter, Karat expects net sales to grow in the low double-digit range from the prior-year period. It forecast gross margin of 35% to 37% and adjusted EBITDA margin of 9% to 11%, with insignificant IEEPA tariff refunds anticipated during the quarter.
For the full year, the company expects low-double-digit net-sales growth, gross margin in the low 40% range and adjusted EBITDA margin at approximately the mid-teens. Full-year margin expectations include IEEPA tariff refunds recorded in the first half of 2026.
As of June 30, Karat had $110.8 million in working capital, $42 million in financial liquidity and $15.7 million in short-term investments. Operating cash flow totaled $33.2 million and free cash flow was $31.8 million during the quarter, both aided by $25.2 million in tariff refunds received.
The company repurchased 73,510 shares for $2 million during the quarter, leaving approximately $10 million authorized under its repurchase program. Karat also increased its regular quarterly dividend to $0.47 per share, payable Aug. 28 to shareholders of record as of Aug. 21.
About Karat Packaging (NASDAQ:KRT)
Karat Packaging Technologies, Inc (NASDAQ: KRT) is a U.S.-based provider of premium packaging solutions for consumer goods and industrial products. The company specializes in the design, manufacture and delivery of high-quality litho-laminated folding cartons, tubes and flexible packaging. Karat Packaging operates an integrated production model that combines prepress, printing, converting and finishing capabilities to support the branding and shelf-appeal needs of its customers.
The company serves a diverse range of end markets, including food and beverage, confectionery, health and beauty, pharmaceuticals, specialty chemicals and promotional packaging.
