Sign in

You're signed outSign in or to get full access.

KP

Karat Packaging Inc. (KRT)·Q1 2025 Earnings Summary

Executive Summary

  • Revenue and EPS beat consensus with resilient margins despite tariff and freight headwinds; net sales rose 8.4% to $103.6M and adjusted diluted EPS was $0.33; gross margin held at 39.3% while adjusted EBITDA margin was 11.5% .
  • Significant beats: Revenue +1.5% vs consensus, Primary EPS +15.8% vs consensus, Adjusted EBITDA +13.3% vs consensus; pricing actions (5–20% across items) and sourcing diversification underpinned performance, with China sourcing cut to 15% in March and most China imports suspended mid-April .
  • Q2 2025 outlook: net sales expected high-single- to low-double-digit YoY, gross margin in line with Q1, adjusted EBITDA margin mid-teens; full-year 2025 guidance reiterated (net sales +9–11%, GM 36–38%, adj. EBITDA margin low-to-mid double-digits) .
  • Stock reaction catalysts: additional mid-May price increases, rapid supplier diversification (targeting <10% China by end of Q2), and added capacity from a new 187k sq ft Chino distribution center could support share gains amid industry shortages .

What Went Well and What Went Wrong

What Went Well

  • Volume-led top-line growth with stable gross margin: sales volume up 10.9%, net sales +8.4% YoY to $103.6M; gross margin held at 39.3% despite higher freight/duty costs .
  • Strategic sourcing agility: China exposure reduced from ~20% (end-2024) to 15% in March; imports from most China vendors suspended mid-April; management expects <10% China by end of Q2, diversifying to Malaysia/Indonesia/Vietnam/Thailand and exploring Middle East .
  • Online channel momentum and capacity expansion: online sales +19.6% YoY; new 187k sq ft Chino distribution center enabling ~500 new SKUs and faster delivery, supporting anticipated growth .

What Went Wrong

  • Margin mix and opex pressure: adjusted EBITDA down to $11.9M from $13.5M YoY and margin to 11.5% from 14.2% due to higher shipping/transportation (+$3.4M), higher rent (+$0.9M), and increased marketing/professional services .
  • Pricing headwinds: YoY pricing impact unfavorable by $3.9M as the company remained competitive, dampening price/mix contribution despite volume strength .
  • Freight/duty inflation and volatility: ocean freight container rates +4.3% and import volume +15.5% drove $2.0M higher freight/duty; management highlighted ongoing freight cost volatility into Q2 .

Financial Results

Revenue, EPS, Margins vs Prior Periods and Estimates

MetricQ1 2024Q4 2024Q1 2025 ActualQ1 2025 Consensus*
Revenue ($USD Millions)$95.6 $101.6 $103.6 $102.1*
Gross Profit ($USD Millions)$37.6 $39.8 $40.8 —
Gross Margin %39.3% 39.2% 39.3% —
Operating Income ($USD Millions)$8.1 $7.3 $7.8 —
Net Income ($USD Millions)$6.5 $5.9 $6.8 —
Net Income Margin %6.8% 5.8% 6.6% —
Diluted EPS (GAAP, $)$0.31 $0.28 $0.32 —
Adjusted Diluted EPS ($)$0.40 $0.29 $0.33 $0.285*
Adjusted EBITDA ($USD Millions)$13.5 $11.3 $11.9 $10.51*
Adjusted EBITDA Margin %14.2% 11.1% 11.5% —

Estimates marked with * are values retrieved from S&P Global.

Segment/Channel Breakdown

CategoryQ1 2024Q1 2025
Chains and Distributors ($USD Millions)$74.3 $79.6
Online ($USD Millions)$14.9 $17.8
Retail ($USD Millions)$6.4 $6.2
Total Net Sales ($USD Millions)$95.6 $103.6

KPIs

KPIQ1 2024Q1 2025
Sales Volume Growth YoY (%)—10.9%
Online Sales Growth YoY (%)—19.6%
Inventories ($USD Millions)—$79.9
Cash from Operations ($USD Millions)$6.6 $7.7
Free Cash Flow ($USD Millions)$5.6 $6.6
Working Capital ($USD Millions)—$111.9
China Sourcing Share (%)—15% (Mar)
Dividend per Share ($)—$0.45 (payable May 23)

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Net Sales Growth YoYQ2 2025N/AHigh single-digit to low double-digits New
Gross MarginQ2 2025N/AIn line with Q1 (≈39%) New
Adjusted EBITDA MarginQ2 2025N/AMid-teens New
Net Sales Growth YoYFY 2025+9% to +11% Reiterated Maintained
Gross MarginFY 202536% to 38% Reiterated Maintained
Adjusted EBITDA MarginFY 2025Low-to-mid double-digits Reiterated Maintained

Earnings Call Themes & Trends

TopicQ3 2024 (Prev Mentions)Q4 2024 (Prev Mentions)Q1 2025 (Current Period)Trend
Supply chain diversificationExpanding warehouse footprint; online momentum China dependence ~20%; Taiwan >50% of sourcing; plan further reductions China 15% in March; suspend most China imports mid-April; target <10% by end Q2; diversify to SE Asia/Middle East Accelerating
Tariffs/macroFreight/duty pressures rising Expect minimal LT margin effect from tariffs given strong USD/stable freight Pricing actions to offset tariffs; reciprocal tariffs uncertain; freight volatility into Q2 More cautious
Pricing strategyCompetitive pricing; online fees adjustments Price increases in March/April Additional mid-May increases (5–20% by item) Firming
Domestic manufacturingScaling back US production in 2024; asset-light —Ramping lines and overtime to meet industry shortages; percentage mix TBD Increasing
Online channelGrowth, enhanced marketing —+19.6% YoY; continued focus Strengthening
Regional trends——Strongest growth in Texas/Midwest; California improving in retail/distribution/chain Improving
Capacity expansionWarehouse footprint expanding —New 187k sq ft Chino DC nearly doubles local capacity; +500 SKUs Expanding
Cost savings——Switching third-party carriers to lower shipping costs; early savings from March Progressing

Management Commentary

  • “We delivered another strong quarter… reducing reliance on China from approximately 20 percent at the end of 2024 to 15 percent in March 2025… we have temporarily suspended imports from most vendors in China starting mid-April.” — Alan Yu, CEO .
  • “Online business… experienced a nearly 20 percent sales increase during the first quarter… we expect to implement additional price increases in mid-May.” — Alan Yu, CEO .
  • “Operating expenses… increased due to $3.4M higher shipping/transportation… $0.9M higher rent… increased online marketing and professional services.” — Jian Guo, CFO .
  • “We generated operating cash flow of $7.7M… working capital of $111.9M… financial liquidity of $46.7M with another $23.8M in short-term investments.” — Jian Guo, CFO .

Q&A Highlights

  • Sourcing pivot: Management expects China shipment share to be around 1% by August, diversifying to Malaysia, Indonesia, Vietnam, Thailand and exploring the Middle East .
  • Pricing actions: Across-the-board price increases effective May 19, ranging 5–20% by product; company aims to remain competitive while pursuing internal efficiencies to absorb some costs .
  • Tariff uncertainty: Reciprocal tariffs not embedded in guidance given day-to-day policy volatility; management prepared to adapt to outcomes .
  • Freight dynamics: Q1 freight lower than Q4; early Q2 freight trending higher but highly volatile week to week due to shipment delays/competition .
  • Cost-saving initiatives: Switching third-party carriers already generating savings since March; updates to follow next quarter .
  • Domestic manufacturing: Ramping production capacity and overtime to address shortages; mix not disclosed yet .
  • Market share: Taking share due to reliability and preparedness; additional inventory cushion from new Chino warehouse supported customers amid tariff shock .

Estimates Context

  • Q1 2025 results vs consensus: Revenue $103.6M vs $102.1M estimate (+1.5% beat); Primary EPS $0.33 vs $0.285 estimate (+15.8% beat); Adjusted EBITDA $11.9M vs $10.51M estimate (+13.3%) . Estimates marked with * are values retrieved from S&P Global.
  • Estimate depth: EPS had 2 estimates, revenue 3 for Q1; limited coverage increases uncertainty of consensus precision*.
  • Implications: Consensus likely needs to reflect stronger volume, pricing pass-through, and mid-teens adjusted EBITDA margin in Q2, while modeling 2H margin compression due to tariffs per CFO .

Key Takeaways for Investors

  • Resilient topline with stable gross margins: volume growth and sourcing agility offset freight/duty inflation; continued online strength supports mix .
  • Pricing power near term: additional 5–20% price increases mid-May likely support Q2 revenue/margins amid industry supply shortages; monitor elasticity and customer response .
  • Margin trajectory: Q2 adjusted EBITDA margin guided mid-teens, but management embeds conservatism for 2H margin compression from tariffs; adjust models accordingly .
  • Supply chain risk mitigation: rapid diversification away from China (<10% by end of Q2; targeting ~1% by August), plus domestic manufacturing ramp reduces tariff exposure and enhances reliability .
  • Capacity-led growth: new Chino distribution center adds 187k sq ft and ~500 SKUs, enabling faster delivery and inventory expansion ahead of peak season .
  • Capital returns sustained: $0.45 quarterly dividend approved (May 23 payable), supported by solid operating cash flow and liquidity .
  • Near-term trading setup: Potential upside from consensus revisions (Q2 mid-teens EBITDA margin, price increases) versus watch items (freight/duty volatility, tariff developments) .
Notes: 
- Estimates marked with * are values retrieved from S&P Global.