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KP

Karat Packaging Inc. (KRT)·Q2 2025 Earnings Summary

Executive Summary

  • Record quarter: net sales $124.0M (+10.1% YoY), gross margin 39.6% (+110 bps YoY), and net income $11.1M (+19.8% YoY); adjusted diluted EPS $0.57 and adjusted EBITDA $17.7M .
  • Versus Street: Revenue modestly beat ($123.5M* consensus), adjusted EPS modestly missed ($0.60* consensus), adjusted EBITDA roughly in line ($17.6M* consensus). Drivers were strong volume (+13% YoY) and favorable mix offset by FX losses and higher duties; we expect near-term estimate pressure on margins given Q3 guide to low–mid-30s gross margin and 10–12% adj. EBITDA margin .
  • Guidance: Q3 2025 net sales expected to grow high single-digit to low double-digit YoY; gross margin low–mid 30s; adjusted EBITDA margin 10–12%; full-year 2025 guidance maintained pending tariff impacts .
  • Strategic actions: Rapid supply chain diversification (China sourcing reduced to ~10% in Q2; expansion into other Asia and Latin America) and domestic manufacturing ramp underpin resilience and new national-chain wins shipping in H2 .
  • Key catalysts: Strong July demand (double-digit in California), national chain onboarding in Q3/Q4, and easing FX pressure entering Q3, versus near-term margin compression from inventory imported under elevated tariffs .

What Went Well and What Went Wrong

What Went Well

  • Record quarterly net sales ($124.0M) and net income ($11.1M) on 13% volume growth and favorable mix; gross margin expanded to 39.6% (+110 bps YoY) .
  • CEO: “We are swiftly diversifying our sourcing footprint, reducing sourcing from China to just 10 percent in the second quarter... and further expand across other Asian countries and Latin America” .
  • Operational wins: New Chino warehouse fully operational; logistics improved; inventory built ahead of expansion; online shipping/marketing savings by switching providers and shifting fulfillment toward owned storefronts .

What Went Wrong

  • FX headwind: $2.9M loss on foreign currency transactions (USD vs. TWD), flipping other income to a $2.0M expense; Street EPS miss tied to FX and tariff/duty costs .
  • Tariffs/duties: Ocean freight and duty costs up $2.1M; import volume +37% as inventory purchases were pulled forward, pressuring near-term margins .
  • Sequential margin pressure expected: Q3 gross margin guided to low–mid 30s and adj. EBITDA margin to 10–12% as COGS reflects inventory brought in with elevated tariffs .

Financial Results

MetricQ2 2024Q4 2024Q1 2025Q2 2025
Revenue ($USD Millions)$112.6 $101.6 $103.6 $124.0
Gross Profit ($USD Millions)$43.4 $39.8 $40.8 $49.1
Gross Margin (%)38.5% 39.2% 39.3% 39.6%
Operating Income ($USD Millions)$11.1 $7.3 $7.8 $16.6
Net Income ($USD Millions)$9.2 $5.9 $6.8 $11.1
Net Income Margin (%)8.2% 5.8% 6.6% 8.9%
Diluted EPS (GAAP)$0.45 $0.28 $0.32 $0.54
Adjusted Diluted EPS (non-GAAP)$0.49 $0.29 $0.33 $0.57
Adjusted EBITDA ($USD Millions)$15.7 $11.3 $11.9 $17.7
Adjusted EBITDA Margin (%)13.9% 11.1% 11.5% 14.3%

Versus Wall Street consensus (Q2 2025):

MetricActualConsensusBeat/Miss
Revenue ($USD Millions)$124.0 $123.5*Beat (~$0.5M)
Primary EPS (Normalized)$0.57 $0.60*Miss ($0.03)
EBITDA ($USD Millions)$17.7 $17.6*In line/slight beat

Values with * retrieved from S&P Global.

Segment net sales breakdown (Q2 2025 vs Q2 2024):

CategoryQ2 2024 ($USD Millions)Q2 2025 ($USD Millions)
Chains and Distributors$87.2 $97.2
Online$19.5 $20.9
Retail$5.8 $5.9
Total$112.6 $124.0

Key KPIs and balance sheet (point-in-time and quarter flow):

KPIDec 31, 2024Jun 30, 2025
Cash and Cash Equivalents ($USD Millions)$31.6 $30.5
Short-term Investments ($USD Millions)$28.3 $26.4
Accounts Receivable, net ($USD Millions)$26.7 $36.4
Inventories ($USD Millions)$70.7 $88.8
Total Assets ($USD Millions)$294.5 $321.0
Total Liabilities ($USD Millions)$132.3 $158.3
Stockholders’ Equity ($USD Millions)$162.2 $162.7

Quarterly cash metrics (Q2):

  • Operating cash flow: $9.8M; Free Cash Flow: $9.6M; Working capital: $116.8M; Liquidity: $44.7M plus $26.4M in short-term investments .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Net Sales Growth YoYQ3 2025N/AHigh single-digit to low double-digits New
Gross Margin (%)Q3 2025N/ALow–mid 30s New
Adjusted EBITDA Margin (%)Q3 2025N/A10–12% New
Net Sales Growth YoYFY 2025+9–11% (provided Q4 2024) Maintained pending tariff impact Maintained
Gross Margin (%)FY 202536–38% (provided Q4 2024) Maintained pending tariff impact Maintained
Adjusted EBITDA Margin (%)FY 2025Low–mid double-digits (provided Q4 2024) Maintained pending tariff impact Maintained
DividendOngoing$0.45/share (Feb & May 2025) $0.45/share (Aug 27, 2025) Maintained

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4 2024 & Q1 2025)Current Period (Q2 2025)Trend
Tariffs/Duties & FXAnticipated tariff uncertainty; diversified sourcing; tariff impact expected minimal long-term; strong USD tailwind in 2024 Elevated duties from pull-forward inventory; FX loss $2.9M (USD vs TWD); Q3 margins to compress, recovery expected in Q4 as new sourcing benefits flow Near-term headwind, easing into Q4
Supply Chain DiversificationChina exposure reduced to ~20% by end-2024; increasing Taiwan share China sourcing reduced to ~10% in Q2; expanding in other Asian and LatAm; domestic manufacturing ramp Accelerating diversification
Pricing StrategyPrice increases planned in March/April; additional in May Price impact was negative in Q2; management expects pricing near breakeven in H2 as cost mitigation from alternative sourcing takes hold Neutralizing in H2
Online Channel StrategyOnline growth ~20% in Q1; shift from third-party fulfillment; expanding marketplaces Continued shift from Amazon FBA to owned storefronts; added Cisco Marketplace SKUs; aiming for double-digit online growth in Q4 Margin-focused growth
Regional DemandStrength in Texas/Midwest targeted in Q1 Double-digit sales growth in California in June/July; strong July demand cited Improving
New Business/National ChainsBuilding capacity (Chino DC) ahead of peak; innovation pipeline National-chain wins scheduled to ship in Q3/Q4; logistics improved via new Chino DC Converting pipeline
M&A/PartnershipsEvaluating strategic opportunities Active dialogue; disciplined criteria (location, client base, new items) vs. acquiring SKUs; partnerships/joint ventures considered Opportunistic, disciplined

Management Commentary

  • CEO: “We are swiftly diversifying our sourcing footprint, reducing sourcing from China to just 10 percent in the second quarter, while implementing plans to further expand across other Asian countries and Latin America… In addition, our ability to quickly ramp up existing domestic manufacturing operations enabled us to respond rapidly to customer needs and win new business” .
  • CEO on demand and logistics: “Business trends remain strong… Recent new business wins from large national chains are scheduled to begin shipping in the third and fourth quarter… our new Chino warehouse is now fully operational” .
  • CFO: “We expect net sales for the 2025 third quarter to increase by approximately 9% to 10%… gross margin… low to mid-30s and adjusted EBITDA margin… 10 to 12% as our cost of goods sold have begun to reflect inventory brought in with the elevated tariff” .

Q&A Highlights

  • Pricing dynamics: Despite tariff-driven increases, Q2 price impact was negative; management expects pricing near breakeven in H2 as sourcing shifts to lower-tariff geographies and vendor cost reductions mitigate impacts .
  • Margin trajectory: Sequential gross margin decline in Q3 due to tariff/duty and FX on Q2-imported inventory; recovery expected in Q4 as new sourcing benefits materialize .
  • Demand cadence: Strong July demand, notably double-digit growth in California; share gains as smaller importers reduced inventory amid tariff uncertainty .
  • Online strategy: Transition from third-party fulfillment (Amazon FBA) to owned operations; Cisco Marketplace expansion (adding ~750 SKUs) targets double-digit online growth in Q4 .
  • M&A posture: Disciplined approach (strategic fit in location/client base/items not carried); exploring partnerships/joint ventures versus acquiring SKUs outright .

Estimates Context

  • Revenue: Actual $124.0M versus $123.5M* consensus — modest beat; volume strength and mix offset negative price comparison .
  • EPS (normalized): Adjusted diluted EPS $0.57 versus $0.60* consensus — modest miss; FX losses ($2.9M) and higher duties compressed profitability .
  • EBITDA: Adjusted EBITDA $17.7M versus $17.6M* consensus — roughly in line/slight beat .
  • Forward adjustments: Given Q3 guide (gross margin low–mid 30s; adj. EBITDA margin 10–12%), Street may need to recalibrate near-term margin assumptions downward; revenue trajectories could be nudged higher on H2 national-chain ramps and strong July demand .

Values with * retrieved from S&P Global.

Key Takeaways for Investors

  • Near-term margin compression is transitory: Q3 margins reflect Q2-imported tariff-impacted inventory; management expects margin improvement in Q4 as alternative sourcing and pricing actions flow through .
  • Structural resilience: Rapidly diversified sourcing (China ~10%), domestic manufacturing agility, and logistics upgrades (Chino DC) underpin supply continuity and competitiveness .
  • Demand backdrop healthy: Double-digit volume growth, strong July trends in California, and national-chain wins scheduled for H2 support top-line growth .
  • Estimate implications: Consider trimming Q3 gross margin/EBITDA assumptions toward guidance while holding or modestly raising H2 revenue on onboarding wins; watch FX sensitivity (USD/TWD) .
  • Non-GAAP context: Adjusted EPS/EBITDA exclude stock-based comp and secondary offering costs; FX/duty dynamics were key to the EPS miss vs normalized consensus .
  • Working capital and liquidity strong: $116.8M working capital, $44.7M liquidity, $26.4M short-term investments; dividend maintained at $0.45/share .
  • Trading setup: Near-term volatility around Q3 margin guide and tariff headlines; medium-term thesis supported by sourcing diversification, national-chain ramps, and online channel optimization .