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Karat Packaging Inc. (KRT)·Q3 2025 Earnings Summary

Executive Summary

  • Record net sales of $124.5M (+10.4% YoY), but margins compressed (gross margin 34.5%, -410 bps YoY) as elevated duties/tariffs flowed through COGS; diluted EPS $0.36 vs S&P Global consensus $0.39 (miss), revenue modestly beat ($124.5M vs $124.0M) .
  • Management introduced Q4 guidance: revenue +10–14% YoY, gross margin 33–35%, adjusted EBITDA margin 8–10%; full-year guidance maintained pending tariff developments .
  • Strategic sourcing pivot accelerated (US sourcing 20.4% in Q3 vs 14.6% in Q2; Taiwan imports 41.6% vs 58.0%), mitigating tariff risk; FX turned favorable vs Q2’s headwind .
  • Announced $15M share repurchase authorization and maintained $0.45 quarterly dividend, reinforcing capital return discipline amid robust working capital ($91.1M) .
  • Near-term catalyst: ramp of new paper bag category with a national chain (~$20M annual revenue), potential to scale >$100M over 2–3 years; Q4 sales trending mid-teens per CEO commentary .

What Went Well and What Went Wrong

What Went Well

  • Record sales with double-digit growth across key markets (Texas, California), driven by volume and favorable mix; pricing initiatives continued sequentially .
  • Sourcing diversification and domestic ramp: US sourcing increased to 20.4% (from 14.6%), Taiwan reduced to 41.6% (from 58.0%), improving resilience and positioning for tariff uncertainty .
  • New category entry: paper bags shipping began in Q3, expected ~$20M annual revenue; management aims to scale the category above $100M over 2–3 years; “we expect continued market share growth in this segment” .

What Went Wrong

  • Margin compression: import costs rose to 14.4% of net sales vs 8.6% YoY, driving gross margin down to 34.5% from 38.6% YoY; adjusted EBITDA margin fell to 10.5% from 13.0% YoY .
  • EPS Miss: diluted EPS $0.36 vs S&P Global consensus $0.39, as tariffs/duties and higher shipping/rent costs offset volume/mix tailwinds *.
  • Operating expense uptick: OpEx increased to $34.3M (+$2.1M shipping, +$0.7M rent, +$0.6M salaries), partially offset by $1.4M lower online platform fees .

Financial Results

Quarterly performance vs prior periods

MetricQ3 2024Q1 2025Q2 2025Q3 2025
Revenue ($USD Millions)$112.8 $103.6 $124.0 $124.5
Gross Profit ($USD Millions)$43.5 $40.8 $49.1 $42.9
Gross Margin %38.6% 39.3% 39.6% 34.5%
Net Income ($USD Millions)$9.3 $6.8 $11.1 $7.6
Net Income Margin %8.2% 6.6% 8.9% 6.1%
Diluted EPS ($)$0.45 $0.32 $0.54 $0.36
Adjusted EBITDA ($USD Millions)$14.7 $11.9 $17.7 $13.1
Adjusted EBITDA Margin %13.0% 11.5% 14.3% 10.5%

Actuals vs S&P Global consensus (Q3 2025) and forward

MetricQ3 2025 ConsensusQ3 2025 ActualQ4 2025 ConsensusQ1 2026 Consensus
Revenue ($USD Millions)$124.0*$124.5 $113.6*$116.0*
Diluted EPS ($)$0.39*$0.36 $0.28*$0.26*
EBITDA ($USD Millions)$12.7*$10.9*$10.0*$10.3*

Values retrieved from S&P Global.*

Segment breakdown (Net Sales)

Segment ($USD Millions)Q3 2024Q2 2025Q3 2025
Chains & Distributors$87.4 $97.2 $99.4
Online$19.0 $20.9 $19.5
Retail$6.4 $5.9 $5.6
Total$112.8 $124.0 $124.5

KPIs and Operating Items

KPIQ2 2025Q3 2025
US sourcing (% of supply)14.6% 20.4%
Taiwan import (% of supply)58.0% 41.6%
Import costs (% of net sales)—14.4%
Working capital ($USD Millions)—$91.1
Cash & equivalents ($USD Millions)$30.5 $24.0
Short-term investments ($USD Millions)$26.4 $19.9
Free Cash Flow YTD ($USD Millions)$16.2 (H1) $14.7 (9M)
Quarterly dividend ($/share)$0.45 $0.45
Share repurchase authorization ($USD Millions)—$15.0

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Net Sales GrowthQ3 2025High single-digit to low double-digits Actual: +10.4% YoY Achieved within range
Gross Margin %Q3 2025Low–mid 30s Actual: 34.5% In range
Adjusted EBITDA Margin %Q3 202510–12% Actual: 10.5% In range
Net Sales GrowthQ4 2025—+10–14% YoY Introduced
Gross Margin %Q4 2025—33–35% Introduced
Adjusted EBITDA Margin %Q4 2025—8–10% Introduced
FY 2025 (Revenue, GM, Adj. EBITDA Margin)FY 2025Maintained Maintained (pending tariffs) Maintained
Dividend ($/share)Ongoing$0.45 $0.45 (Nov 28 payment) Maintained
Share RepurchaseOngoing—$15.0M authorization New

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1 & Q2)Current Period (Q3)Trend
Tariffs/MacroQ1: Suspended most China imports mid‑Apr; pricing actions in Apr/May . Q2: Currency headwind; import duties rising; still record margins .Duties/tariffs lifted import cost to 14.4% of sales; GM 34.5% .Headwind realized; mitigated via sourcing and pricing.
Supply chain & SourcingQ2: Reduced China to ~10%; inventory built ahead of H2 expansion .US sourcing 20.4% (from 14.6%); Taiwan down to 41.6% (from 58.0%) .Diversification accelerating.
FX impactQ2: Significant FX loss ($2.9M); USD weakened vs TWD .FX gain $0.7M as USD strengthened vs TWD .Tailwind vs prior quarter.
Pricing actionsQ1/Q2: Price increases implemented to offset costs .“Disciplined pricing approach” continues .Ongoing discipline.
New category: Paper bagsIntroduced as pipeline (Q2) .Shipments began; ~$20M annual; aiming >$100M over 2–3 years .Ramp starting; material growth optionality.
Online channelQ1: +~20% YoY online sales . Q2: Marketing reduction; shipping rate improvements .Online sales +3.1% YoY in Q3 .Still growing, slower pace.
Capital allocationRegular $0.45 dividend (Q1/Q2) .Adds $15M buyback; maintains dividend; clarifies VIE debt treatment .Enhanced shareholder returns toolkit.

Management Commentary

  • “Despite significant increase in import costs…which rose to 14.4 percent of net sales…we were able to sustain gross margin at 34.5 percent.” – Alan Yu, CEO .
  • “We increased sourcing from the United States to 20.4 percent from 14.6 percent and reduced import from Taiwan to 41.6 percent from 58.0 percent.” .
  • “This new business [paper bags] is projected to add approximately $20 million in annual revenue…we aim to scale…to more than $100 million in additional annual revenue.” .
  • CFO: Q4 outlook revenue +10–14%, GM 33–35%, adj. EBITDA 8–10%; working capital $91.1M; financial liquidity $34.7M plus $19.9M in short-term investments .

Q&A Highlights

  • Paper bag scale and margins: Management targets >$100M annual over 2–3 years; product margin mix ranges high teens to 50% depending on bag type, with potential uplift from domestic production and online mix .
  • Capital returns vs debt: $15M buyback seen as an incremental tool alongside a “rich” dividend; clarified that reported debt resides in VIE real estate entity; flexible approach to paying down or refinancing, with intercompany options .
  • Q4 run-rate and conservatism: While guiding +10–14% YoY, CEO noted mid-teen sales trends intra-quarter, yet prefers prudence given sourcing/tariff variability .
  • Margin trajectory: Stabilizing FX and vendor renegotiations cited as tailwinds; management wants more evidence of improvement before raising margin expectations .

Estimates Context

  • The quarter modestly beat revenue consensus ($124.5M vs $124.0M*) but missed EPS ($0.36 vs $0.39*). Consensus EBITDA ($12.7M*) contrasts with company-reported adjusted EBITDA ($13.1M), suggesting definitional differences (GAAP vs non‑GAAP) .
  • Coverage is thin (EPS estimates: 1; revenue estimates: 2–3), which may heighten volatility around adjustments and guidance updates*.
  • Given Q4 guide implies GM 33–35% vs Q3’s 34.5%, EPS estimates may drift lower near-term if tariff intensity persists, while revenue could bias up with bag ramp and stronger chains/distributors demand .

Values retrieved from S&P Global.*

Key Takeaways for Investors

  • Volume and mix remain strong; revenue resilience offsets part of tariff headwinds, but margin recovery depends on continued sourcing diversification and stable FX .
  • EPS miss was primarily cost-driven (duties/tariffs and shipping/rent); watch for sequential improvements as domestic sourcing rises and vendor pricing is renegotiated .
  • New paper bag category is a credible multi‑year growth vector (~$20M near-term, potential >$100M), with attractive margin mix and cross‑channel leverage .
  • Capital return profile is robust (dividend + buyback), underpinned by strong working capital and liquidity; clarify VIE debt optics when assessing leverage .
  • Q4 guide suggests solid top-line momentum (CEO indicates mid-teens trend); near-term stock drivers include visibility on bag ramp, margin trajectory, and tariff policy updates .
  • Monitor opex discipline (shipping/rent) and import cost ratio; any moderation in duties or freight could quickly translate to margin upside .
  • Limited sell-side coverage increases the potential for estimate drift; management’s conservative tone on margins indicates prudent positioning ahead of tariff outcomes .