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    KRT
    Earnings call· Jun 2026(Q2 FY26)

    Karat Packaging Q2 FY26 earnings call KRT

    Aug 6, 2026 Source

    Executive summary

    Karat Packaging Q2 FY26 — Record Sales Driven by Online Growth and Tariff Refunds

    Karat Packaging delivered record net sales in Q2 FY26, propelled by robust online channel growth and the significant impact of IEPA tariff refunds. The company is expanding its distribution network with a new Orlando facility to enhance service in the Southeast, while actively managing operating costs, particularly shipping expenses, to sustain profitability. Management expressed confidence in continued top-line growth and operational efficiency.

    Highlights

    5

    • Record quarterly net sales of $136.3 million, up 9.9% year-over-year.

    • Online channel net sales increased 23.6% year-over-year, with July growth at 37% for online sales and 49% for Amazon sales.

    • Gross margin increased to 56.6% (37.7% excluding tariff refunds), up from 39.6% in prior year.

    • Adjusted EBITDA rose to $41.6 million, with adjusted EBITDA margin at 30.5% (11.6% excluding tariff refunds).

    • Operating cash flow of $33.2 million and free cash flow of $31.8 million generated in the quarter.

    Concerns

    3

    • Operating expenses increased to $39.6 million from $32.6 million last year, driven by higher shipping and transportation costs of $3.1 million.

    • Product costs represented 49.2% of net sales, up from 48.5% in the prior year.

    • Import costs increased to 11.1% of net sales, from 9.5%, primarily due to higher freight and import-related expenses.

    Guidance & targets

    7
    CategoryTargetConfidence
    Net sales growth
    low double-digit range
    medium materiality
    High
    Gross margin
    35% to 37%
    medium materiality
    High
    Adjusted EBITDA margin
    9% to 11%
    medium materiality
    High
    Net sales growth
    low double-digit range
    high materiality
    High
    Gross margin
    low 40%
    high materiality
    High
    Adjusted EBITDA margin
    approximately mid-teens
    high materiality
    High
    Online revenue
    $100 million
    medium materiality
    High

    Segment performance

    3
    SegmentRevenueYoYQoQMargin
    Online Channel
    Experienced accelerated momentum, with strong year-over-year growth in Q2 and further acceleration into July, driven by customer demand.
    July online sales growth: 37% YoYJuly Amazon sales growth: 49% YoY
    		—23.6%——
    Chain Accounts and Distributors
    This is the company's biggest sales channel, showing solid growth. Four new chain accounts were added, with shipments expected to begin in Q4 FY26.
    New chain accounts added: 4
    		—9.0%——
    Retail Channel
    Sales declined primarily due to a decrease in shipping and logistics revenue.
    		—-23.4%——

    Operational metrics

    31
    Net sales
    $136.3 millionup 9.9% YoY
    Q2 FY26

    Record quarterly net sales, driven by volume growth and favorable pricing, partially offset by reduced shipping and logistics revenue.

    Eco-friendly products as % of total sales
    33.8%vs 31.8% prior year
    Q2 FY26

    Continued traction benefiting from SKU expansion and growth in paperback categories.

    Gross margin
    56.6%vs 39.6% prior year
    Q2 FY26

    Significant increase driven by IEPA tariff refunds, demonstrating strong sourcing capabilities even with higher product and ocean freight costs.

    Cost of goods sold
    $59.1 milliondecreased 21.0% YoY
    Q2 FY26

    Decrease primarily due to tariff refunds, partially offset by higher product and import costs.

    Product costs as % of net sales
    49.2%up from 48.5% prior year
    Q2 FY26

    Slight increase in product costs relative to net sales.

    Import costs as % of net sales
    11.1%up from 9.5% prior year
    Q2 FY26

    Increase primarily due to higher freight and import-related expenses.

    Operating expenses
    $39.6 millionup from $32.6 million last year
    Q2 FY26

    Increase driven by various factors including shipping, online platforms, marketing, salaries, bad debt, and warehouse expenses.

    Loss on disposal of machinery
    $0.1 millionvs $0.3 million gain prior year
    Q2 FY26

    One-time loss on asset disposal in the current quarter, compared to a gain in the prior year.

    Operating income
    $37.6 millionincreased 127.2% YoY
    Q2 FY26

    Strong growth in operating income.

    Other income net
    $1.4 millionvs other expenses net of $2.0 million prior year
    Q2 FY26

    Improvement primarily driven by significantly lower foreign currency transaction losses and increased interest income, including from tariff refunds.

    Net income
    $29.6 millionincreased 168.3% YoY
    Q2 FY26

    Substantial increase in net income.

    Net income margin
    21.8%vs 8.9% prior year
    Q2 FY26

    Margin expansion largely due to tariff refunds.

    Net income attributable to Karat
    $29.3 millionvs $10.9 million prior year
    Q2 FY26

    Net income attributable to the company.

    Diluted EPS
    $1.46vs $0.54 prior year
    Q2 FY26

    Diluted EPS significantly boosted by tariff refunds.

    Adjusted EBITDA
    $41.6 millionvs $17.7 million prior year
    Q2 FY26

    Adjusted EBITDA rose significantly, primarily due to tariff refunds.

    Adjusted EBITDA margin
    30.5%vs 14.3% prior year
    Q2 FY26

    Margin expansion largely due to tariff refunds.

    Adjusted diluted EPS
    $1.48vs $0.57 prior year
    Q2 FY26

    Adjusted diluted EPS significantly boosted by tariff refunds.

    Working capital
    $110.8 million
    as of June 30, 2026

    Balance at quarter end.

    Financial liquidity
    $42 million
    as of June 30, 2026

    Total financial liquidity available.

    Short-term investments
    $15.7 million
    as of June 30, 2026

    Balance of short-term investments.

    Quarterly dividend per share
    $0.45
    Q2 FY26

    Regular quarterly dividend paid to shareholders.

    Share repurchase
    $2 million
    Q2 FY26

    Amount repurchased under the share repurchase program, with remaining authorization.

    Quarterly dividend per share (new)
    $0.47increased from $0.45
    Q3 FY26

    Board approved an increase in the regular quarterly dividend.

    Domestic purchase as % of total sourcing
    nearly 20%
    Q2 FY26

    Part of sourcing diversification initiative.

    Sourcing from Taiwan as % of total sourcing
    46%
    Q2 FY26

    Key component of sourcing strategy.

    Sourcing from China as % of total sourcing
    11%
    Q2 FY26

    Key component of sourcing strategy.

    Sourcing from Indonesia, Singapore, South America as % of total sourcing
    12%
    Q2 FY26

    Aggregate sourcing from these regions.

    Offline shipping cost
    $6.1 millionup $1.4 million sequentially
    Q2 FY26

    Incurred in Q2, primarily from third-party carriers. Focus for cost management in Q3.

    Diesel gas price
    $5.40highest in past year
    Q2 FY26

    High fuel costs impacting transportation expenses.

    Diesel gas price (expected)
    around $4.0025% discount vs Q2
    Q3 FY26

    Expected decline in fuel costs in Q3.

    Foreign currency transaction losses
    $1 millionvs $2.9 million prior year
    Q2 FY26

    Significantly lower losses compared to prior year.

    Industry KPIs

    2
    MetricValueDetails
    Contract vs spot large customer mix4 new chain accountsaccounts
    Digital vending managed inventory penetration23.6%%

    Capital programs

    1
    Orlando, Florida Distribution Centerunderway

    Benefit: 47,000 square feet warehouse

    Finalizing a lease for a new distribution center to enhance service in the Southeast, improve e-commerce fulfillment, and reduce delivery times.

    Risks & headwinds

    5
    High fuel costsQ2 FY26

    Diesel gas price at $5.40/gallon in Q2 FY26 (highest in past year)

    Mitigation: Utilizing internal fleet for local deliveries and inter-warehouse transfers; expecting Q3 prices around $4.00/gallon (25% discount).

    Increased shipping and transportation costsQ2 FY26, ongoing

    $3.1 million increase in Q2 FY26 operating expenses; offline shipping cost of $6.1 million in Q2 FY26, up $1.4 million sequentially.

    Mitigation: Focusing on utilizing internal fleet, optimizing routes, and negotiating with third-party carriers for online order delivery cost savings.

    Higher product costsQ2 FY26, ongoing

    Product costs represented 49.2% of net sales in Q2 FY26, up from 48.5% in prior year.

    Mitigation: Sourcing diversification initiatives to strengthen competitive advantage and cost competitiveness.

    Increased import costsQ2 FY26, ongoing

    Import costs increased to 11.1% of net sales in Q2 FY26 from 9.5% prior year, driven by 8.9% increase in average container rates and 4.3% increase in number of containers imported.

    Mitigation: Sourcing diversification and cost management efforts.

    Currency devaluation of U.S. dollar (prior period)Q2 FY25

    $2.9 million currency loss in Q2 FY25 due to U.S. dollar devaluation against Taiwan dollars.

    Mitigation: Currently seeing a stronger U.S. dollar in Q3 FY26, providing a tailwind.

    What to watch in Q3 FY26

    5

    Online sales growth

    next quarter
    Current37% YoY (July)
    TargetContinued strong growth, on track for $100M FY26 target

    Why it matters

    Sustained online growth is a key driver for overall revenue and market share expansion, especially with new DC capacity coming online.

    I think the online growth year-over-year just in July we're seeing Amazon growth around 49 percent year-over-year growth just in Amazon our old growth in July in the month of July we just finished a number we're at 37% plus just the online sales growth so right now I can confidently say that a hundred million dollars is on track for this year's revenue goal just for online it may be higher but I'm not sure how much higher so we're still pushing even more online sales right now that's where we are.

    Q&A highlights

    5

    Analyst inquired about the unexpected increase in SG&A in Q2 and the company's plans to mitigate higher costs, particularly shipping.

    Management attributed the SG&A increase to macro environment trends, specifically higher shipping costs from third-party carriers and increased salary/benefits. They are focusing on optimizing shipping by utilizing internal fleets for local deliveries and inter-warehouse transfers, and seeking savings on online delivery costs. They also noted a decrease in fuel costs in Q3 compared to Q2.

    “So the second quarter in in terms of the offline shipping cost. In total, we incurred about $6.1 million on the year-over-year basis that's a 1.4 uh a sequent I'm sorry sequential that's a 1.4 million dollars increase right there so that's that's one area that in this in the third quarter really we're focusing on utilizing our internal fleet to try to minimize to get more efficiency out of the offline shipping cost to the customers by as I mentioned, utilizing the internal fleet.”

    asked by Unknown Speaker · answered by Jian Guo

    2 min read5 chapters

    Detailed Narrative

    01

    Strong Online Channel Performance

    Karat Packaging experienced significant momentum in its online business, with net sales increasing 23.6% year-over-year in Q2 FY26. This growth accelerated into July, with Amazon sales up 49% and overall online sales up 37% year-over-year. The company is confident in achieving its $100 million online revenue target for FY26, potentially exceeding it, driven by strong customer demand and expanded fulfillment capabilities.

    02

    Impact of IEPA Tariff Refunds

    The company's Q2 FY26 results significantly benefited from IEPA tariff refunds, which contributed 1,890 basis points to gross margin and $25.8 million to adjusted EBITDA. These refunds also added $1 per diluted share to adjusted EPS and $25.2 million to operating and free cash flow. While pleased with the benefit, management emphasized focus on fundamental business drivers for long-term financial performance.

    03

    Strategic Distribution Network Expansion

    To support its long-term growth strategy and enhance customer service, Karat Packaging is finalizing a lease for a 47,000 square foot warehouse for a new distribution center in Orlando, Florida. This facility, expected to be operational by Q3 FY26, will improve fulfillment for the growing e-commerce business in the Southeast, reducing delivery times for customers in the company's fourth-largest online customer base.

    04

    Cost Management and Operational Efficiency

    The company is actively executing initiatives to enhance efficiency and manage costs, particularly focusing on shipping and transportation expenses. Efforts include utilizing internal fleets for local deliveries and inter-warehouse transfers, and seeking cost savings on online order deliveries. Management noted a decline in fuel costs in Q3 compared to Q2, which saw the highest fuel costs in the past year.

    05

    Sourcing Diversification and Gross Margin Drivers

    Karat Packaging's sourcing diversification initiative continues to yield benefits, strengthening its competitive advantage through reliable product availability and cost competitiveness. Domestic purchases increased to nearly 20% of total sourcing, while imports from Taiwan represented 46%, China 11%, and Indonesia, Singapore, and South America an aggregate of 12%. This strategy, combined with a stronger U.S. dollar against Asian currencies, is expected to support gross margin in Q3.

    AI-generated summary of the company’s earnings call. Not investment advice.