Image source: The Motley Fool.

DATE

Thursday, Aug. 6, 2026 at 5:00 p.m. ET

CALL PARTICIPANTS

• Chief Executive Officer - Alan Yu
• Chief Financial Officer - Jian Guo

TAKEAWAYS

• Net Sales -- $136.3 million, up 9.9% driven by $13.1 million in volume growth and product mix.
• Gross Margin -- 56.6%, including a contribution of 1,890 basis points from IEEPA tariff refunds.
• Ex-Refund Gross Margin -- 37.7%, reflecting sourcing diversification and cost management despite higher ocean freight rates.
• Net Income -- $29.6 million, increasing 168.3% primarily due to $20.2 million in IEEPA tariff refunds and lower foreign currency losses.
• Diluted EPS -- $1.46, including $1.00 per share from the IEEPA tariff refunds, compared with $0.54 per share in the prior-year quarter.
• Adjusted EBITDA -- $41.6 million, reflecting the benefit from $25.8 million in tariff refunds versus $17.7 million last year.
• Online Sales -- $25.8 million, growing 23.6% year over year and reaching 18.9% of total net sales.
• Chains and Distributors Sales -- $105.9 million, rising 9.0% over the prior-year quarter.
• Eco-Friendly Product Sales -- 33.8% of total net sales, increasing from 31.8% due to SKU expansion and growth in paper bags.
• Sourcing Diversification -- Taiwan accounted for 46%, China represented 11%, and domestic sourcing increased to nearly 20% of total sourcing.
• Third Quarter Guidance -- Net sales are expected to grow in the low double-digit range, with gross margin projected between 35% to 37%.
• Full Year 2026 Guidance -- Net sales are expected to grow in the low double-digit range, with adjusted EBITDA margin targeted at approximately mid-teens.
• Operating Expenses -- $39.6 million, increasing from $32.6 million due to higher shipping costs, marketing expenses, and salaries.
• Import Costs -- 11.1% of net sales, up from 9.5% due to an 8.9% increase in average container rates.
• Free Cash Flow -- $31.8 million, including cash receipts of $25.2 million related to the tariff refunds.
• Dividends -- Increased to $0.47 per share, payable on Aug. 28, 2026, to stockholders of record as of Aug. 21, 2026.
• Share Repurchases -- $2 million for 73,510 shares, leaving approximately $10 million available under the current program.
• Financial Liquidity -- $42 million in liquidity plus $15.7 million in short-term investments as of June 30, 2026.
• Warehouse Expansion -- Finalizing a lease for a 47,000-square-foot facility in Orlando to service the Southeast region and support e-commerce fulfillment.
• July Online Growth -- Online sales growth accelerated to 37% plus in July, with Amazon sales specifically growing 49% year over year.
• Fuel Costs -- Diesel costs reached $5.40 per gallon during the second quarter due to Middle East regional instability.
• New Accounts -- Added four new chain accounts during the quarter, with product shipments expected to begin in the fourth quarter.

Need a quote from a Motley Fool analyst? Email [email protected]

RISKS

• CFO Guo stated, "The increase was primarily driven by higher shipping and transportation costs of $3.1 million," noting that these expenses rose sequentially by $1.4 million.
• CEO Yu noted that "the second quarter was the highest fuel cost that we ever seen in the past year," attributing the peak to the crisis in the Middle East.
• Jian Guo warned that product costs as a percentage of net sales increased to 49.2% from 48.5% in the prior-year quarter, primarily due to increased sales volume and resin prices.

SUMMARY

Management for **Karat Packaging Inc.** (KRT -0.89%) reported record quarterly net sales driven by volume growth and expansion in the e-commerce channel. The company is expanding its distribution infrastructure with a new facility in Florida to reduce delivery times for its Southeast customer base. Operational initiatives focus on mitigating rising shipping costs through the use of an internal delivery fleet for local orders and inter-warehouse transfers. Additionally, the company is diversifying its supply chain by increasing domestic sourcing to a higher portion of total requirements while managing a significant influx of tariff-related refunds.

• CEO Yu stated that the company target for "online revenue is $100 million" for the year and categorized the goal as being on track.
• CFO Guo indicated that gross margin without the impact of IEEPA tariff refunds would have been 37.7% for the quarter.
• The Orlando distribution center is expected to improve fulfillment for the e-commerce business in the company's fourth-largest online customer base.
• CEO Yu noted that the company is seeing a "strong tailwind" in the third quarter from a stronger U.S. dollar against the Taiwan dollar.
• Operational efficiency efforts include utilizing the internal fleet to perform local deliveries and inter-warehouse inventory transfers to reduce reliance on third-party carriers.
• Management confirmed the addition of four new chain accounts during the quarter, with product shipments expected to ramp up in the fourth quarter.

INDUSTRY GLOSSARY

• IEEPA: International Emergency Economic Powers Act, which allows the U.S. president to regulate international commerce in response to unusual and extraordinary threats.
• Adjusted EBITDA: A non-GAAP financial measure representing net income before interest, taxes, depreciation, and amortization, adjusted for stock-based compensation and specific transaction costs.
• Basis Points: A unit of measure for percentages in finance, where one basis point equals 0.01%.
• Resin: A raw material used in the manufacturing of plastic products; its cost is often tied to oil prices.
• SKU: Stock Keeping Unit, a unique code used to identify and track inventory items.

Full Conference Call Transcript

Operator: Good day, and welcome to the Karat Packaging Second Quarter 2026 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Roger Pondel.

Roger Pondel: Good afternoon, everyone, and welcome to Karat Packaging's 2026 second quarter conference call. I'm Roger Pondel with PondelWilkinson, Karat Packaging's investor relations firm. It will be my pleasure momentarily to introduce the company's Chief Executive Officer, Alan Yu; and its Chief Financial Officer, Jian Guo. Before I turn the call over to Alan, I want to remind our listeners that today's call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements are subject to numerous conditions, many of which are beyond the company's control, including those set forth in the risk factor section of the company's most recent Form 10-K, as filed with the Securities and Exchange Commission, and copies of which are available on the SEC's website at www.sec.gov, along with other company filings made with the SEC from time to time. Actual results could differ materially from these forward-looking statements, and Karat Packaging undertakes no obligation to update any forward-looking statements except as required by law.

Please also note that during this call, we will be discussing adjusted EBITDA, adjusted EBITDA margin, adjusted diluted earnings per share, and free cash flow, which are non-GAAP financial measures as defined by SEC Regulation G. A reconciliation of the most directly comparable GAAP measures to the non-GAAP financial measures is included in today's press release, which is now posted on the company's website. And with that, I will turn the call over to CEO Alan Yu. Alan?

Alan Yu: Thank you, Roger. Good afternoon, everyone. We delivered record quarterly net sales of more than $136 million, reflecting the strength of our customers' demand and accelerated momentum in our online business growth. During the quarter, our sales pipeline expanded, adding four new chain accounts, which further broadened our market reach and created additional opportunities for future revenue growth. We continue to experience encouraging momentum across our business, highlighted by the strong performance of our online channel, where net sales increased 23.6% year over year. Our eco-friendly product portfolio also continued to gain traction, benefiting from the continued expansion of SKUs and growth in the paper bag categories.

As a result, eco-friendly products represented 33.8% of total sales during the quarter, compared with 31.8% in the prior-year period. Our results also benefited from IEEPA tariff refunds, which reverses higher tariff costs absorbed in the prior periods, and further contributed to the strong reported profitability. While we were pleased to capture this benefit in the quarter, our focus remains on the fundamental drivers of the business and sustaining strong long-term financial performances. To support our long-term growth strategy, we are currently finalizing a lease for a 47,000-square-foot warehouse for a new distribution center in Orlando, Florida, which we expect to be operational by the third quarter of this year.

The new facility is expected to enhance Karat's ability to better service customers throughout the Southeast, improve fulfillment capability for our growing e-commerce business, reduce delivery time, and provide additional infrastructure to support future growth. At the same time, we remain focused on driving operational excellence. We are continuing to execute initiatives designed to enhance efficiency across the organization, while carefully managing costs, aiming to support sustainable profitability, and position the company for continued success. During this quarter, we achieved gross margin of 56.6%, including the benefit from the IEEPA tariff refund of 1,890 basis points. Despite higher product costs and ocean freight rates, the performance underscores the strength of our sourcing capabilities.

Our sourcing diversification initiative continues to deliver tangible benefits, strengthening Karat's competitive advantage through reliable product availability and cost competitiveness. In the second quarter, domestic purchase increased to nearly 20% of total sourcing, while importing from Taiwan represented 46%, China represented 11%, and sourcing from Indonesia, Singapore, and South America represented an aggregate of 12%. Overall, we are pleased with the progress we are making with the expanding sales pipeline, new customer wins, strong e-commerce growth, and a continued focus on the operational discipline. We believe Karat is well positioned to advance profitability and long-term growth. I will now turn the call over to Jian Guo, our Chief Financial Officer, to discuss the company financial results in greater detail. Jian?

Jian Guo: Thank you, Alan. I'll begin with a summary of our second quarter performance, followed by an update on our guidance. Net sales for the 2026 second quarter increased to $136.3 million, up 9.9% from $124.0 million in the prior-year quarter. The increase primarily reflected $13.1 million in volume growth and product mix, and a $0.4 million favorable impact from pricing, partially offset by a decrease of $1.1 million in shipping and logistics revenue. Sales to chain accounts and distributors, our biggest sales channel, were up by 9.0% in the 2026 second quarter.

Online sales, as Alan discussed earlier, rose 23.6% over the prior-year quarter, and sales to the retail channel declined 23.4% from the 2025 second quarter, primarily from the decrease in shipping and logistics revenue. Costs of goods sold for the 2026 second quarter, including the benefit of $25.8 million from IEEPA tariff refunds, decreased 21.0% to $59.1 million from $74.9 million in the prior-year quarter. This benefit was partially offset by higher product costs of $6.9 million and increased import costs of $3.5 million, including an 8.9% increase in average container rates and a 4.3% increase in the number of containers imported versus the prior-year quarter.

Gross profit for the 2026 second quarter increased to $77.2 million from $49.1 million in the prior-year quarter. Gross margin increased to 56.6% in the second quarter of 2026 from 39.6% a year ago, reflecting that 1,890 basis point contribution from IEEPA tariff refunds. Product costs represented 49.2% of net sales, up from 48.5% in the prior-year quarter, while import costs increased to 11.1% of net sales from 9.5%, primarily due to higher freight and import-related expenses. Operating expenses in the 2026 second quarter increased to $39.6 million from $32.6 million last year.

The increase was primarily driven by higher shipping and transportation costs of $3.1 million, along with increases in online platform of $0.6 million and marketing expenses of $0.5 million. We also incurred higher costs of $1.1 million in salaries and benefits, while bad debt expense and warehouse expenses increased by $0.6 million and $0.4 million, respectively. Additionally, the second quarter included a $0.1 million loss on the disposal of machinery compared with a $0.3 million gain recognized in the prior-year quarter from routine asset disposals. Operating income in the 2026 second quarter increased 127.2% to $37.6 million from $16.6 million in the prior-year quarter.

Other income net for the 2026 second quarter was $1.4 million compared to other expenses net of $2.0 million in the prior-year quarter. The year-over-year improvement was primarily driven by significantly lower foreign currency transaction losses, which were $0.1 million in the current quarter compared with $2.9 million in the same period last year. In addition, interest income increased by $0.5 million, reflecting $0.9 million of interest income associated with IEEPA tariff refund, partially offset by a $0.4 million decline in interest income earned on investments in certificates of deposit. Net income for the 2026 second quarter increased 168.3% to $29.6 million from $11.1 million for the prior-year quarter.

Net income margin was 21.8% in the 2026 second quarter, reflecting the benefit from IEEPA tariff refunds of 1,480 basis points versus 8.9% last year. Net income attributable to Karat for the 2026 second quarter was $29.3 million, or $1.46 per diluted share, reflecting the benefit from IEEPA tariff refunds of $1 per diluted share compared with $10.9 million, or $0.54 per diluted share in the prior-year quarter. Adjusted EBITDA for the 2026 second quarter rose to $41.6 million, reflecting the benefit from IEEPA tariff refunds of $25.8 million from $17.7 million for the prior-year quarter. Adjusted EBITDA margin was 30.5%, reflecting the benefit from IEEPA tariff refunds of 1,890 basis points compared with 14.3% for the 2025 second quarter.

Adjusted diluted earnings per common share increased to $1.48 for the 2026 second quarter, reflecting the benefit from IEEPA tariff refunds of $1 per diluted share from $0.57 per share in a comparable prior-year period. As of June 30, 2026, we had working capital of $110.8 million and $42 million in financial liquidity, with another $15.7 million in short-term investments. During the second quarter, we generated operating cash flow of $33.2 million and free cash flow of $31.8 million, both of which reflected the benefit from IEEPA tariff refunds received of $25.2 million during the second quarter of 2026. We paid out a regular quarterly dividend of $0.45 per share to shareholders on May 28, 2026.

During the second quarter, we repurchased 73,510 shares of our common stock for a total of $2 million under our share repurchase program. As of June 30, approximately $10 million remained available under the program. On August 4, 2026, our board of directors approved an increase of regular quarterly dividend to $0.47 per share, payable on August 28, 2026, to stockholders of record as of August 21, 2026. Now, let me provide an update to our guidance. For the 2026 third quarter, we expect net sales to grow in the low double-digit range from the prior-year quarter.

We expect gross margin for the 2026 third quarter to be within 35% to 37% and adjusted EBITDA margin to be within 9% to 11%, both including insignificant IEEPA tariff refunds anticipated during the quarter. For full year 2026, we expect net sales to grow in the low double-digit range over the prior year. With more clarity around the IEEPA tariff refund process, we now expect gross margin for the full year 2026 to be in the low 40% and adjusted EBITDA margin to be approximately mid-teens, both including IEEPA tariff refunds recorded during the first half of 2026.

As Alan mentioned earlier, we are experiencing what we believe is accelerated growth in our sales pipeline, reflecting current strong market position and ongoing initiatives to gain market share. Looking ahead, we expect to continue driving top-line growth, sustaining healthy growth momentum through our diverse [ sourcing ] strategy and reduced tariffs. We're also confident that the actions we're taking to manage operating costs will further improve operating leverage and drive sustainable profitability. Alan and I will now be happy to answer your questions, and I'll turn the call back to the operator.

Operator: [Operator Instructions] The first question today comes from Michael Francis with William Blair.

Michael Francis: I want to start on the SG&A. That seemed to be the big surprise for us in the quarter to the downside. You mentioned you have some actions that you're taking to improve that. Can you talk a bit more about, A, what surprised you there, and then, B, what you're doing to offset some of the higher costs?

Jian Guo: Yes, sure. Let me start and then Alan, please feel free to add some additional colors there. So in terms of the SG&A, I know you mentioned some surprises. I think really the way that we think about it is just consistent with the trend that we are observing with the macro environment, right? Just the biggest item that we are focusing on for the third quarter as far as the cost management is really the shipping cost. So shipping costs, a lot of the orders that we ship out to the customers, we utilize the third-party carriers. We partner with our third-party carriers.

That's an area that we're focusing on in the third quarter to try to manage the cost. Just to give you a high-level idea, so the second quarter in terms of the offline shipping cost. In total, we incurred about $6.1 million on the year-over-year basis. That's a sequential $1.4 million increase right there. So that's one area that 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. We're delivering orders -- local orders to our local customers with our own employees.

And we're also performing the inter-warehouse inventory transfers with some of our internal fleet as well. So that's the biggest area. Another area is we're continuing to try to get savings on the online order as well, online order delivery cost. The shipping cost is one area that we talked about previously on the call is we have a service agreement with one of the carriers, so that's one area that we're continuing to focus on in terms of realizing cost savings there. So that's the biggest kind of in terms of the offline and online shipping costs, really.

I think it's probably fairly consistent with some of the other companies just as we approach, as we're thinking about the overall higher oil, the gas price there. One other area that we're focusing on in the third quarter is our salary and benefit expenses. That's really to utilize our labor force more efficiently. So those are the two biggest areas I would call out.

Alan Yu: I want to add a little bit of color to that, what Jian just mentioned. The second quarter was the highest fuel cost that we ever seen in the past year due to the crisis in the Middle East. And in the third quarter, we are actually seeing the cost coming down in the third quarter already. Like for instance, we were paying $5.40 per gallon diesel gas. In the third quarter, we're looking at ship around $4-something, 25% discount on the diesel gas alone. On the carrier fuel surcharge also we're seeing a declining rate from the second quarter to third quarter.

So this is where we're seeing that more of a decline in not only on the ocean freight declines and also as well as the shipping, all because oil prices. Everyone knows that the second quarter oil price was the highest ever but it started to drop in July, so we'll see if it's a continued drop or even at this point it is still lower than the second quarter.

Michael Francis: Yes, that's not surprising. I figured that was the case. And then to the pause of your online sales are continuing to trend quite well. What drove the strength there and then across the category? Should we expect the similar growth trajectory to the -- in the second half that we saw in the first?

Alan Yu: Well, let me add to this online growth. During our last quarter earning call, I mentioned that we are -- our target for this year's online revenue is $100 million. As we see July's number, we were looking at the second quarter, we're looking at 20%, 24%, 25%. I think the online growth year-over-year just in July we're seeing Amazon growth around 49% year-over-year growth just in Amazon. Our overall online sales 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 $100 million is on track for this year's revenue goal just for online.

Definitely 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.

Michael Francis: That's good to hear. One last one for me. Florida D.C. coming online, you continue to sort of add capacity there. Do you still think you have any sort of gaps in your current coverage where you could add more DCs and sellers, and if so, where?

Alan Yu: Well, Orlando, Florida, it's on the, basically we're finalizing the agreement and that's going to help because that is our fourth largest online customer base. And we have been shipping from South Carolina and Houston into Orlando. Once we have the Orlando D.C. ready, our customer can receive their product the next day, if not the following day, instead of waiting three or five days. So that would definitely improve our sales number online in just the Southeast area, which is our fourth largest. Now the other area that we're seeing that we might need some support, definitely it would be in the Colorado area, which can support the Utah area.

But we're still looking at that because Colorado is, the shipping, anything shipping to Colorado is actually more into Texas. That's what we see. So currently we're shipping to Colorado from Texas into Colorado, which is two to three days for online. And, of course, we have been looking to the North America area, the Vancouver, Toronto. These are the areas we have been trying to figure how we can get the logistic part of the issues resolved because we do see a very wide open market in that part of the segment, which is North America.

Michael Francis: Okay, that's all understood. I'll pass it on.

Operator: The next question comes from Ryan Meyers with Lake Street.

Ryan Meyers: If we exclude the tariff refund during the quarter, I'm just curious, how would you characterize just the underlying gross margin and performance of the business? Was it relatively as you expected?

Jian Guo: Let me start and then, Alan, please feel free to add colors on there as well. Hi Ryan, that's a great question. So as we reported our gross margin is 56.6% for the quarter. If you do the math, if you exclude the contribution, our gross margin without the refund -- tariff refund would have been 37.7%, which I think is still really strong. We're talking about high, close to 40% gross margin. And I think we talked about the underlying drivers, right? Our sourcing diversification, our sourcing capabilities. And I think we do expect to continue to navigate this environment really well with the pricing dynamics, with the sourcing, the changing kind of the trade landscape.

We did provide the guidance for the third quarter gross margin to continue to be in the high 30s, so 35% to 37%. Does that answer your question?

Alan Yu: Yes, Ryan, I want to add something to this. During the second quarter, we did see our, like Jian mentioned, a 37.7%. And in the third quarter, we're seeing a stronger U.S. dollar versus other currency in Asia, especially against Taiwan dollars. Last year, if you saw the second quarter, we had a $2.9 million currency loss due to the currency devaluation of U.S. dollars against Taiwan dollars. Now we're seeing a strong tailwind, which is the currency gain. We're seeing one of the highest gains in the third quarter that we're looking at as we stay at the same current level right now.

So there's going to be some pretty positive things in the third quarter, like the ocean freight. There might be some reduction in ocean freight, because we're about to ending the peak season. Might not be a lot but it's definitely going to help. I think everything helps in terms of helping the gross margin and also we're looking at not only on that part, we're looking at into the savings in terms of operating expense as well.

Ryan Meyers: Got it. Now, that's great to hear. That's awesome. And then, you know, lastly, you mentioned in the press release that you guys added four new chain accounts during the quarter. You know, how should we think about the timing and potential contribution from those wins?

Alan Yu: We're thinking about the fourth quarter. So we start to ship the product. Yes, it takes us two to three months to ramp up the inventory and then start the -- so we promise the customers fourth quarter we'll start shipping the product.

Ryan Meyers: Okay, got it. No, that's helpful. Thanks for taking my questions.

Operator: This concludes our question and answer session. I would like to turn the conference back over to Alan Yu for any closing remarks.

Alan Yu: Thank you, Operator, and thank you to everyone for joining us today. Karat is built on a strong business foundation, and we are encouraged by the positive momentum across our business. We remain focused on executing our growth strategy and look forward to keeping you updated on our continued progress. Have a nice day, everyone. Thank you. Bye-bye.

Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.