Karat Packaging KRT Q1 2026 Earnings Transcript

Image source: The Motley Fool.

DATE

Thursday, May 7, 2026 at 5 p.m. ET

CALL PARTICIPANTS

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

TAKEAWAYS

• Net Sales -- $116.9 million, up 12.9%, driven by $12.1 million in volume/mix and $2.0 million from pricing actions.
• Online Sales -- $19.5 million, a rise of nearly 10%; online sales achieved 19% growth in March, with record double-digit expansion continuing into April.
• Gross Margin -- 35.5%, compared to 39.3% in the prior-year quarter; decline attributed to higher import costs, which increased to 13.8% of net sales from 8.6% previously.
• Operating Expenses -- Increased to $33.1 million due to higher rent and salaries, offset by $0.7 million lower online platform fees and $0.4 million less in shipping costs.
• Operating Income -- $8.5 million, up 8.2%, with improved cost leverage (operating costs down to 28.3% from 31.8%).
• Net Income -- $7.1 million, up 4.8%, with net income margin at 6.1% versus 6.6% previously.
• Adjusted EBITDA -- $12.5 million, with a margin of 10.7%, down from 11.5% in the prior-year quarter.
• Dividend -- $0.45 per share approved and paid, next payout scheduled for May 28, 2026, to shareholders of record on May 21, 2026.
• Working Capital & Liquidity -- $90.7 million in working capital, $36.4 million in financial liquidity, plus $45.7 million in short-term investments.
• Cost Pressures & Response -- Import duties and tariffs rose by $7.1 million year over year, but price increases of 5%-15% are being implemented to offset plastic input cost inflation.
• Sourcing Diversification -- Domestic purchases rose to 18% (from 14%), Malaysia and Vietnam sourcing reached 17% combined (from 12%), with Taiwan reduced to 46% (from 54%) and China to 11% (from 18%).
• Eco-Friendly Product Growth -- Paperback eco-friendly product sales rose 16.9%, supported by a new national chain account.
• Q2 Guidance -- Net sales targeted to grow 8%-10%; gross margin expected to range 35%-37% and adjusted EBITDA margin 11%-13%, excluding tariff refund impacts.
• Full-Year 2026 Guidance -- Net sales anticipated to grow low double digits; gross margin guidance 34%-36%, adjusted EBITDA margin 11%-13%, both without potential tariff refunds.
• Order Timing -- Approximately $2.0 million in orders pulled forward from April into March affected the quarter-end sales mix.

Need a quote from a Motley Fool analyst? Email pr@fool.com

RISKS

• Cost of goods sold rose 20%, primarily due to import tariffs and duties, which increased to $10.5 million from $3.4 million, pressuring gross and EBITDA margins.
• Net income margin declined to 6.1% from 6.6%, with lower gross margin versus the prior-year period.
• Sales to the retail channel declined 12%, signaling weakness in that segment.

SUMMARY

Management reported that sales momentum accelerated during the quarter, culminating in March growth over 20%, but this was partially driven by order pull-forward impacting April. Sourcing optimization reduced dependence on China and Taiwan, reinforcing cost control and supply chain resilience. Recent price increases of 5%-15% were below peer levels and designed to offset inflationary pressures, while tariff reductions helped maintain margin stability. Free cash flow reached $6.3 million, and an eco-friendly product expansion led to a new large national account win. Guidance calls for continued double-digit sales growth and gross margins above 34%, contingent on tariff trends and execution of price increases.

• CEO Yu stated, "last month, April, we topped our record with double-digit online sales growth, and we do foresee that this quarter we will have record online sales as well."
• Management highlighted accelerated national account pipeline development, expecting new conversions this or next quarter, particularly in sustainable product lines.
• Dividend payments remain consistent, supporting shareholder return strategy despite import cost challenges.
• CFO Guo indicated net sales growth in the low double digits for full-year 2026, with gross margin and EBITDA margin guidance maintained, excluding possible tariff refunds.

INDUSTRY GLOSSARY

• Paperback: Company’s product line of paper-based, eco-friendly packaging solutions, highlighted for recent category growth and new account wins.
• Chain accounts: Large, multi-location customers typically in the restaurant or foodservice industry, a primary sales channel for the company.

Full Conference Call Transcript

Operator: Thank you for standing by. My name is Pryla, and I will be your conference operator today. At this time, I would like to welcome everyone to the Karat Packaging Inc. First Quarter 2026 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. Thank you. I would now like to hand the conference over to Roger Pondel. Please go ahead.

Roger Pondel: Thank you, operator. Good afternoon, everyone, and welcome to Karat Packaging Inc.’s 2026 First Quarter Conference Call. I am Roger Pondel with Pondel Wilkinson, Karat Packaging Inc.’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 Factors 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 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 Inc. undertakes no obligation to update any forward-looking statements, except as required by law.

Please also note that during today’s call, we will be discussing adjusted EBITDA, adjusted EBITDA margin, adjusted diluted earnings per share, and free cash flow, all of 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 began 2026 with a robust first quarter. Year-over-year sales increased almost 13%, with momentum building throughout the quarter. Our performance during the quarter accelerated significantly, starting with modestly impacted growth in January to growth exceeding 20% in March, which included some pull-forward of orders. The acceleration reflected improving demand, strong execution across the organization, and continued gains in market share. Notably, our online sales, which are typically at a higher contribution margin, returned to robust growth this quarter after we pivoted to grow and fulfill our own online sales on our company storefront and third-party platforms.

Compared to the prior-year quarter, online sales increased almost 10% to $19.5 million in 2026 from $17.8 million in the prior-year quarter, with momentum building steadily throughout the first quarter, achieving 19% year-over-year growth in March 2026. Gross margin remained resilient at 35.5% despite the continued impact of higher tariffs. This performance demonstrates the effectiveness of our diversified sourcing strategy and was further supported by a favorable product mix and pricing. As we look ahead, we are closely managing a dynamic cost environment. Given the sharp increase in oil prices and the resulting impact on product costs, we are implementing price increases on select plastic items beginning in the middle of this month.

While certain sourced product costs are rising, we expect tariff savings under current trade policy to begin reducing cost of goods sold this month. These savings should partially offset inflationary pressure and, together with our pricing action, we expect to support gross margin stability. Importantly, we are well positioned to continue gaining market share amid ongoing resin supply challenges. Our strong inventory position and disciplined supply chain execution give us confidence in our ability to consistently serve customers and meet demand. Turning to innovation and sustainability, our paperback product category continues to expand steadily, driving a year-over-year increase in eco-friendly product sales of 16.9% in the first quarter.

We also successfully closed another national chain account for paperback during this quarter, further strengthening our leadership position and reinforcing our long-term strategy in sustainable packaging solutions. Our sourcing diversification initiative continues to deliver tangible benefits. We have proactively rebalanced import volumes across geographies in response to evolving tariff structures, strengthening our cost competitiveness and consistent product availability. In this quarter, we increased domestic purchases to 18% compared to 14% in the prior-year quarter, and increased sourcing from Malaysia and Vietnam to an aggregate of 17% from 12% in the prior-year quarter.

At the same time, we reduced purchases from Taiwan in the current quarter to 46% compared to 54% in the prior-year quarter, and reduced sourcing from China to 11% compared to 18% in the prior-year quarter. Additionally, we expanded our sourcing footprint by adding a new supplier in the Americas, which further reduces geographic risk and enhances supply chain flexibility. We remain focused on providing responsive customer service and disciplined execution, which are a hallmark of Karat Packaging Inc., while advancing operational efficiencies. These efforts are reflected in better operating cost leverage, which decreased to 28.3% in 2026 from 31.8% in the prior-year quarter.

In summary, we delivered a strong start to the year, maintained margin resilience in a challenging environment, and continue to invest in growth areas that align with our customer demand and long-term industry trends. I will now turn the call over to Jian Guo, our Chief Financial Officer, to discuss the company’s financial results in greater detail. Jian?

Jian Guo: Thank you, Alan. I will begin with a summary of our Q1 performance, followed by an update on our guidance. Net sales for the 2026 first quarter increased to $116.9 million, up 12.9% from $103.6 million in the prior-year quarter. The increase primarily reflected $12.1 million in volume and mix and a $2.0 million favorable impact from pricing. Sales to chain accounts and distributors, our biggest sales channel, were up by 15.1% in the 2026 first quarter. Online sales, as Alan discussed earlier, rose almost 10% over the prior-year quarter, and sales to the retail channel declined 12% from the 2025 first quarter.

Cost of goods sold for the 2026 first quarter increased 20% to $75.4 million from $62.9 million in the prior-year quarter. The increase was driven primarily by sales growth and higher import costs of $7.3 million, primarily as a result of higher import duty and tariffs, which increased from $3.4 million for the three months ended March 31, 2025 to $10.5 million for the three months ended March 31, 2026. Gross profit for the 2026 first quarter increased to $41.5 million from $40.8 million in the prior-year quarter. Gross margin for the 2026 first quarter was 35.5% compared with 39.3% a year ago.

The year-over-year decline in gross margin reflects the expected impact from higher import costs, which increased to 13.8% of net sales from 8.6% in the prior-year quarter, as well as elevated inventory adjustments as a percentage of net sales. These impacts were partially offset by lower product costs as a percentage of net sales. Operating expenses in the 2026 first quarter increased to $33.1 million from $32.9 million last year. The increase was primarily driven by higher rent expense of $0.6 million associated with the opening of the company’s new Chino distribution center in March 2025, along with a $0.6 million increase in salaries and benefits.

These increases were partially offset by a $0.7 million reduction in online platform fees resulting from a shift away from third-party fulfillment of online orders, as well as a $0.4 million decrease in shipping and transportation costs due to lower online shipping rates. Operating income in the 2026 first quarter increased 8.2% to $8.5 million from $7.8 million in the prior-year quarter. Total other income (net) decreased $2.9 million for the 2026 first quarter from $1.1 million in the prior-year quarter. Net income for the 2026 first quarter increased 4.8% to $7.1 million from $6.8 million for the prior-year quarter. Net income margin was 6.1% in the 2026 first quarter compared with 6.6% last year.

Net income attributable to Karat Packaging Inc. for the 2026 first quarter increased 5.2% to $6.7 million, or $0.34 per diluted share, from $6.4 million, or $0.32 per diluted share, in the prior-year quarter. Adjusted EBITDA for the 2026 first quarter rose to $12.5 million from $11.9 million for the prior-year quarter. Adjusted EBITDA margin was 10.7% compared with 11.5% for the 2025 first quarter. Adjusted diluted earnings per common share increased to $0.34 for the 2026 first quarter from $0.33 per share in the comparable prior-year period.

We executed strong working capital management during the first quarter, generating operating cash flow of $7.2 million and free cash flow of $6.3 million, despite continued heavy duty and tariff payments discussed earlier. We paid out a regular quarterly dividend of $0.45 per share to shareholders on February 27, 2026. As of March 31, 2026, we had $90.7 million in working capital and $36.4 million in financial liquidity, with another $45.7 million in short-term investments. On May 5, 2026, our Board of Directors approved a regular quarterly dividend of $0.45 per share, payable May 28, 2026 to shareholders of record as of May 21, 2026.

Looking ahead to the 2026 second quarter, we expect net sales to increase by approximately 8% to 10% from the prior-year quarter. As Alan noted earlier, some timing shift of orders in March contributed to a softer start in April. Since then, we have replenished inventory, and we are confident in our ability to achieve our sales target. We expect gross margin for the 2026 second quarter to be within 35% to 37% and adjusted EBITDA margin to be within 11% to 13%, excluding potential tariff refund impact under the current trade policy. For the full year 2026, we expect net sales to grow in the low double-digit range over the prior year.

We expect gross margin for the full year 2026 to be within 34% to 36% and adjusted EBITDA margin to be within 11% to 13%, excluding potential tariff refund impact under the current trade policy. As Alan mentioned earlier, we are seeing accelerated growth in our pipeline, reflecting our strong market positioning and initiatives to continue gaining market share in a dynamic trade and supply chain environment. We expect to continue to drive top-line growth, sustain our gross margin, and continue to deliver strong profitability with enhanced operational efficiency and disciplined cost management. Alan and I will now be happy to answer your questions, and I will turn the call back to the operator.

Operator: Thank you. We will now open the call for questions. If you have dialed in and would like to ask a question, please press star then 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, please press star then 1 again. Your first question comes from the line of George Staphos with Bank of America. Please go ahead.

Kyle Benvenuto: Hi. This is Kyle Benvenuto on for George. Thank you for taking my question. You noted the sharp increase in oil prices is pressuring costs across sourced products and plastics. Within both your Q2 2026 margin guidance ranges, what oil price assumptions are embedded, and at what point would the mid-May plastic price increases no longer be sufficient to protect the 34% margin floor for the year?

Alan Yu: Well, here is what we see on the oil prices. Yes, you are correct. Oil prices have gone up, and raw materials have gone up sharply. But we were able to negotiate with our vendors to support less increase versus the full increase impact of the oil prices, so the majority of our partner vendors overseas have absorbed the majority of the increases. That is where we are seeing that we are giving minimal increases in the May 15 to June area. Is this going to escalate more? Right now, we see that the resin price has stabilized in Asia. It has come down a little bit also.

So we do not see, at this point, that the raw material price will go up even higher from this point.

Kyle Benvenuto: Thank you, Alan. And then one more question for you, and I will turn it over. Your guidance points to 8% to 10% sales growth for Q2. How much of this is driven by the expansion of new national accounts versus organic volume growth from your existing customer base? Thank you.

Alan Yu: We are seeing a sharp increase in our online sales portion of our business. For example, last month, April, we topped our record with double-digit online sales growth, and we do foresee that this quarter we will have record online sales as well. Last year, we did about $72 million to $73 million in online revenue, and this year we are on track for $100-plus million in online revenues. So a big chunk of the growth is from online sales revenue. From our national chain accounts, yes, we do see some of the national chain pipeline converting to revenues. That is also a segment where we see growth, especially in the summer season.

Most of these chains are going to increase their orders for their drink cups and carriers, as well as the to-go part of our foodservice segment of our business. These are all organic growth.

Unknown Speaker: Right away.

Kyle Benvenuto: Thank you, and congrats on the quarter.

Alan Yu: Thank you.

Operator: The next question comes from the line of Ryan Meyers with Lake Street Capital Markets. Please go ahead.

Ryan Meyers: Hey, guys. Thanks for taking my questions. First one for me, and I just want to make sure I understand this dynamic correctly. Alan, you had called out the 20% growth that you saw in the month of March, and then, obviously, the second-quarter guidance is only 8% to 10% revenue growth. So it sounds like you guys saw some pull-forward in order demand that drove the strength in March, and then things kind of stabilized a little bit in the second quarter. That is where that delta is between that 20% and that 8% to 10% growth. It is not necessarily that the business is slowing?

Alan Yu: No, it is not. And we want to be conservative in terms of our growth numbers. We do expect our full-year guidance to be in range with what we have guided earlier this year. For the second quarter, we saw some softening in April because of the pull-forward from March, and so far this month we are seeing very positive revenue growth in May. But we want to be conservative and cautious to make sure that we meet or exceed the guidance.

Ryan Meyers: Yep. Fair enough. That makes sense. And then thinking in terms of pricing, you called that out in the prepared remarks. How much price do you feel needs to be taken for you to preserve your gross margins? And then, industry-wide, what do your price increases look like compared to competitors? Are you still feeling like you are priced below where the market is, allowing for some of those share gains?

Alan Yu: Yes. Our price announcement was 5% to 15%, depending on category. Our peer group seems to have price increases of 8% to 12%, so we are in the lower range among our peer group. We understand this is a difficult environment, with foodservice having a challenging year and beef prices going up, so we want to support our partners. We are announcing a lower price increase, and because of some help with tariffs—over the past six to nine months we were paying a 20% tariff, and now we are down to a 10% tariff—this reduction is helping our gross margin a lot. So that is where we see it.

We do see a stronger gross margin for this quarter versus the prior quarter. That is why we are seeing that our net sales should be intact and on track with our guidance.

Ryan Meyers: Okay. Got it. Thank you for taking my questions.

Alan Yu: Thank you, Ryan.

Operator: The next question comes from the line of Ryan Merkel with William Blair. Please go ahead.

Analyst: Hey. Good afternoon. Thanks for the questions. This is Ben Schmidt on for Ryan. First question here, just to put a finer point on March and April, is there any way to size the pull-forward impact in March? It sounds like April might have been down, so just a finer point there would be great.

Alan Yu: I would think that about $2.0 million was pulled forward from April into March.

Analyst: Okay. Got it. Thank you.

Analyst: And then last one for me. I know you mentioned a win this quarter, but any other updates on the pipeline of potential wins you discussed last quarter?

Alan Yu: We are working with a few very large chains that might convert this quarter or at least next quarter. This quarter, we are converting some existing customers by adding additional SKUs to those customers, such as items in the eco-friendly product line and paper bags. That is what we are seeing right now.

Analyst: Alright. Got it. That is all for me. Thanks, guys.

Alan Yu: Thank you.

Operator: We have no further questions at this time. I would like to turn it back to Alan Yu for closing remarks.

Alan Yu: Thank you, everybody, for joining our first quarter Karat Packaging Inc. earnings conference call. We look forward to speaking with you next time. Thank you very much, and have a wonderful day. Bye-bye.

Operator: Thank you. Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has positions in and recommends Karat Packaging. The Motley Fool has a disclosure policy.