Karat Packaging Q3 2026 Earnings Call Transcript
Karat Packaging (NASDAQ:KRT) reported third-quarter financial results on Thursday. The transcript from the company’s third-quarter earnings call has been provided below.
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Summary
Karat Packaging Inc reported an 8.2% increase in net sales for Q3 2026, reaching $134.7 million, driven by a 37.7% growth in online sales.
Despite strong sales, increased import and shipping costs, along with elevated resin prices, pressured margins, resulting in a decrease in net income to $4.7 million from $7.6 million year-over-year.
The company secured new chain accounts and expanded its distribution footprint, with significant growth in the East Coast and Midwest regions.
A new 47,000 square foot distribution center in Orlando, Florida is set to become operational in November 2026 to support growth in the Southeast.
Karat Packaging implemented price increases to offset rising costs and plans additional hikes in early 2027.
Guidance for Q4 2026 anticipates 9% to 11% sales growth, with gross margin between 33% to 35% and adjusted EBITDA margin in the high single digits.
Full Transcript
OPERATOR (Moderator)
All lines have been placed on mute to prevent any background noise. Now I would like to turn the call over to Roger Pondell of Investor Relations. Please go ahead.
Roger Pondell (Investor Relations)
Thank you, operator. Good afternoon everyone and welcome to Karat Packaging’s 2026 third quarter conference call. I’m Roger Pondell with Pondel Wilkinson, Karat Packaging’s investor relations firm. It will be my pleasure momentarily to introduce the Company’s Chief Executive Officer Alan Yu and 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 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 today’s 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, it’s my pleasure to turn the call over to CEO Alan Yu.
Alan Yu (Chief Executive Officer)
Thank you, Roger. Good afternoon everyone. We delivered solid top-line growth in the third quarter with net sales increasing more than 8% to about $135 million. We experienced continued strong momentum in our e-commerce business where online sales grew nearly 38% compared with the prior-year quarter. While increased import costs, higher domestic shipping costs and elevated resin prices pressured margins and contributed to results below our expectation, we remain encouraged by the resilience of demand across our business.
We continue success in new account wins and the strength in our pipeline. We are confident in our long-term growth prospect. In October, we began shipping select products to the four new chain accounts that we secured in the second quarter. Notably, we expanded these relationships during the third quarter, winning additional business across multiple product lines such as paper bags, bagasse trays and others, with shipments expected to begin in early 2027.
Building on these wins, we recently secured four additional chain accounts, further expanding our distribution footprint. We believe these new relationships underscore the appeal of our broad product offering, flexibility and outstanding service, as well as our reliability as a value supplier. These new business wins support our continued focus on deepening Karat’s market penetration on the East Coast and Midwest. Sales on the East Coast grew 19% year over year while Midwest sales increased 22% compared to the prior-year quarter. Beyond these new accounts, we are in testing phases with other large chains across different product categories. We are also building inventory to prepare for shipments in the first and second quarter of 2027.
Our new 47,000 square foot distribution center in Orlando, Florida is expected to be fully operational in November 2026 to serve customers throughout the Southeast. The facility is expected to strengthen fulfillment capabilities for our growing e-commerce business, help reduce delivery time and provide additional infrastructure to support future growth. To address elevated oil prices and ongoing cost pressures, we continue to realign and optimize Karat’s global supply chain and diversify sourcing toward regions with more favorable trade conditions and freight costs, including Indonesia, Malaysia and South America. We have also implemented price increases on select items this month and we expect to implement additional price increases early next year to help offset higher costs. Aggregated purchases from Indonesia, South America and Malaysia increased to 19.4% of total sourcing, while sourcing from Taiwan, China and the U.S. accounted for 39.1%, 14.4% and 16.7%, respectively, of total purchases.
We believe our expanded distribution capacities, together with our supply chain and pricing initiatives, along with the continuous strength of our online channel and new chain account wins, will position Karat to accelerate revenue growth and improve operating performance and profitability in the quarters ahead. 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 (Chief Financial Officer)
Thank you, Alan. I’ll begin with a summary of our Q3 performance, followed by an update on our guidance. Net sales for the 2026 third quarter increased to $134.7 million, up 8.2% from $124.5 million in the prior-year quarter. The increase primarily reflected $10.7 million in volume growth and product mix and a $0.4 million favorable impact from pricing, partially offset by a decrease of $0.8 million in shipping and tax revenue. As Alan mentioned earlier, online sales rose 37.7% in the third quarter of 2026 compared with the prior-year quarter.
Sales to chains and distributors, our largest sales channel, increased 3.9% year over year and retail channel sales declined 18.4% from the third quarter of 2025, primarily due to lower logistics service revenue. Cost of goods sold for the 2026 third quarter increased 9.8% to $89.6 million from $81.6 million in the prior-year quarter. This increase was primarily driven by higher product costs of $7.2 million due to higher sales volume and prices, as well as higher import costs. Ocean freight costs increased $2.4 million, including a 17.0% increase in average container rates and an 11.7% increase in the number of containers imported versus the prior-year quarter, partially offset by a decrease in duty and tariff costs of $1.1 million compared with the prior-year quarter.
Gross margin for the 2026 third quarter increased 5.2% to $45.1 million from $42.9 million in the prior-year quarter. Gross margin was 33.5% in the 2026 third quarter compared with 34.5% in the prior-year quarter. The decrease was primarily driven by higher product costs, which represented 50.6% of net sales compared with 48.9% in the prior-year quarter. The increase in product costs was partially offset by a lower depreciation expense to 1.0% as a percentage of net sales from 1.3% in the prior-year quarter.
Operating expenses in the 2026 third quarter increased 17.2% to $40.3 million from $34.3 million last year. The increase primarily reflected higher shipping and transportation costs of $2.8 million, mainly due to the increase in online shipping costs of $2.2 million, platform fees of $0.9 million and online marketing expenses of $0.7 million. Additionally, salaries and benefits increased $0.9 million, warehouse expenses increased $0.4 million and stock-based compensation expense increased $0.4 million.
Operating income in the 2026 third quarter was $4.9 million compared with $8.6 million in the prior-year quarter. Other income, net, for the 2026 third quarter was approximately $1.0 million compared with $1.3 million in the prior-year quarter. The decrease was primarily due to a $0.5 million decline in the gain on foreign currency transactions. Net income for the 2026 third quarter was $4.7 million compared with $7.6 million for the prior-year quarter.
Net income margin was 3.5% in the 2026 third quarter compared with 6.1% for the prior-year quarter. Net income attributable to Karat for the 2026 third quarter was $4.4 million, or $0.22 per diluted share, compared with $7.3 million, or $0.36 per diluted share, in the prior-year quarter. Adjusted EBITDA for the 2026 third quarter was $8.9 million compared with $13.1 million for the prior-year quarter. Adjusted EBITDA margin was 6.6% of net sales for the 2026 third quarter compared with 10.5% for the prior-year quarter. Adjusted diluted earnings per common share was $0.24 for the 2026 third quarter compared with $0.37 per share in the prior-year quarter.
As of September 30, 2026, we have working capital of $87.0 million and $37.0 million in financial liquidity, with another $10.0 million in short-term investments. During the third quarter, we generated operating cash flow of $9.7 million and free cash flow of $9.1 million. We paid a regular quarterly dividend of $0.47 per share to shareholders on August 28, 2026. Additionally, Global Wealth, our consolidated variable interest entity, fully repaid the remaining balance of $11.2 million on one of its term loans that matured on September 30, 2026, further reducing our consolidated leverage ratio going forward.
During the third quarter of 2026, the company did not repurchase any of its common stock under its previously announced share repurchase program. For the first three quarters of 2026, the company repurchased a total of $2.0 million of its common stock. As of September 30, 2026, approximately $10.0 million remained available for future repurchases under the program. On November 3, 2026, our Board of Directors approved a regular quarterly dividend of $0.47 per share payable on or about November 27, 2026 to stockholders of record as of November 19, 2026.
Alan outlined the initiatives that we are implementing to support our long-term growth and enhance profitability in the quarters ahead while navigating significant pressure from resin products and oil prices. Against this backdrop, I’ll provide an update to our guidance for the 2026 fourth quarter. We expect net sales to grow by 9% to 11% from the prior-year quarter. We expect gross margin for the 2026 fourth quarter to be within 33% to 35% and adjusted EBITDA margin to be in the high single digits.
For the full year of 2026, we expect net sales to grow by 9% to 11% over the prior year. We expect gross margin for the full year 2026 to be between 39% and 41% and adjusted EBITDA margin to be in the mid-teens. Both margin expectations include IPA tariff refunds recorded during the first half of 2026. Alan and I now will be happy to answer your questions and I’ll turn the call back to the operator.
OPERATOR (Moderator)
Thank you. Quick reminder, before we start the Q&A, if you’d like to ask a question, please press star number one on your telephone keypad to raise your hand. If you’d like to withdraw your question, simply press star one again. We would like to advise that you pick up your handset when asking for optimal sound quality, and if you’re muted locally, please remember to unmute your device. We will take our first question from Ryan Myers from Lake Street Capital Markets.
Please go ahead.
Ryan Myers (Analyst)
Hey guys. Hey guys. Thanks for taking my question. You know, first one for me. Can you just walk us through what you saw on the revenue side of the business during the quarter and where the delta was for the growth rate, where it actually came in at versus where you guys had guided to?
Alan Yu (Chief Executive Officer)
Sure. For the third quarter, we missed our revenue by $2.5 million. Fundamentally, it is by one thing: we expected some of the chain accounts to start pulling the orders. They have been delaying for testing purposes, so they will be pushed forward into the fourth quarter. That’s why we’re looking at guiding the fourth quarter to be in the 9% to 11%, because they were supposed to take in the third quarter. They moved toward in the fourth quarter. At the same time, we have been adding additional new chain accounts that have signed up to start in the first quarter of 2027. So we will be ramping up inventory in the fourth quarter for them to start taking in the first quarter. One of the common practices for the chain accounts is even though they committed to buying from us, they have to deplete their inventory from their previous vendors. So often that kind of pushes away in terms of guidance.
I can give kind of an idea of what’s on the ocean freight side. First, ocean freight: our contracted rate is about $2,500 that we signed in the second quarter that was supposed to start on May 1. But during the third quarter of the year, because of oil price increases and the Iran war issues, each carrier has been raising their peak season charge, adding bunker fees and additional fees, and shorting on the containers. So we had to pull additional containers not from the contractors’ traditional contract.
So our rate had been basically averaging about $4,500 to $6,000 a container. We were expecting about $3,500 based on normal peak season surcharges. Normally, the peak season is for a couple months only, and this year it extended even longer. And also carriers removed peak season and the bunker—it added additional fees claiming that the Iran war has raised the price of oil and gas and delayed the shipments, delaying—there’s an over-demand. So, I mean, we’re fortunate paying $4,500 to $6,000. We’re seeing other non-contracted people—our competitors—have been paying $7,000 to $10,000 for the East Coast.
So for us, we’re competitive on the ocean freight compared to other people. Now, going forward, we’re seeing that the container cost did not reduce during the month of October. It kind of slowly dropped a little bit, but we’re hearing that the cost should be coming down in the fourth quarter, the last month, December of this year. As of yesterday, we knew that the midterm election was over, and a lot of these carriers are looking like they will reduce the bunker fee and peak season earlier. So we’re waiting to see when they will start.
OPERATOR (Moderator)
Thank you. Our next question comes from the line of George Stoffos from Bank of America. Please go ahead.
George Stoffos (Analyst)
Hi everyone. Good evening. Thanks for taking my question. Congratulations on the progress. I guess my first question, Alan, to the extent that you would have a view on this two days after the fact, does the election outcome change what you think the buying preferences might be over the next year and how are you positioned for it, and do you need to worry at all or do your customers have to worry at all? Does it mean the likelihood of more fiber versus plastic?
How would you have us think about that, to the extent that you might have a view? Second question. Retail was down 18%. You might have mentioned your remarks and I missed it. But what was driving that? And then the pipeline—you talk about adding the new retail outlets and you having new products. Help us understand how that might add to your revenue base for ’27.
Alan Yu (Chief Executive Officer)
Sure, George. Now, first to go to your question. For the election, first of all, originally we were wondering if the Iran war was going to continue because there was a threat from the President that after the election he was going to go all out with the war and bomb Iran, which we would expect the oil price to go even higher. That will basically raise the price of all the resin and costs. So we actually, in the third quarter, did not take any step into raising prices to our customers—passing the cost to our customers.
We were anticipating the war to end because every time there was a peace talk—I’m sure you heard the peace talk during the third quarter—that it was going to end. It was going to end. So we thought that it was going to end, but it didn’t. And after the election it seems like the war is going to end right now. But we did not account for the war to be ended a week ago. So we actually made a pricing announcement in October. We added a few surcharges to kind of offset some of the costs on delivery. In November we actually announced a price increase, which we started two days ago—a price increase across the board for most of our clients, except for some chain accounts. And we also, just last Friday, announced another price increase, a bigger price increase, January 1st of 2027, 3% to 13% price increase. Because we feel that we can’t rely on the fact that the war is going to be over, that the rising cost is going to come down—the cost of delivery.
I mean, one key thing that impacted our margin is online shipping. We use UPS for online shipping—actually it was FedEx. Okay, we use FedEx for online shipping. They have a fuel surcharge that goes up and down. With the diesel price going up, the fuel surcharge was up as much as 40%. So we’re paying more. The more we sell online, we’re paying more. But we can’t pass this on to online customers because a lot of these are prepaid online orders, or we actually have a fee to it.
So with the anticipation now that the war is going to end and the gas prices come down earlier in the fourth quarter, we feel that with our price increases and the decrease in the diesel prices and delivery costs, that is definitely going to help our margin to normalize, and we don’t see our margin deteriorating even further down. So I feel that the midterm election result is going to have a favorable effect on the cost of the oil prices. That’s one. Second, with the Democratic Party winning the election, there will most likely be the states pushing more further into compostable, more biodegradable, eco‑friendly items, which we have been gaining traction in terms of the bagasse product, the fiber product, and also the paper product. As I mentioned earlier in our calls, we have a few additional pipelines.
Most of these additional pipelines are related to the fiber product and the paper‑related product. Some are plastic cups, but mostly are the fiber products that we wanted to push forward. So we feel that in 2027 our fiber and paper growth can grow as much as double. That’s how we feel for the 2027 year. And the margins are actually a little bit higher on the fiber side, because our competitors have been enjoying a higher margin. As we come in, even though we’re being competitive, we’re still seeing a better margin than selling the traditional paper and plastic.
Okay. Does that answer your two questions?
George Stoffos (Analyst)
Alan? That’s correct. I just want to ask just a point of clarification. I think you said your fiber paper sales can double. Just make sure it wasn’t a double digit. You expect it would double and then Can you give us rough sizing? Is paper half your portfolio, 5% of your portfolio—just size it relative to the whole of Karat.
Alan Yu (Chief Executive Officer)
Right now, currently we have revenue, in terms of calculating bagasse sales monthly, it’s around $850,000. So it’s not huge. We only have a big base of the fiber product line now. Doubling that will be $1.6 to $1.7 million total in revenue per month. Basically looking at that, our paper shopping bag business—I think Jen might have a better idea in terms of what is our current paper shopping bag—in terms of winning additional, because on the pipeline we’re seeing more and more companies coming to us for the paper shopping bag, mainly chain accounts.
So when we mentioned about the four pipeline, five pipeline, these are all national chain accounts that we’re converting into the fiber and also paper product. That’s why we’re seeing we are more confident in terms of 2027. This—actually this election is going to be—and also this war, the ending of the war, and also recently there will be a shortage of—major shortage of—product that I’m seeing, just as bad as 2022 right now for the next couple months.
The inventory wise. Yeah.
George Stoffos (Analyst)
Of everything or just the paper?
Alan Yu (Chief Executive Officer)
Everything. Because of the containers. One of the ways that the shipping companies have been able to raise their—and gouge all these importers—is by reducing shipping space. So they canceled almost 40% of the shipping coming to North America, so they can create kind of a shortage and raise their price. And containers coming out of Indonesia—most of the importers can get 50 out of 100 containers they want. Out of Vietnam right now they can probably get 30 containers out of 100 containers they need.
We, fortunately, have more experience in terms of dealing with this situation, so we’re getting around 70% to 80% of what we need for our product. So we will at least have product in the warehouse. But we have been seeing shortages. We have been shorting customers. I mean, we try to fulfill as much as we can, but during the latter part of the third quarter we have started to short customers. In the fourth quarter we’re seeing shortages. That’s why the price increase is necessary.
George Stoffos (Analyst)
Understood. I want to turn it over to the others to be fair. But just on the last question, just on retail being down 18%—what was driving that? Thanks, Alan.
Alan Yu (Chief Executive Officer)
No problem. Jen, can you answer that question? Because I know that online sales is up but the retail side down 18%, and I wasn’t aware of that retail.
Jian Guo (Chief Financial Officer)
Sure, I’ll take that question. Hi George. On the retail side, the decline was primarily in the logistics services. That’s a really small piece of our revenue stream, as we have our own fleet and provide logistics services to some of our customers. So almost the entire amount of the decline in the retail channel is logistics sales revenue.
George Stoffos (Analyst)
Okay, I will turn it over. Thank you very much.
OPERATOR (Moderator)
Thank you. Our next question comes from the line of Michael Francis from William Blair. Please go ahead.
Michael Francis (Analyst)
Hi Alan. Jian, thanks for the questions. This is Mike on for Ryan. Wanted to start with the new chain accounts. Can we get a sense how quickly it takes those to ramp from the first shipment to sort of a full bore
Alan Yu (Chief Executive Officer)
Somebody’s chain account. They will actually do a regional test and then full-blown. But the majority of the chains that we deal with would actually start when we have all the inventory available to ship in all of our distribution centers. So what we normally do with the chain is, say they have, for example, a chain with 500 stores. They need us to ship to eight of their different locations, the distribution centers. So we have to put the product into California, Texas, South Carolina, or Washington.
A lot of time we get our product into California, then we transfer it into Texas and other places. At the same time we ship the product from overseas into Washington and New Jersey and South Carolina. So to us it gets ramp up first. Ramp up. Tell them we have the inventory. Approximately when will the inventory from the previous vendor be depleted? Sometimes they’re accurate, sometimes they’re a little bit off. Sometimes the previous vendor would tell them, hey, they found an extra one-month inventory, so they asked us to wait for an extra month. But normally it will be 90 days to start shipping for the first shipment into the DCs if basically everything’s okay.
The resin costs increased the most, and in most years, most cases, resin cost—the raw material costs—spike up for a couple months, then come back down. But this year, everybody, not just ourselves, anticipated the war to be ended quickly, no more than three months. But this war has started since March and basically it didn’t end until the day of midterm election. So that part of it was the biggest part that caught us off guard because when we thought that the war would end, the oil price would come down sharply as well as the raw material—that’s one thing.
But also with the war going on, the oil prices continued to rise. With the diesel price going beyond $657.50 per gallon, our delivery cost went up. The majority of our contracts are delivered price. We actually added the cost of the delivery into the product itself. So when the oil price is high, we have to absorb that cost. And once we began realizing this war is not ending, we finally announced a price increase and fuel surcharge on October 1, November 1. That’s where we see that we cannot rely on what we’re hearing from the government that the war is ending. And basically we just—we wanted to help our customer to see that if this is going to end, we lower it, we wouldn’t have to raise the price, but it was to a point that we had to raise our prices for our customer.
And initially we raised a nominal number basically in October and a different number in November. But then we just made an announcement that we have to go even higher on January 1st because now it’s not only the oil prices causing the price to go up. The disruption in ocean freight is going to cause a disruption in the supply chain throughout—not just us. Every importer, manufacturer that purchases from overseas in Asia is going to see a major supply chain disruption in the upcoming months.
But we are prepared for it, basically. So I’m sure that we will be benefiting additional revenue at the same time. With us raising the prices, our customer is not going to be complaining because you can’t find product out there in the market in the next two months. Well, the chain account likes to have the stability in prices. They tend—it’s more of a kind of a business relationship that if we can absorb the price toss, but passing the chain price mainly on a yearly basis unless there’s a major issue. In this case we did kind of tell the chain that, hey, the war is more like a force majeure situation. So we did increase a nominal increase in the fourth quarter, but latter part of the third quarter starting in some chains, some other chains in the first part of the fourth quarter.
Other chains, we made announcement that the first month of the year, January 1st, is when their price increase takes place because we know that now basically the raw material might not come back down to normalization anytime soon. So the chains understood because they know they themselves are getting the price increase notice from every vendor out there—from their food supplier, from the distribution center that helps them distribute the product to the store. Like Sysco and US Foods, everyone is putting a fuel surcharge, not 5% but more like 15–20% fuel surcharge on top of the normal delivery fees. So it’s become a norm that if you don’t raise the price you’re just taking a hit on the margin side.
So we are taking action in terms of protecting our margin in the fourth quarter and first quarter ongoing.
Jian Guo (Chief Financial Officer)
So on that, I just wanted to also add a couple of data points just maybe to help quantify—help us quantify—thinking about really the pressure on the margin side. I know we talked about—Alan talked about—the resin price, the ocean freight. Just some additional data points here: over the past couple years, our average product cost as a percentage of total net sales is about 47%. That’s our average. Q3 2026, we’re at a little over 50%. So that’s—so obviously just the majority of our product cost, it’s our imported finished goods.
So very closely correlated to price. And on the ocean freight, our average is about 11% over the past couple of years. Q3 2026, we were at 14.2%. So just wanted to add some data points there. So I know Alan also talked about the price increases that we implemented in Q4, as well as the increases we’re planning to implement in Q1 2027 to help offset some of the pressure that we’re facing on the margin side.
OPERATOR (Moderator)
Thank you. Thank you. We have reached the end of the Q and A session. I will now turn the call back over to Alan for closing remarks.
Alan Yu (Chief Executive Officer)
Thank you, operator. And thanks to everyone for joining us today. We’re encouraged by the positive sales momentum and geographic expansion. We remain focused on executing our growth strategy and look forward to keeping you updated on our continued progress. Have a nice day.
OPERATOR (Moderator)
The meeting is now concluded. Thank you all for joining, and you may now disconnect.
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