Karat Packaging (NASDAQ:KRT) reported higher third-quarter sales as its online business grew, but rising product and freight costs squeezed margins and contributed to a decline in earnings.
Net sales rose 8.2% to $134.7 million from $124.5 million a year earlier, while net income attributable to Karat fell to $4.4 million, or $0.22 per diluted share, from $7.3 million, or $0.36 per share. Adjusted EBITDA declined to $8.9 million from $13.1 million.
CEO Alan Yu said results came in below the company’s expectations as import costs, domestic shipping costs and resin prices rose. He said revenue missed expectations by $2.5 million in part because some chain accounts delayed orders for testing and to use up inventory from previous vendors.
Online growth accompanied by cost pressures
Online sales increased 37.7% year over year, while sales to chains and distributors, Karat’s largest channel, rose 3.9%. Retail channel sales fell 18.4%. CFO Jian Guo said almost the entire retail decline was attributable to lower revenue from logistics services, a relatively small part of the business.
Gross profit rose to $45.1 million from $42.9 million, but gross margin narrowed to 33.5% from 34.5%. Operating expenses increased 17.2% to $40.3 million, reflecting higher shipping and transportation costs, online marketing expenses, salaries and other costs.
Guo said ocean freight costs increased $2.4 million, with average container rates up 17% and the number of imported containers up 11.7%. Duty and tariff costs fell $1.1 million from the prior-year quarter.
Yu said Karat’s container costs averaged $4,500 to $6,000 during the quarter, compared with an expectation of about $3,500 including normal peak-season surcharges. He also cited higher resin and domestic delivery costs as pressures on profitability.
To offset costs, Yu said the company introduced delivery-related surcharges and price increases in the fourth quarter and announced further increases of 3% to 13% for January 1, 2027. The timing and size of increases vary for some chain customers, he said.
New accounts and distribution capacity
Karat began shipping select products in October to four chain accounts secured in the second quarter. Yu said the company expanded those relationships with additional products, including paper bags and bagasse trays, with shipments expected to begin in early 2027. Karat also recently secured four more chain accounts and is testing products with other large chains, he said.
East Coast sales grew 19% year over year and Midwest sales rose 22%, according to Yu. A new 47,000-square-foot distribution center in Orlando, Florida, is expected to be fully operational in November and serve customers across the Southeast.
Yu said Karat is building inventory for shipments in the first half of 2027. He also warned that limited shipping capacity has caused shortages: the company began shorting some customer orders in the latter part of the third quarter and was seeing shortages in the fourth quarter.
Karat is diversifying sourcing toward regions including Indonesia, Malaysia and South America. Combined purchases from those locations represented 19.4% of total sourcing, Yu said.
Outlook and shareholder returns
For both the fourth quarter and full year of 2026, Karat expects sales growth of 9% to 11% from the respective prior-year periods. The company forecasts fourth-quarter gross margin of 33% to 35% and adjusted EBITDA margin in the high single digits.
For the full year, Karat expects gross margin of 39% to 41% and adjusted EBITDA margin in the mid-teens. Guo said both full-year margin expectations include IEEPA tariff refunds recorded in the first half of 2026.
Yu said he believes fiber and paper product growth could double in 2027, citing a pipeline of potential chain business. He estimated current bagasse sales at about $850,000 a month, describing the existing fiber product base as relatively small.
Karat generated $9.7 million in operating cash flow and $9.1 million in free cash flow during the third quarter. The board approved a quarterly dividend of $0.47 per share, payable on or about November 27 to shareholders of record as of November 19. The company made no share repurchases during the quarter and had approximately $10 million available under its repurchase program at September 30.
About Karat Packaging (NASDAQ:KRT)
Karat Packaging Inc is a foodservice packaging company that manufactures and distributes disposable products for restaurants, cafés, convenience stores, supermarkets, institutional foodservice providers and other businesses. The company is headquartered in Chino, California, and serves customers primarily across North America through its distribution and manufacturing operations.
Its product portfolio includes paper and plastic cups, food containers, lids, cutlery, straws, gloves, napkins, bags and other supplies used for food preparation, packaging and takeout service.
