Karat Packaging Inc. Q3 FY2025 earnings call

Key Points

• Record net sales up over 10% YOY driven by volume, product mix, pricing; double-digit growth in major markets.
• Sustained gross margin of 34.5% despite higher import costs; increased domestic sourcing to 20% from 15%, reduced imports from Taiwan to 42% from 58%.
• Secured major paper bag business with a chain account, initial shipments in Q3, expected volume acceleration in Q4, contributing ~$20M annual revenue, aiming for $100M+ in 2-3 years.
• Implemented pricing increases, strong business trends in Q4/2026, active in integrating new customers and online marketing.
• Board approved quarterly dividend and first-ever stock repurchase program.

Net sales for the 2025 third quarter were $124.5 million, up 10.4% from $112.8 million in the prior year quarter. Cost of goods sold increased 17.8% to $81.6 million. Gross profit was $42.9 million, with a gross margin of 34.5% (down from 38.6% prior year). Operating expenses increased, leading to operating income of $8.6 million vs. $11.3 million prior year. Net income was $7.6 million, $0.36 per diluted share vs. $9.1 million, $0.45 per diluted share prior year.

Forward-Looking

• Q4 2025 net sales expected to increase ~10%-14% YOY.
• Gross margin projected 33%-35%, adjusted EBITDA margin 8%-10%.
• New business pipeline robust with paper bag category and key customer additions.

• Trade volatility and import costs due to tariffs.
• Foreign currency exchange rate fluctuations.
• Uncertainty in supply chain and market conditions affecting margins.

Q: Michael Francis asked about scaling paper bags to $100M and confidence in the number.

A: Alan Yu stated chains moving from plastic to paper bags, organic growth in the segment, multiple chains testing products, and one chain contributing $20M+ annually.

Q: George Staphos asked about gross margin and capital allocation.

A: Alan Yu discussed margin mix for paper bags (high teens to high 50s depending on product), and Jian Guo mentioned share repurchase as a tool to enhance shareholder return while focusing on growth.