Karat Packaging Inc. Q2 FY2026 earnings call

• Top Line Business Performance

• Delivered record quarterly net sales of $136.3 million, with broad-based growth supported by four new chain account wins that expanded market reach and future growth opportunities.
• Online channel continued strong acceleration, with 23.6% YoY net sales growth, and early third quarter monthly growth tracking even higher at 37%+ YoY.
• Eco-friendly product portfolio gained traction, with expanded SKUs and growth in paperback categories driving its revenue contribution up 200 basis points YoY to 33.8%. • Strategic Infrastructure Investments
• Finalizing a lease for a new 47,000 square foot distribution center in Orlando, Florida, expected to be operational in Q3 2026. The facility will improve service for Southeast customers, enhance e-commerce fulfillment, reduce delivery times, and support future regional growth.
• Management is evaluating additional distribution center expansion in Colorado to support the Utah regional market, and exploring logistics solutions to enter the Canadian market (Vancouver and Toronto), where management sees significant untapped demand. • Operational and Cost Initiatives
• Continued execution of sourcing diversification, which now has domestic sourcing at nearly 20% of total purchases, 46% from Taiwan, 11% from China, and 12% aggregate from Indonesia, Singapore, and South America. This initiative has improved product reliability and cost competitiveness.
• Focused on targeted cost management to offset higher shipping and labor costs: prioritizing efficiency gains for shipping via expanded use of internal fleets for local deliveries and inter-warehouse transfers, seeking cost savings from existing online carrier service agreements, and improving labor force utilization to control salary and benefit expenses.

Carrot Packaging reports net sales broken out by sales channel rather than product segments, with an overall Q2 2026 net sales of $136.3 million, up 9.9% year-over-year (YoY). The largest channel, chain accounts and distributors, posted 9.0% YoY sales growth. The online sales channel grew 23.6% YoY, and represented approximately 18.4% of total annual targeted 2026 revenue at the $100 million annual target. The retail channel experienced a 23.4% YoY sales decline, driven primarily by reduced shipping and logistics revenue. By product category, eco-friendly products represented 33.8% of total Q2 2026 sales, up from 31.8% in the prior-year quarter.

• Q3 2026 Guidance:

• Net sales are expected to grow in the low double-digit range compared to Q3 2025.
• Gross margin is projected to be between 35% and 37%, with only an insignificant amount of IEPA tariff refunds expected in the quarter.
• Adjusted EBITDA margin is projected to be between 9% and 11%. • Full Year 2026 Guidance (updated from prior projections, with clarity on IEPA tariff refund timing):
• Full year net sales are expected to grow in the low double-digit range over 2025.
• Full year gross margin is expected to be in the low 40% range, including IEPA tariff refunds recorded in the first half of 2026.
• Full year adjusted EBITDA margin is expected to be approximately mid-teens, including first half 2026 IEPA tariff refunds. • Management expects continued top-line growth momentum driven by its diverse channel strategy and reduced tariffs, and anticipates cost management actions will improve operating leverage and deliver sustainable profitability.

• Elevated fuel and shipping costs: Q2 2026 saw the highest diesel fuel costs of the past year due to the Middle East crisis, which drove sequential increases in offline shipping costs of $1.4 million sequentially in Q2. While fuel prices have declined in early Q3, future oil price volatility remains a risk to shipping and transportation costs. • Input cost pressure: Product and ocean freight costs are higher than prior year periods, partially offsetting the benefit of tariff refunds. Sustained high import costs could pressure profitability if not offset by sourcing and efficiency initiatives. • Foreign currency volatility: The company experienced $2.9 million in foreign currency transaction losses in Q2 2025 due to U.S. dollar movements against the Taiwan dollar. While a stronger U.S. dollar is providing a favorable tailwind in Q3 2026, future exchange rate fluctuations could create unexpected losses. • Uncertainty around future tariff refunds: All material IEPA tariff refunds were recorded in the first half of 2026, with no significant additional refunds expected for the remainder of the year, so the elevated profitability from refunds will not persist in H2 2026.

Q: What factors drove the unexpected SG&A increase in Q2, and what initiatives is management implementing to offset higher costs going forward? / A: The primary driver of higher SG&A was elevated shipping costs, which saw a $1.4 million sequential increase in Q2 driven by record high diesel fuel prices from the Middle East crisis. Management is focusing cost reduction efforts on shipping by expanding use of internal fleets for local customer deliveries and inter-warehouse transfers, and pursuing additional savings from existing online carrier service agreements. A secondary focus is improving labor force utilization to control salary and benefit expenses. Early Q3 2026 has already seen a 25% drop in diesel prices from Q2 peaks, which is expected to reduce shipping costs.

Q: What is driving the strong online sales growth, and can this growth trajectory be sustained in the second half of 2026? / A: Online growth has accelerated beyond Q2 levels, with July 2026 online sales up 37%+ YoY and Amazon-specific sales up 49% YoY. Management confirms the full-year 2026 online revenue target of $100 million is firmly on track, and results are likely to exceed this target, so strong momentum is expected to continue through the second half.

Q: After adding the Orlando distribution center, are there additional gaps in distribution coverage that would lead to more facility expansion, and where would those be? / A: The new Orlando DC will cut delivery times from 3-5 days to 1-2 days for the Southeast, the company's fourth largest online market, and is expected to drive regional online sales growth. Management has identified a potential need for an additional facility in Colorado to better serve the Utah regional market, and is actively evaluating that location. Longer term, the company is exploring logistics solutions to enter the Canadian market (Vancouver and Toronto), where it sees significant untapped market opportunity.

Q: Excluding the one-time Q2 2026 tariff refund, what was the underlying gross margin performance, and was it in line with management expectations? / A: Excluding the $25.8 million tariff refund benefit, Q2 2026 underlying gross margin was 37.7%, which management characterized as very strong, near 40%. This strong underlying performance is supported by sourcing diversification and strong sourcing capabilities. Management's Q3 2026 guidance of 35-37% gross margin (with negligible future refunds) reflects expectations that this strong underlying performance will continue.