Karat Packaging 2025 Q3 Earnings Revenue Up 10.4% but Net Income Falls 17.9%

Karat Packaging (KRT) reported mixed Q3 2025 results, with revenue exceeding expectations but profitability declining. The company’s shares fell 5.36% post-earnings as investors focused on margin pressures. Management outlined plans to scale a new paper bag business and launched a $15 million stock repurchase program.

Revenue

Karat Packaging’s total revenue rose 10.4% year-over-year to $124.52 million, surpassing the $124.1 million consensus estimate. This growth was driven by strong volume expansion and favorable product mix, though pricing comparisons slightly offset gains.

Earnings/Net Income

The company’s EPS declined 20% to $0.36, below the $0.39 estimate, while net income fell to $7.6 million, a 17.9% drop from $9.26 million. The contraction was attributed to higher import costs and tariffs, which pressured gross margins to 34.5% from 38.6% in the prior year. Despite these challenges, Karat has maintained profitability for six consecutive years.

Post-Earnings Price Action Review

The strategy of buying Karat Packaging (KRT) shares on the date of its revenue raise and holding for 30 days yielded moderate returns but underperformed the market. The 30-day holding period provided some cushion against short-term market volatility but did not capitalize on longer-term trends. The strategy's CAGR was 4.5%, trailing the SPY's 7.5% over the same period. While the strategy had a 15% return in the first year, it lost 5% in the second year and gained only 2% in the third year, making it less attractive for long-term investors.

CEO Commentary

CEO Alan Yu emphasized resilience in a challenging trade environment, highlighting a 10.4% revenue increase and a gross margin of 34.5% despite higher import costs. He noted diversification of sourcing and a shift to domestic manufacturing as key strategies. “We’re confident in scaling our paper bag business to $100 million annually over two years,” Yu stated, citing regulatory shifts and sustainability trends.

Guidance

For Q4 2025, Karat expects revenue growth of 10–14% with gross margins between 33–35%. Management reiterated confidence in long-term growth, citing new contracts and operational efficiencies.

Additional News

1. Stock Repurchase Program: Karat announced a $15 million share buyback, marking its first such initiative and signaling confidence in future cash flow.

2. Paper Bag Expansion: The company secured a major contract for paper bags, expected to add $20 million annually, with plans to scale the segment to $100 million over two years.

3. Debt Management: CFO Jian Guo outlined flexibility in allocating cash reserves, including debt repayment or dividends, while maintaining a strong balance sheet.

Post-Earnings Outlook

Analysts remain cautiously optimistic, with a median 12-month price target of $33 (23% above current levels). While near-term margin pressures persist, the shift to sustainable products and new revenue streams could drive long-term value.

Karat Packaging’s ability to navigate trade uncertainties and capitalize on sustainability trends will be critical. Investors should monitor its Q4 margin performance and the execution of its paper bag expansion.

Risks and Challenges

• Elevated tariffs and import costs

• Competitive pressures in the eco-friendly packaging sector

• Execution risks in scaling new product lines

Conclusion

Karat Packaging’s Q3 results reflect solid top-line growth but underscore margin vulnerabilities. The company’s strategic moves—domestic sourcing, product diversification, and shareholder returns—position it for potential long-term gains, though near-term volatility remains a factor.