Karat Packaging's Q1 2025: Navigating Tariff Turbulence and Margin Challenges

Tariff impact on business strategy, freight cost trends, gross margin guidance, sourcing strategy and tariff impact are the key contradictions discussed in Karat Packaging's latest 2025Q1 earnings call.



Sales Volume and Net Sales Growth:
- Karat Packaging reported a nearly 11% increase in sales volume and 8.4% growth in net sales year-over-year.
- The growth was driven by a shift in inventory sourcing from China to countries with lower tariffs and more favorable trade conditions, as well as effective management of domestic manufacturing operations.

Inventory and Supply Chain Management:
- The company ended the first quarter with approximately $80 million in inventory, strategically managing sales to ensure long-term reliability in meeting customers' needs.
- This strategy helped Karat address ongoing supply chain challenges and navigate an uncertain trade environment by quickly adjusting its sourcing strategies and leveraging its diverse international supplier network.

International Sourcing Strategy:
- Karat's sourcing from China decreased from approximately 20% in December 2024 to 15% in March 2025, and it is on track to reduce it to under 10% by the end of the second quarter.
- The company's strategy to move inventory sourcing to countries like Malaysia, Indonesia, Vietnam, and Thailand, along with plans to diversify into the Middle East, aimed to mitigate risks associated with extreme tariffs and trade uncertainties.

Operating Expenses and Cost Management:
- Operating expenses for the 2025 first quarter increased by 11.6% to $32.9 million from $29.5 million in the prior year quarter, primarily due to increased shipping and transportation costs and rent expense.
- The company is focusing on lowering operating costs, including enhancing distribution efficiency and reducing online selling expenses, as part of its ongoing strategy to improve profitability.

Online Business Growth and Market Expansion:
- Online sales increased by 19.6% over the prior year quarter, reflecting the company's continued focus on expanding this high-margin category.
- The growth in online sales was supported by the company's expansion into new markets and its ability to maintain strong relationships with customers, ensuring reliability and timely delivery of products.