Karat Packaging’s Q2 2026 Earnings Call: Sales Growth and Margin Guidance Clash with Prior Claims

Date of Call: Aug 6, 2026

Financials Results

• Revenue: $136.3M, up 9.9% YOY ($124.0M prior year quarter)
• EPS: $1.46 per diluted share, compared to $0.54 per diluted share in the prior year quarter (reflecting $1 per share benefit from IEEPA tariff refunds)
• Gross Margin: 56.6%, compared to 39.6% in the prior year quarter (including 1,890 basis point contribution from IEEPA tariff refunds)

Guidance:

• Q3 2026 net sales expected to grow in low double-digit range YOY.
• Q3 2026 gross margin expected within 35%-37% and adjusted EBITDA margin within 9%-11%, both including insignificant IEEPA tariff refunds.
• Full year 2026 net sales expected to grow in low double-digit range YOY.
• Full year 2026 gross margin expected in low 40% and adjusted EBITDA margin expected approximately mid-teens, both including IEEPA tariff refunds recorded in first half.

Business Commentary:

Record Quarterly Sales and Online Growth:

• Karat Packaging reported record quarterly net sales of $136.3 million for Q2 2026, up 9.9% from $124.0 million in the prior year quarter.
• The increase was driven by $13.1 million in volume growth and product mix, with online sales growing 23.6% year-over-year.

Eco-Friendly Product Portfolio:

• Eco-friendly products accounted for 33.8% of total sales in Q2 2026, compared to 31.8% in the prior year period.
• The growth was due to the continued expansion of SKUs and increased demand for paper-based categories.

Impact of IEEPA Tariff Refunds:

• The company benefited from IEEPA tariff refunds totaling $25.8 million, contributing significantly to the quarter's profitability.
• This benefit was partially offset by higher product costs and increased import costs.

Gross Margin Improvement:

• Gross margin increased to 56.6% in Q2 2026 from 39.6% a year ago, reflecting a 1,890 basis point contribution from the IEEPA tariff refunds.
• Despite higher product and ocean freight costs, strong sourcing capabilities helped maintain profitability.

Operational and Cost Management Initiatives:

• Operating expenses increased to $39.6 million from $32.6 million last year, primarily due to higher shipping, online platform, and marketing expenses.
• The company is focusing on managing costs, especially in shipping, by utilizing an internal fleet to improve efficiency.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted 'record quarterly net sales,' 'accelerated momentum,' and a 'strong performance' from online sales (+23.6% YOY). The company also noted 'encouraging momentum,' 'continued growth' in eco-friendly products, and is 'well-positioned to advance profitability and long-term growth.'

Q&A:

• Question from Michael Francis (William Blair): SGA seemed to be a big surprise to the downside; what surprised you there, and what are you doing to offset higher costs?
  Response: Higher shipping costs (including carrier fuel surcharges) and salary/benefit expenses drove the increase, primarily due to higher fuel prices from the Middle East crisis. Actions to offset include using an internal fleet for local deliveries and inter-warehouse transfers, and improving labor efficiency.

• Question from Michael Francis (William Blair): What drove the strength in online sales, and should we expect similar growth in the second half?
  Response: Strong performance driven by a target of $100M in online revenue for the year; July saw 37%+ online sales growth YOY, with Amazon up ~49% YOY, putting the $100M goal 'on track' and potentially exceeding it.

• Question from Michael Francis (William Blair): With the new Florida DC coming online, are there any gaps in coverage where you could add more DCs or sellers?
  Response: The Orlando DC will improve service to the Southeast (fourth largest customer base). Potential future needs exist in the Colorado/Utah area and in North America (Vancouver, Toronto), where the market is 'very wide open' but requires resolving logistics issues.

• Question from Ryan Meyers (Lake Street): Excluding the tariff refund, how would you characterize the underlying gross margin and performance?
  Response: Underlying gross margin would have been 37.7%, still strong near 40%, supported by sourcing diversification. Expectation is for Q3 gross margin to continue in the high thirties (35%-37%), aided by a stronger USD tailwind and potential ocean freight reductions post-peak season.

• Question from Ryan Meyers (Lake Street): How should we think about the timing and potential contribution from the four new chain accounts added?
  Response: Contribution expected to begin in Q4 2026, as it takes 2-3 months to ramp up inventory and ship product to these new accounts.

Contradiction Point 1

Sales Growth Drivers and Future Outlook

Inconsistent explanation for strong growth and future guidance, impacting expectations for the business trajectory.

Michael Francis (William Blair) - Michael Francis (William Blair)

2026Q2: Online sales growth has been robust... The company is confident it will meet its $100 million online revenue target for the year, and growth may even exceed that. - Alan Yu(CEO)

What factors drove the strong online sales growth, and will this trend continue in the second half? - Ryan Meyers (Lake Street Capital Markets)

2026Q1: The strong March growth included an estimated $2 million pull-forward from April orders. April saw some softening... The company's guidance is conservative to ensure it meets or exceeds targets. - Alan Yu(CEO)

Contradiction Point 2

Gross Margin Guidance and Explanations

Contradiction on the primary factors supporting gross margin performance and future expectations.

Ryan Meyers (Lake Street) - Ryan Meyers (Lake Street)

2026Q2: Excluding the tariff refund, Q2 gross margin would have been 37.7%... The company expects to maintain this level, as reflected in Q3 guidance of 35%-37%. - Jian Guo(CFO), Alan Yu(CEO)

How would you characterize the underlying gross margin and performance of the business, excluding the IEEPA tariff refund, and was it in line with expectations? - Kyle Benvenuto (Bank of America)

2026Q1: The company has negotiated with vendors to absorb the majority of raw material cost increases... resulting in a minimum price increase of 5%-15% on select plastic items beginning mid-May. - Alan Yu(CEO)

Contradiction Point 3

Gross Margin Trajectory and Confidence

Shift from a cautious, uncertain outlook to a specific, confident near-term target for gross margin.

Ryan Meyers (Lake Street) - Ryan Meyers (Lake Street)

2026Q2: Excluding the tariff refund, Q2 gross margin would have been 37.7%, which is still strong. The company expects to maintain this level, as reflected in Q3 guidance of 35%-37%. - Jian Guo(CFO) and Alan Yu(CEO)

How would you characterize the underlying gross margin and performance of the business, excluding the IEEPA tariff refund, and was it in line with expectations? - Michael Francis (William Blair)

20251107-2025 Q3: The company is being conservative due to ongoing uncertainty but sees a tailwind for potential gross margin improvement. - Alan Yu(CEO)

Contradiction Point 4

Online Sales Growth Trajectory

Inconsistent outlook on the sustainability and drivers of online sales growth, affecting investor perceptions of growth momentum.

Michael Francis (William Blair) - Michael Francis (William Blair)

2026Q2: Online sales growth has been robust... The company is confident it will meet its $100 million online revenue target for the year, and growth may even exceed that. - Alan Yu(CEO)

What factors drove the strength in online sales, and should we expect a similar growth trajectory in the second half as the first? - Kyle Benvenuto (Bank of America, for George Staphos)

20260313-2025 Q4: The company foresees double-digit online sales growth for 2026... This is driven by expanding onto new platforms... and increasing bulk sales... - Alan Yu(CEO)

Contradiction Point 5

Capital Allocation and Share Buyback Strategy

The characterization of the buyback program's role evolves from a discretionary enhancement tool to a tool weighed against a rich dividend, affecting perceptions of capital allocation priorities.

Michael Francis (William Blair) - Michael Francis (William Blair)

2026Q2: The company has strong liquidity... The share repurchase program ($15 million authorization) is seen as a tool to enhance shareholder return while the stock is considered low. - Alan Yu(CEO)

Can you provide an update on capital allocation priorities between debt paydown, share buybacks, dividends, and potential M&A? - George Staphos (Bank of America)

20251107-2025 Q3: The $15 million buyback program is a small, discretionary tool to enhance shareholder returns. The board will weigh this against the existing rich dividend yield and other priorities... - Jian Guo(CFO)