KRT Q2 Deep Dive: Sourcing Diversification and Tariff Pressures Shape Guidance

Foodservice packaging supplier Karat Packaging (NASDAQ:KRT) met Wall Street’s revenue expectations in Q2 CY2025, with sales up 10.1% year on year to $124 million. On the other hand, next quarter’s revenue guidance of $121.2 million was less impressive, coming in 2.6% below analysts’ estimates. Its non-GAAP profit of $0.57 per share was 5% below analysts’ consensus estimates.

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StockStory’s Take

Karat Packaging’s second quarter results were met with a negative market reaction as non-GAAP earnings missed Wall Street’s consensus despite revenue aligning with expectations. Management attributed the quarter’s growth to robust sales volumes, notably from large national chain customers and sustained double-digit gains in key markets like California. CEO Alan Yu emphasized that operational efficiency, including domestic manufacturing ramp-up and a shift to first-party e-commerce fulfillment, supported both margin expansion and cost savings. However, Yu noted that foreign currency headwinds and increased import duties, primarily from new tariffs, weighed on profitability.

Looking forward, Karat Packaging’s guidance reflects the impact of continued tariff-related cost pressures and ongoing shifts in its global sourcing strategy. Management pointed to efforts to diversify away from China and Taiwan in favor of other Asian and Latin American suppliers as a key lever to mitigate rising costs. CFO Jian Guo cautioned that gross margins are expected to decline sequentially in the next quarter as higher-cost inventory works through the system but should recover in the fourth quarter as sourcing changes take effect. The company also expects recent price adjustments, along with new business wins, to support sales momentum in the second half of the year.

Key Insights from Management’s Remarks

Management cited sourcing diversification, operational improvements, and sales channel shifts as major contributors to the latest quarter’s performance, while also highlighting the challenges posed by tariffs and currency fluctuations.

• Sourcing diversification underway: Karat Packaging reduced reliance on China to 10% of supply in the quarter, accelerating its shift to vendors in other Asian countries and Latin America to increase supply chain resilience and limit tariff exposure.
• Operational efficiency gains: The company achieved $1 million in shipping and marketing savings by switching providers and focusing on its own e-commerce storefront, which also improved control and margins for online sales.
• Large chain and distributor momentum: Sales to chain accounts and distributors outpaced other segments, driven by new business wins with national chains scheduled to ramp in the second half of the year.
• Tariffs and FX headwinds: Management noted that recent tariffs resulted in higher import duties and ocean freight costs, while unfavorable currency moves (notably the New Taiwan dollar) further increased cost of goods sold.
• Price increases and product mix: Selective price adjustments were implemented, but overall pricing impact was negative this quarter as growth in chain and distributor sales outpaced higher-margin online and retail channels.

Drivers of Future Performance

Management expects tariff costs, sourcing changes, and evolving sales mix to drive results in upcoming quarters, with gross margins under pressure before partial recovery later in the year.

• Tariff-driven margin compression: CFO Jian Guo stated that cost of goods sold will reflect higher tariffs in the third quarter, leading to gross margin pressure. Recovery is expected in the fourth quarter as lower-tariff inventory enters the supply chain.
• Sourcing and cost mitigation: CEO Alan Yu highlighted ongoing vendor diversification and cost negotiations, aiming to offset tariff impacts and currency volatility by sourcing more from countries with lower duties and favorable pricing.
• Sales channel evolution: The company anticipates continued volume growth from national chains and distributors, but expects price realization to stabilize as online sales return to double-digit growth, especially through new platforms like Sysco Market.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will closely monitor (1) the pace and effectiveness of Karat Packaging’s sourcing diversification efforts, (2) the trajectory of gross margin recovery as lower-tariff inventory is sold, and (3) the ramp-up of new business from national chain accounts. The evolution of online sales channels and the impact of additional tariffs or currency movements will also be important markers for tracking execution against the company’s strategy.

Karat Packaging currently trades at $25.55, down from $26.65 just before the earnings. In the wake of this quarter, is it a buy or sell? See for yourself in our full research report (it’s free).

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