KRT Q3 Deep Dive: Margin Pressures and Product Expansion Shape Outlook

Foodservice packaging supplier Karat Packaging (NASDAQ:KRT) met Wall Streets revenue expectations in Q3 CY2025, with sales up 10.4% year on year to $124.5 million. The company expects next quarter’s revenue to be around $113.8 million, coming in 1.7% above analysts’ estimates. Its non-GAAP profit of $0.37 per share was 5.1% below analysts’ consensus estimates.

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StockStory’s Take

Karat Packaging’s third quarter drew a negative market reaction, as non-GAAP profit came in below Wall Street’s expectations despite revenue landing in line. Management attributed the quarter’s results to robust volume growth and a favorable product mix, particularly in Texas and California, but acknowledged that higher import duties and tariffs significantly pressured margins. CEO Alan Yu highlighted the company’s ability to sustain gross margin levels by increasing domestic sourcing and maintaining operational flexibility, yet admitted that ongoing supply chain and cost challenges weighed on operating performance.

Looking forward, Karat Packaging’s updated guidance is anchored by the anticipated acceleration of its new paper bag business, expansion of customer accounts, and ongoing pricing initiatives. Management pointed to regulatory-driven demand for paper over plastic and the onboarding of additional chain accounts as meaningful revenue drivers. CEO Alan Yu stated, “We are actively integrating several meaningful new customer accounts and focusing on increasing online marketing, which will strengthen our 2026 pipeline, building a strong foundation for what we expect to be another record-setting year in sales.”

Key Insights from Management’s Remarks

Management credited Q3 growth to strong volume expansion in core markets and the successful launch of new product categories, but flagged increased import costs as a major headwind.

• Volume and product mix gains: Karat achieved double-digit revenue growth, with notable strength in Texas and California, driven by higher volumes and a shift toward more profitable product lines.

• Domestic sourcing ramp-up: To combat higher import costs, Karat increased domestic sourcing from 15% to 20% of total supply, while reducing reliance on Taiwanese imports. This move is intended to mitigate tariff exposure and supply chain disruptions.

• Paper bag business launch: Karat secured a two-year contract with a major national chain to supply paper bags—a new product category for the company. Initial shipments began in Q3, and management expects the segment to contribute up to $100 million in annual sales within a few years, supported by regulatory shifts away from plastic.

• Margin pressures from tariffs: Significantly higher import duties and tariffs led to a decline in gross and operating margins. Management cited ongoing efforts to negotiate better vendor pricing and optimize manufacturing locations to offset these headwinds.

• First-ever share repurchase program: The company announced a $15 million share buyback initiative, supplementing its regular dividend, as an additional tool for shareholder return. Management emphasized this would not compromise ongoing investments or capital allocation flexibility.

Drivers of Future Performance

Management expects near-term performance to be shaped by product expansion, customer onboarding, and ongoing efforts to manage cost pressures, with continued volatility in tariffs and sourcing costs as key variables.

• Paper bag market expansion: Management is banking on growing demand for paper over plastic bags, citing both regulatory pressure and customer preference. The new paper bag category, already backed by several chain accounts, is expected to materially boost revenue and diversify the company’s product mix.

• Operational efficiency and sourcing: The company is focused on ramping up domestic production and optimizing its global supply chain to reduce exposure to tariffs and import volatility. Management believes these efforts will support margin stabilization, though acknowledges that cost headwinds could persist if trade conditions change.

• Continued pricing initiatives: Karat plans to maintain disciplined pricing strategies to help offset higher input costs. Management noted that recent pricing actions have been accepted by customers, but cautioned that competitive dynamics and further cost inflation could impact future margin recovery.

Catalysts in Upcoming Quarters

Going forward, the StockStory team will be tracking (1) adoption and revenue contribution from the new paper bag product line, (2) Karat’s ability to improve or stabilize gross margins despite ongoing tariff and cost pressures, and (3) the pace of new customer account integration and growth in online sales channels. Key markers will include updates on regulatory-driven demand shifts and the effectiveness of domestic sourcing initiatives.

Karat Packaging currently trades at $22.50, down from $24.01 just before the earnings. Is there an opportunity in the stock?The answer lies in our full research report (it’s free for active Edge members).

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