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.
Is now the time to buy KRT? Find out in our full research report (it’s free for active Edge members).
Karat Packaging (KRT) Q3 CY2025 Highlights:
- Revenue: $124.5 million vs analyst estimates of $124.1 million (10.4% year-on-year growth, in line)
- Adjusted EPS: $0.37 vs analyst expectations of $0.39 (5.1% miss)
- Adjusted EBITDA: $13.05 million vs analyst estimates of $13.01 million (10.5% margin, in line)
- Revenue Guidance for Q4 CY2025 is $113.8 million at the midpoint, above analyst estimates of $111.9 million
- Operating Margin: 6.6%, down from 10% in the same quarter last year
- Market Capitalization: $441.2 million
While we enjoy listening to the management's commentary, our favorite part of earnings calls are the analyst questions. Those are unscripted and can often highlight topics that management teams would rather avoid or topics where the answer is complicated. Here is what has caught our attention.
Our Top 5 Analyst Questions From Karat Packaging’s Q3 Earnings Call
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Michael Francis (William Blair) asked about the company’s confidence in scaling the paper bag business to $100 million in annual sales. CEO Alan Yu cited organic growth from restaurant chains switching to paper, a robust pipeline, and multiple chains testing their offerings.
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Francis (William Blair) also questioned whether gross margins could return to high-30% levels amid ongoing tariffs. Yu responded that margin recovery depends on currency stability and vendor negotiations, noting, “We do want to be conservative… we want to see more of the positive trend before we can issue an increase.”
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Francis (William Blair) inquired about capital allocation priorities. Yu explained that the company’s strong cash position allows for the dividend, buybacks, and potential M&A, with recent inventory reductions helping to free up cash.
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George Staphos (Bank of America) challenged the rationale for share buybacks given the high dividend payout and upcoming debt maturities. Yu clarified that debt is limited to a real estate entity, and CFO Jian Guo emphasized buybacks are a discretionary tool that will not limit growth or financial flexibility.
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Staphos (Bank of America) pressed for clarity on margins in the new bag business and the wide Q4 guidance ranges. Yu described a mix of margin profiles depending on bag type and reaffirmed a conservative approach to forecasting given market uncertainty.
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 $21.96, down from $24.01 just before the earnings. Is the company at an inflection point that warrants a buy or sell? See for yourself in our full research report (it’s free for active Edge members).
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