Karat Packaging, Inc. ((KRT)) has held its Q1 earnings call. Read on for the main highlights of the call.
Karat Packaging Inc. recently held its earnings call, revealing a mixed sentiment in its financial performance. While the company showcased impressive sales growth and strategic moves to diversify its supply chain, it also faced challenges with rising operating expenses and maintaining profit margins. Despite strong cash flow and liquidity, the decline in adjusted EBITDA and earnings per share highlighted underlying financial pressures.
Strong Sales Growth
Karat Packaging Inc. reported an 8.4% increase in net sales and a nearly 11% rise in sales volume year over year for the first quarter of 2025. This growth reflects the company’s robust market presence and effective sales strategies.
Diversification of Supply Chain
The company made significant strides in reducing its dependence on Chinese imports, decreasing sourcing from China from 20% at the end of 2024 to 15% by March 2025. Plans are in place to further reduce this to under 10% by the end of Q2 2025, with a shift towards production in Malaysia, Indonesia, Vietnam, and Thailand.
Expansion of Online Business
Online sales saw a nearly 20% increase during the first quarter, underscoring Karat Packaging’s focus on expanding this high-margin category, which is becoming increasingly important in the digital age.
New Distribution Center
The opening of a new 187,000 square feet distribution center near their headquarters in Chino provides additional capacity to support the company’s growth ambitions, enhancing logistical capabilities.
Operating Cash Flow and Liquidity
Karat Packaging Inc. generated $7.7 million in operating cash flow and ended the quarter with $111.9 million in working capital and $46.7 million in financial liquidity, indicating a strong financial position to support future operations.
Increased Operating Expenses
Operating expenses rose by 11.6%, driven by higher shipping and transportation costs, increased rent due to the new distribution center, and elevated marketing and professional service expenses.
Decline in Retail Channel Sales
Sales to the retail channel decreased by 3.2% compared to the prior year quarter, highlighting a challenge in this segment that the company may need to address.
Pressure on Gross Margin
Despite an 8.4% increase in gross profit, the gross margin remained steady at 39.3%. However, potential future pressures from tariffs and higher freight costs could impact margins.
Adjusted EBITDA and Earnings Decline
Adjusted EBITDA for the quarter was $11.9 million, down from $13.5 million the previous year, and adjusted diluted earnings per share decreased from 40¢ to 33¢, reflecting financial pressures.
Forward-Looking Guidance
Looking ahead, Karat Packaging expects net sales for the second quarter to grow by high single digits to low double digits compared to the previous year. The company aims to maintain a consistent gross margin and anticipates an adjusted EBITDA margin in the mid-teens. Efforts to reduce reliance on Chinese imports continue, with a target to decrease imports from China to under 10% by the end of the second quarter, while expanding sourcing from Malaysia, Indonesia, and Vietnam.
In conclusion, Karat Packaging Inc.’s earnings call presented a balanced view of its current financial health. While the company is achieving strong sales growth and making strategic supply chain adjustments, it faces challenges in managing rising expenses and maintaining margins. The forward-looking guidance suggests optimism for continued growth, albeit with caution regarding potential financial pressures.