Karat Packaging — Third Quarter 2026 Earnings Summary

Financial Performance

• Quarterly net sales reached $134.7 million, an 8.2% increase from $124.5 million in the prior-year quarter.
• Gross profit was $45.1 million, up 5.2% from $42.9 million in the prior-year quarter; gross margin declined to 33.5% from 34.5%.
• Net income was $4.7 million compared to $7.6 million in the prior-year quarter; net income margin decreased to 3.5% from 6.1%.
• Net income attributable to Karat Packaging was $4.4 million ($0.22 per diluted share), down from $7.3 million ($0.36 per diluted share) in the prior-year quarter.
• Adjusted EBITDA was $8.9 million versus $13.1 million in the prior-year quarter; Adjusted EBITDA margin was 6.6% versus 10.5%.
• Adjusted diluted earnings per share was $0.24, down from $0.37 in the prior-year quarter.
• For the nine months ended September 30, 2026, net sales increased 10.2% to $388.0 million from $352.1 million.
• Nine-month net income was $41.5 million compared to $25.5 million in the same period of 2025; net income margin was 10.7% versus 7.2%.
• Nine-month Adjusted EBITDA was $63.0 million versus $42.7 million in the prior-year period; Adjusted EBITDA margin was 16.2% versus 12.1%.
• Nine-month Adjusted diluted earnings per share was $2.07, up from $1.27 in the prior-year period.
• Cost of goods sold increased 9.8% to $89.6 million in the quarter and 2.2% to $224.2 million for the nine months, driven by higher product costs, resin prices, and import costs.
• Operating expenses increased 17.2% to $40.3 million in the quarter and 13.1% to $112.9 million for the nine months, primarily due to higher shipping, online platform fees, and salaries.
• Net cash provided by operating activities for the nine months was $50.0 million, compared to $18.5 million in the prior-year period.
• Free Cash Flow for the nine months was $47.2 million, compared to $14.7 million in the prior-year period.
• Cash and cash equivalents were $33.4 million as of September 30, 2026, down from $37.9 million at December 31, 2025.
• Inventories increased to $96.8 million as of September 30, 2026, from $81.7 million at December 31, 2025.

Guidance and Future Outlook

• Net sales for the fourth quarter of 2026 are expected to increase by 9% to 11% from the prior-year quarter.
• Gross margin for the fourth quarter of 2026 is expected to be between 33% and 35%.
• Adjusted EBITDA margin for the fourth quarter of 2026 is expected to be in the high-single digits.
• Net sales for full-year 2026 are expected to increase by 9% to 11% from the prior year.
• Gross margin for full-year 2026 is expected to be between 39% and 41%, including IEEPA tariff refunds recorded in the first half of 2026.
• Adjusted EBITDA margin for full-year 2026 is expected to be approximately mid-teens, including IEEPA tariff refunds recorded in the first half of 2026.
• Price increases on select items are scheduled for implementation in the current month and January 2027 to offset higher costs.
• A new Florida distribution center is expected to open in November 2026.

Business Segments and Product Lines

• E-commerce sales grew nearly 38% year-over-year in the third quarter.
• Chains and distributors segment sales were $103.3 million for the quarter and $302.1 million for the nine months.
• Online segment sales were $26.9 million for the quarter and $72.2 million for the nine months.
• Retail segment sales were $4.6 million for the quarter and $13.6 million for the nine months.
• The company secured four new chain accounts in the second quarter, with shipments beginning in October 2026.
• Additional new business was won with existing chain customers across multiple product lines in the third quarter, with shipments expected to commence in early 2027.
• Four additional chain accounts were secured in the third quarter, with shipments expected to commence in the first half of 2027.
• The company is diversifying sourcing toward markets with favorable trade conditions and freight costs, including Indonesia, Malaysia, and South America.

Market and Competitive Landscape

• The company operates in the specialty distribution and manufacturing of environmentally friendly, disposable foodservice products.
• Market conditions include elevated oil prices and ocean freight costs.
• The company is realigning its global supply chain to mitigate the impact of higher import and domestic shipping costs.

Risks and Challenges

• Increased import and domestic shipping costs pressured margins.
• Elevated resin prices contributed to higher product costs.
• Ocean freight costs rose 17.0% in average container rate and 11.7% in the number of containers imported in the third quarter.
• Forward-looking statements are subject to risks, uncertainties, and assumptions, including those detailed in the company's Form 10-K and 10-Q filings.

Management Commentary and Tone

• CEO Alan Yu described the quarter as delivering "solid top-line growth" with "continued strong momentum" in e-commerce.
• Management expressed encouragement regarding sales performance despite results being below expectations due to cost pressures.
• Management stated confidence in long-term growth prospects driven by new account wins and pipeline strength.
• Management believes supply chain realignment, price increases, online channel strength, new account wins, and the new Florida distribution center position the company to accelerate revenue growth and improve operating performance.

Other Key Points

• On November 3, 2026, the Board of Directors approved a regular quarterly dividend of $0.47 per share, payable on or about November 27, 2026, to stockholders of record as of November 19, 2026.
• During the first nine months of 2026, the company repurchased $2.0 million of common stock; approximately $10.0 million remained available for future repurchases as of September 30, 2026.
• No stock repurchases occurred during the third quarter of 2026.
• IEEPA tariff refunds of $25.8 million were recognized during the first nine months of 2026, contributing significantly to net income and Adjusted EBITDA.
• Interest income increased by $0.9 million in the nine-month period due to interest income related to IEEPA tariff refunds.
• A gain on foreign currency transactions of $0.3 million was recognized in the nine-month period, compared to a loss of $1.9 million in the prior-year period.
• Net cash receipts related to IEEPA tariff refunds totaled $25.2 million during the nine months ended September 30, 2026.