Karat Packaging Inc. (KRT) achieved a remarkable financial performance in the second quarter of 2026, reporting unprecedented net sales and significant profit growth. This success was underpinned by a strong increase in sales volume, particularly within its online channels, and a strategic focus on expanding its eco-friendly product offerings. The company also saw a substantial boost from tariff refunds, which positively impacted its financial metrics.
On Thursday, August 6, 2026, Karat Packaging hosted its second-quarter earnings call. Key participants included Chief Executive Officer Alan Yu and Chief Financial Officer Jian Guo. The discussion centered on the company's robust performance and its strategic direction for future growth.
The company recorded net sales of $136.3 million, a 9.9% increase year-over-year, largely due to a $13.1 million growth in volume and an improved product mix. Gross margin reached an impressive 56.6%, bolstered by an 1,890 basis point contribution from IEEPA tariff refunds. Excluding these refunds, the gross margin stood at a healthy 37.7%, reflecting effective sourcing and cost control efforts despite increased ocean freight rates.
Net income soared by 168.3% to $29.6 million, primarily attributable to $20.2 million in IEEPA tariff refunds and reduced foreign currency losses. Diluted earnings per share (EPS) were $1.46, with $1.00 per share derived from tariff refunds, a significant jump from $0.54 in the previous year. Adjusted EBITDA climbed to $41.6 million, benefiting from $25.8 million in tariff refunds. Online sales demonstrated strong momentum, growing 23.6% to $25.8 million, now accounting for 18.9% of total net sales. Sales to chains and distributors also increased by 9.0% to $105.9 million.
Karat Packaging's commitment to sustainability was evident, with eco-friendly product sales contributing 33.8% of total net sales, up from 31.8%, driven by an expanded product range and growth in paper bag sales. The company continued its supply chain diversification, with Taiwan representing 46% of sourcing, China 11%, and domestic sourcing nearly 20%. Looking ahead to the third quarter, Karat Packaging anticipates low double-digit net sales growth and a gross margin between 35% and 37%. For the full year 2026, net sales are expected to grow in the low double-digit range, with an adjusted EBITDA margin in the mid-teens.
Operating expenses rose to $39.6 million from $32.6 million, mainly due to higher shipping and transportation costs ($3.1 million), increased marketing expenses, and salaries. Import costs rose to 11.1% of net sales, up from 9.5%, driven by an 8.9% increase in average container rates. Despite these challenges, the company generated $31.8 million in free cash flow, including $25.2 million from tariff refunds. The quarterly dividend was increased to $0.47 per share, payable on August 28, 2026. The company also repurchased 73,510 shares for $2 million, with approximately $10 million remaining under the current program.
Financially, Karat Packaging held $110.8 million in working capital, $42 million in financial liquidity, and $15.7 million in short-term investments as of June 30, 2026. A new 47,000-square-foot distribution center in Orlando, Florida, is being finalized to service the Southeast region and enhance e-commerce fulfillment, expected to be operational by Q3 2026. Online sales growth accelerated to over 37% in July, with Amazon sales specifically increasing by 49% year-over-year. CEO Alan Yu confirmed the target of $100 million in online revenue for the year remains on track.
The company also successfully added four new chain accounts during the quarter, with product shipments projected to commence in the fourth quarter. Management is actively implementing strategies to manage rising operating costs, particularly shipping and transportation. The significant increase in fuel costs during Q2, with diesel reaching $5.40 per gallon due to Middle East instability, is expected to moderate in Q3, with diesel prices potentially dropping to around $4 per gallon. This, coupled with a stronger U.S. dollar against the Taiwan dollar, is anticipated to provide a positive tailwind for gross margins in the upcoming quarter.
In conclusion, Karat Packaging’s second quarter of 2026 was marked by impressive financial achievements and strategic advancements. The company’s ability to drive record sales, expand its e-commerce footprint, and effectively manage costs amidst a dynamic economic environment demonstrates its resilience and strong market position. The ongoing diversification of its supply chain, investment in infrastructure, and focus on operational efficiencies are expected to sustain its growth trajectory and enhance long-term profitability. With new customer acquisitions and a clear strategy for the future, Karat Packaging is well-positioned for continued success.
