Karat Packaging Q2 2026 Earnings: Tariff Refunds Lift Reported Margins

Karat Packaging (Nasdaq: KRT) reported Q2 2026 net sales of $136.3 million, up 9.9% year over year, while diluted EPS increased to $1.46 from $0.54. Sales growth came primarily from volume and product mix, but the sharp increase in reported profit was dominated by $25.8 million of IEEPA tariff refunds that reversed costs absorbed in prior periods.

Core earnings results

For the quarter ended June 30, volume growth and product mix added $13.1 million to revenue, while favorable pricing contributed $0.4 million. These gains were partly offset by a $1.1 million decline in shipping and logistics revenue.

Profitability rose much faster than sales because the tariff refunds reduced cost of goods sold by $25.8 million. Operating expenses nevertheless increased 21.5% to $39.6 million, outpacing revenue growth due to higher transportation, online platform, marketing, compensation, bad debt, and warehouse expenses.

Other income also improved to $1.4 million from an expense of $2.0 million. The foreign-currency transaction loss narrowed to $0.1 million from $2.9 million, while the tariff refunds generated another $0.9 million of interest income.

Business and sales-channel performance

Online remained Karat Packaging’s fastest-growing sales channel, while chains and distributors produced most of the company’s revenue. Retail was the only category to decline materially.

Management attributed the broader expansion to customer demand and said the company added four chain accounts during the quarter. Online growth also contributed to higher platform fees, marketing spending, shipping volume, and transportation costs.

Karat Packaging was finalizing a lease for a 47,000-square-foot distribution center in Orlando, Florida, expected to become operational during Q3 2026. Management expects the facility to support Southeast customers, shorten delivery times, and expand fulfillment capacity for e-commerce.

Tariff refunds transformed reported margins, but Q3 guidance points to normalization

The IEEPA tariff refunds contributed $25.8 million to gross profit and adjusted EBITDA, 18.9 percentage points to both gross margin and adjusted EBITDA margin, and $20.2 million to net income. They also added $1.00 to diluted EPS.

Subtracting the company’s disclosed refund contribution leaves an approximate Q2 gross margin of 37.7%, compared with 39.6% a year earlier. Adjusted EBITDA would have been approximately $15.8 million with an 11.6% margin, versus $17.7 million and 14.3% in Q2 2025. Diluted EPS after subtracting the disclosed $1.00 contribution would have been approximately $0.46, compared with $0.54 a year ago.

These calculations are not company-defined non-GAAP measures, but they show why the reported profit increase should not be treated as a recurring operating run rate. Product costs increased to 49.2% of sales from 48.5%, while import costs rose to 11.1% from 9.5%. The number of imported containers increased 4.3%, and the average container rate rose 8.9%.

Cash flow, balance sheet, and capital allocation

Cash generation improved during the first half of 2026, although the figures include $25.2 million of cash receipts from tariff refunds. The table below uses six-month data and should not be interpreted as quarterly cash flow.

After subtracting the disclosed refund receipts, first-half operating cash flow was approximately $15.1 million and free cash flow was approximately $12.9 million. Both would be below their prior-year comparisons, illustrating the refund’s importance to reported cash generation.

At June 30, cash and cash equivalents were $38.4 million and short-term investments were $15.7 million. Accounts receivable increased to $49.2 million from $36.4 million at the end of 2025, while inventories rose to $89.1 million from $81.7 million. Accounts payable increased to $34.0 million from $26.3 million, and current liabilities reached $88.6 million from $70.2 million.

During Q2, Karat Packaging repurchased 73,510 shares at an average price of $27.11, spending approximately $2.0 million. Another $10.0 million remained authorized at quarter-end. On August 4, the board also increased the regular quarterly dividend to $0.47 per share, payable around August 28 to shareholders of record on August 21.

Earnings guidance

Management expects sales to maintain low-double-digit growth in Q3, but profitability is projected to normalize because tariff refunds during the quarter should be insignificant. Full-year margin guidance includes the refunds recognized during the first half.

The Q3 margin ranges are substantially below Q2’s reported levels and provide a clearer indication of expected profitability without another meaningful tariff-refund contribution.

Recent insider transactions

The supplied insider data reports no purchase or sale transactions during the latest six-month period and total insider holdings of 11.58 million shares. Among older records, the following were the latest entries with an explicit transaction type and reported value; May 2026 records were excluded because their transaction direction and value were not provided.

These transactions are presented as reported and do not, by themselves, establish insiders’ views about the company’s outlook.

Risks investors should monitor

• Profit normalization: Q2’s reported margins and EPS included a large tariff-refund contribution that management expects to be insignificant in Q3.
• Import and product costs: Higher resin prices, duties, tariffs, ocean freight, container volumes, and container rates pressured cost ratios even before considering the refund.
• Operating expense growth: Operating expenses rose faster than sales as online growth increased fulfillment, platform, marketing, and transportation costs.
• Cash-flow quality and working capital: First-half operating and free cash flow were heavily supported by tariff refund receipts, while receivables and inventory increased from year-end.
• Sales-channel divergence: Online and chain-account growth must offset continued weakness in retail, where quarterly revenue fell by approximately 23%.

Summary

Karat Packaging delivered record quarterly sales as volume, chain accounts, and online demand expanded, but the outsized increase in reported earnings came primarily from tariff refunds rather than recurring operations. The main questions for upcoming quarters are whether low-double-digit sales growth can continue, whether import and fulfillment costs stabilize, and whether margins remain within guidance once the refund benefit largely disappears.