Shares of Karat Packaging, Inc. (KRT) have taken a hit, losing 8.5% since the company announced its second-quarter 2024 financial results on August 8th. The results fell short of analyst expectations, with both revenue and earnings per share (EPS) coming in lower than anticipated.
The company’s adjusted EPS of 49 cents missed the Zacks Consensus Estimate of 60 cents, marking a 29% year-over-year decline. Karat Packaging attributed the shortfall to unfavorable pricing comparisons, higher freight costs, and an increase in operating expenses during the quarter.
While total revenues rose 3.5% year-over-year to $112.6 million, this was still below the Zacks Consensus Estimate of $114 million. The increase was driven by higher sales volumes, a shift in product mix, and the inclusion of online sales platform fees. However, these positive factors were partially offset by the aforementioned unfavorable pricing comparisons.
Looking at the company’s operational performance, the cost of sales increased 3.5% year-over-year to $69 million, while gross profit rose 3.7% to $43 million. The gross margin remained flat at 38.5%, with a 90 basis point net favorable impact from online platform fees partially offset by higher ocean freight costs. Operating expenses rose to $32.3 million compared to $28.5 million in the same period last year. This increase was attributed to factors such as online sales platform fees, higher rent and warehouse expenses, online marketing costs, and increased stock compensation.
As a result of these factors, adjusted EBITDA declined by 26% year-over-year to $15.7 million, leading to an adjusted EBITDA margin of 13.9% compared to 19.4% in the second quarter of 2023.
Karat Packaging’s cash and cash equivalents stood at $19.3 million as of June 30th, 2024, down from $23 million at the end of 2023. Despite this decline, the company generated $20 million of cash flow from operations in the first half of 2024, albeit lower than the $31 million generated in the same period of 2023.
Despite the challenging second quarter, Karat Packaging remains optimistic about its future prospects. The company anticipates mid to high-single-digit year-over-year sales growth in the third quarter and mid-single-digit sales growth for the full year 2024. The company also projected a gross margin between 38% and 39% for the third quarter and between 38% and 40% for the entire year.
It’s important to note that Karat Packaging currently carries a Zacks Rank #3 (Hold), indicating a neutral outlook for the stock. While the company faces some challenges, its continued focus on sales growth and maintaining a healthy gross margin suggests a potential for improvement in the future.
