Karat Packaging's last quarter looked spectacular on paper, but roughly a dollar of its $1.45 in earnings per share came from a one-time tariff refund. That makes the upcoming third-quarter report the first clean look at the business since the windfall. It will show whether accelerating online demand and a growing chain-account roster can carry profits now that the refund has rolled off and shipping costs have crept higher.
The Street is looking for earnings of $0.44 a share on revenue of $140.0 million. That would be a 22.2% gain in profit and a 12.4% increase in sales from the year-ago quarter's $0.36 and $124.5 million. Consensus revenue sits right on management's own forecast of about $140 million, and the company has kept its full-year target of roughly $526.2 million. In other words, analysts have not stretched beyond the company's guidance. A modest beat is plausible, but the revenue number alone is unlikely to surprise anyone. The EPS estimate is also telling. Strip the refund out of the second quarter and Karat earned about $0.45, so the Street is effectively modeling flat sequential profit on slightly higher sales. That fits management's guide for gross margin of 35% to 37% and adjusted EBITDA margin of 9% to 11%. Both sit below the roughly 37.7% underlying gross margin of the second quarter.
The top-line story is where Karat has the most to prove, and the most momentum. Online sales grew 23.6% last quarter, a sharp step up from about 10% in the first quarter and low single digits late last year. Management then said July online sales jumped 37%, with Amazon up 49%. If online growth in the third quarter lands near those July figures, it would strongly support the company's roughly $100 million full-year online target. A fade back toward the low 20s would raise the question of whether July was a spike rather than a new run rate. The new Orlando distribution center, slated to open this quarter, should help here, and any early read on its contribution would be useful. Management also expects four new chain accounts to begin shipping in the fourth quarter. This report should show whether that launch remains on schedule.
Costs are the swing factor. Operating expenses rose to $39.6 million in the second quarter from $32.6 million a year earlier, driven largely by shipping and transportation. Analysts flagged that jump as a disappointment. Management blamed peak diesel prices and higher container rates and said it expects relief in the third quarter. If shipping expense eases and EBITDA margin lands in the upper half of the 9% to 11% range, the cost worries fade. If opex keeps climbing, the market may decide the raised full-year margin outlook leaned too heavily on the refund. The retail channel, which fell 23.4% on lower logistics revenue, is a smaller drag but worth a look.
Expectations have clearly warmed. The stock has gained 21.6% since the last report, while the S&P 500 slipped 0.2%. Sentiment has flipped from moderately bearish before the prior report to mildly bullish now. At $54.47, shares trade far above their 200-day moving average of $35.26. They sit within about 3% of the post-earnings high of $56.06, a level that leaves the stock approaching a breakout. The entire post-earnings range sits above last quarter's ceiling of $43, a sign of how much the market has rerated the name.
That rerating raises the bar. The central question is whether Karat can show underlying margins holding near the high end of guidance while online growth keeps compounding. If both happen, the second-quarter narrative of accelerating demand stays intact even without the refund. If cost creep resurfaces, a stock priced near its highs leaves little room for disappointment.