Karat Packaging Inc. (NASDAQ:KRT) is a rapidly-growing specialty distributor and select manufacturer of disposable foodservice products and related items. The company offers a wide range of products for the foodservice industry, including food and take-out containers, bags, tableware, cups, lids, cutlery, straws, specialty beverage ingredients, equipment, gloves and other products. Karat's products are available in plastic, paper, biopolymer-based and other compostable forms.
Business Overview
Karat has established itself as a differentiated provider of high-quality products relative to its competitors. The company's operating model entails generating the majority of its revenue from the distribution of its vendors' products complemented by select manufacturing capabilities in the U.S. This model provides Karat with the flexibility to adjust the mix of its product offering from import and manufacturing in evolving economic environments to drive operating efficiency and sustained margin expansion.
Financials
In fiscal year 2023, Karat reported annual revenue of $405.7 million and net income of $32.5 million. The company generated annual operating cash flow of $53.4 million and free cash flow of $44.0 million. Karat's strong financial performance has enabled the company to consistently return capital to shareholders through a quarterly dividend, which was most recently increased to $0.35 per share.
For the first quarter of 2024, Karat reported revenue of $95.6 million, which was flat compared to the prior year period. Net income for the quarter was $6.5 million, down from $9.2 million in the prior year quarter. The company's gross margin for the quarter was 39.3%, compared to 39.8% in the prior year period.
Karat's sales volume increased 3.5% in the first quarter of 2024 compared to the prior year period. The company noted that its net sales were understated by $0.7 million due to a change in revenue recognition practices, where revenue is now recognized upon delivery to the customer rather than upon shipment. Excluding this impact, Karat's net sales would have been in line with the company's internal projections.
Product Performance
By product category, Karat's eco-friendly product sales increased 6% in the first quarter, representing 34.5% of total sales compared to 32.6% in the prior year period. The company continues to see strong demand for its environmentally-friendly product offerings as customers increasingly focus on sustainability.
Operating Expenses
Karat's operating expenses in the first quarter of 2024 were $29.5 million, or 30.9% of net sales, compared to $25.4 million, or 26.5% of net sales, in the prior year period. The increase was primarily driven by a $2.0 million non-cash impairment charge related to the sublease of the company's City of Industry, California warehouse, as well as higher rent and labor costs associated with the opening of new distribution centers.
Outlook
Looking ahead, Karat provided guidance for the second quarter of 2024, expecting net sales to increase by mid-single digits compared to the prior year period. The company also reiterated its full-year 2024 guidance, projecting net sales growth of 8% to 15% and gross margins in the range of 37% to 40%.
Liquidity
Karat's balance sheet remains strong, with $49.3 million in financial liquidity and an additional $33.5 million in short-term investments as of March 31, 2024. The company's working capital position improved to $112.3 million at the end of the first quarter, up from $110.5 million at the end of 2023.
Recent Developments
The company continues to execute on its strategic initiatives, including the opening of a new distribution center in Mesa, Arizona and the exploration of potential acquisition opportunities to further expand its geographic reach and product offerings. Karat's focus on eco-friendly products, strategic distribution network, and flexible operating model position the company well to capitalize on the growing demand for sustainable foodservice solutions.
Conclusion
Overall, Karat Packaging's first quarter results demonstrate the resilience of its business model and the company's ability to navigate a challenging macroeconomic environment. With a strong balance sheet, consistent cash flow generation, and a clear strategic vision, Karat is well-positioned to continue delivering value to its shareholders.