Karat's Tariff Refund Was Spectacular — and It's Already Over
A $25.8M one-off inflated Q2 margins to 56.6%; underneath, online sales accelerate while fuel and freight costs reset the normalized band back to the mid-30s.
KRT · Earnings Call · 2026-08-06
Karat Packaging's fiscal Q2 report reads, on the surface, like a blowout: record net sales of $136.3 million (+9.9%), net income up 168% to $29.6 million, and diluted EPS of $1.46 versus $0.54 a year ago. But the engine of that growth was a single, largely non-recurring item: the IEEPA tariff refund of $25.8 million, worth a stunning 1,890 basis points of gross margin and about $1.00 per diluted share. CEO Alan Yu framed it plainly:
Our results also benefited from IEEPA tariff refunds, which reverses higher tariff costs absorbed in the prior periods, and further contributed to the strong reported profitability.
The gross margin printed at 56.6% — a level Karat has never come close to before. Strip out the refund and it falls to 37.7%, and CFO Jian Guo made the normalization explicit in Q&A. Management's own guidance confirms it: third-quarter gross margin is expected in the 35%-37% range "including insignificant IEEPA tariff refunds anticipated during the quarter." The market clearly understood the transience — the stock, up roughly 61% over the trailing 90 days into an August 11 peak of $50.06, now sits about 4% off that high.
Excluding the refund, Q2 gross margin of 37.7% sits at the very top of the 35-37% Q3 guide and roughly in line with the steady ~35-39% band the business has held over the past two years, per the fundamentals axis.
This is not a company-specific invention — it is riding a genuine policy wave. IEEPA refund ranked among the top global earnings keywords for the quarter, and a cluster of recent reporters (BARK, ARHS, HVT, Weyco and others) booked similar refund mechanics. Karat is harvesting a cohort-wide policy reversal, not creating a new durable margin regime.
What the Windfall Hides: Online Momentum and a Cost Spike
The more durable story sits underneath the refund. Online sales grew 23.6% year over year in Q2, and Alan Yu supplied fresh July data points: overall online growth of 37%-plus, with Amazon up 49%.
“just in July we're seeing Amazon growth around 49% year-over-year growth just in Amazon. Our overall online sales growth in July... we're at 37% plus” — Alan Yu, Chief Executive Officer · 2026-08-06
That continues an accelerating arc — a year ago the company was navigating the post-Amazon-FBA transition in search of double-digit online growth again; by May it was on track for $100 million in online revenue. Online sales is now the clearest organic growth engine, aided by four new chain accounts (shipments begin Q4 — "we promise the customers fourth quarter we'll start shipping the product") and a sourcing mix that has pushed China down to 11% of imports while domestic purchases reached nearly 20%.
The offsetting pressure, and the real reason the underlying margin is coming down, is cost. Ocean freight and shipping cost spiked in Q2 — diesel hit $5.40 per gallon amid the Middle East crisis, and third-party carrier costs rose $1.4 million sequentially to $6.1 million. That is what pushed SG&A above expectations and what management is attacking with its internal fleet — deploying company drivers for local deliveries and inter-warehouse transfers. CEO Yu added a hopeful near-term note:
“We were paying $5.40 per gallon diesel gas. In the third quarter, we're looking at ship around $4-something, 25% discount on the diesel gas alone.” — Alan Yu, Chief Executive Officer · 2026-08-06
That mix — a one-off refund inflating Q2, followed by a normalization guide that bakes in the persistent cost inflation — is the crux of the trade.
Margins Will Reset — the Cash Won't Hurt
The full-year guidance is the tell. Management now expects gross margin in the "low 40s" and adjusted EBITDA margin "approximately mid-teens," both including the H1 refunds. That is a meaningful step back from the reported Q2 EBITDA margin of 30.5%. The honest takeaway: Karat's normalized run-rate gross margin is around 35-37%, roughly where it was before the refund landed — the fundamentals axis confirms gross margin had already drifted to 35.5% in Q1 2026, down from the 39-40% of 2025.
“our gross margin without the refund would have been 37.7%, which I think is still really strong. We're talking about high, close to 40% gross margin.” — Jian Guo, Chief Financial Officer · 2026-08-06
Still, the $25.8 million of cash did the balance sheet no harm: working capital of $110.8 million, $42 million of liquidity plus $15.7 million in short-term investments, $33.2 million of operating cash flow, a raised quarterly dividend ($0.45 to $0.47) alongside $2.0 million of buybacks. The refund effectively accelerated the company's cash conversion — a one-time gift that, even if it does not repeat, buys flexibility.
Net income of ~$7M in Q1 2026 versus $29.6M in Q2 2026 illustrates just how large the refund was relative to the underlying business.
The deeper question is whether the ex-refund margin is structurally eroding or just cyclically squeezed. Oil-driven freight and a stronger dollar argue the squeeze is partly cyclical; sourcing diversification and online mix argue for structural support. Historically, Karat has preferred to stay in the lower range of peer pricing — “our peer group seems to have price increases of 8% to 12%, so we are in the lower range among our peer group” — Alan Yu, Chief Executive Officer · 2026-05-07 — a discipline that aided share gains through the tariff turmoil of 2025, when the company “was on track for $100-plus million in online revenues” — Alan Yu, Chief Executive Officer · 2026-05-07. For now, the market has done most of its work — +61% in 90 days — and the 4% pullback from the peak suggests investors are waiting to see whether the underlying 35-37% holds through the second half. The next quarter will separate a genuine share-gain story from a refund-inflated quarter.