Carat Packaging (KRT) Q2 2025: Sourcing From China Falls to 10%, Supply Chain Diversification Accelerates Margin Resilience
Carat Packaging’s Q2 saw supply chain diversification drive record sales and margin expansion, even amid tariff and FX headwinds. The company’s rapid reduction of China sourcing to just 10% and expanded regional footprint mitigated cost shocks and positioned KRT for continued double-digit growth. Management’s operational agility, price discipline, and logistics investments signal a robust playbook for navigating ongoing trade volatility and capturing new business wins in H2 2025.
Summary
- Supply Chain Diversification: China sourcing cut to 10% as KRT expands across Asia and Latin America.
- Margin Resilience Amid Tariffs: Gross margin held up due to disciplined cost management and vendor shifts.
- H2 Growth Visibility: New national chain wins and logistics upgrades underpin confidence in sustained double-digit sales.
Performance Analysis
KRT delivered a record Q2, with sales volume up 13% and net sales rising 10% year over year, despite facing a significant foreign currency headwind from a weaker US dollar against the New Taiwan dollar. Notably, chain accounts and distributor sales grew 11.4%, while online sales, a high-margin channel, rose 8.8% and retail returned to growth. Operating income climbed, aided by a 110 basis point improvement in gross margin, reflecting favorable vendor pricing, improved product mix, and lower depreciation as a share of sales. These gains were partially offset by higher ocean freight and duty costs, driven by new tariffs and increased import volume as KRT built inventory ahead of anticipated business expansion.
Cost discipline was evident in operating expenses, which remained largely flat despite higher shipping, rent, and labor costs, thanks to a $1 million reduction in online shipping and marketing spend from switching providers and shifting online fulfillment to KRT’s own e-commerce storefront. Operating cash flow reached $9.8 million, with free cash flow at $9.6 million, supporting a robust liquidity position. The company’s new Chino distribution center enabled faster delivery and inventory buildup, positioning KRT for H2 demand. Tariff and FX pressures did impact margins, but management expects these to ease by Q4 as new sourcing arrangements take effect.
- Channel Mix Shift: Chain and distributor accounts remain the primary growth engine, while online is regaining momentum via new platforms.
- Inventory Build: Q2 inventory ramp supports H2 growth but temporarily elevated cost of goods sold due to tariffed imports.
- Cost Controls: Savings in online fulfillment and marketing offset inflation in labor and shipping for offline channels.
Management’s operational agility and sourcing pivot are cushioning external shocks, with new business wins and logistics upgrades providing a clear runway for the second half.
Executive Commentary
"A record quarter performance is a testimony to CARES' nimble business model and resilient global supply chain, which allows us to early success in navigating the supply chain disruption and trade uncertainties. We are swiftly diversifying our sourcing footprint, reducing reliance on China to just 10% in the second quarter, while implementing plans to further expand our sourcing across other Asian countries and Latin America to enhance supply chain resilience and flexibilities."
Alan Yu, Chief Executive Officer
"We expect net sales for the 2025 third quarter to increase by approximately 9 to 10% over the prior year quarter. We expect our gross margin for the 2025 third quarter to be in the low to mid 30s and adjusted dividend margin to be within 10 to 12% as our cost of goods sold have begun to reflect inventory brought in with the elevated tariffs."
Jan Gow, Chief Financial Officer
Strategic Positioning
1. Supply Chain Diversification and Tariff Mitigation
KRT’s rapid reduction of China sourcing to 10% marks a decisive pivot in its global procurement model. By expanding into other Asian and Latin American countries, the company is lowering tariff exposure and currency risk. Management expects sourcing from new regions to drive margin recovery in Q4, as the impact of higher-tariff inventory abates. This supply chain agility is a key differentiator in today’s volatile trade environment.
2. Channel and Customer Base Expansion
Recent wins with large national chains and a return to growth in retail signal broadening demand, while online sales are poised for a rebound. The addition of the Cisco Marketplace, which KRT fulfills through its own logistics infrastructure, is expected to restore double-digit online growth by Q4. This multi-channel approach diversifies revenue streams and enhances pricing power.
3. Operational Efficiency and Cost Management
Disciplined cost controls and logistics investments, including the new Chino distribution center, are driving improved operating leverage. The shift away from third-party fulfillment (notably Amazon FBA) to in-house e-commerce has reduced online selling costs and improved inventory control, supporting both margin and customer experience. These moves position KRT to scale efficiently as volume grows.
4. Pricing Strategy and Margin Dynamics
Despite tariff-related cost inflation, KRT implemented selective price increases in April and broader adjustments in May, but still saw a negative price impact in Q2 due to channel mix. Management expects price to stabilize and potentially turn neutral in H2 as new sourcing and vendor negotiations offset cost pressures, with the full benefit expected in Q4.
5. M&A and Product Line Expansion Discipline
KRT continues to evaluate M&A opportunities, but remains disciplined, focusing only on targets that provide new geographies, customers, or differentiated product lines. Management is prioritizing organic SKU expansion and strategic partnerships over high-priced acquisitions, reflecting a long-term value orientation.
Key Considerations
KRT’s Q2 results highlight a business actively managing through macro volatility while laying groundwork for sustainable growth. The company’s supply chain overhaul, cost discipline, and channel innovation are offsetting near-term tariff and FX headwinds. Investors should watch for execution on new business wins, margin stabilization, and online growth reacceleration as leading indicators for H2 performance.
Key Considerations:
- Tariff Pass-Through Timing: Margin compression from higher-tariff inventory will persist in Q3, with relief expected in Q4 as new sourcing takes hold.
- Online Channel Mix: Success on Cisco Marketplace and further SKU expansion will be critical to restoring online sales momentum and margin accretion.
- Logistics Leverage: The new Chino distribution center enhances delivery speed and inventory management, supporting large chain wins and customer retention.
- Cost Structure Flexibility: Continued online fulfillment cost savings and vendor negotiations are key to sustaining margin gains against wage and freight inflation.
Risks
Key risks include further escalation of trade tensions and tariffs, potential currency volatility in sourcing regions, and execution risk as the company shifts its supply chain footprint. Margin recovery in Q4 hinges on timely onboarding of new suppliers and successful pass-through of cost increases. Intensifying competition in the packaging sector could pressure pricing if macro demand softens.
Forward Outlook
For Q3 2025, KRT guided to:
- Net sales growth of approximately 9 to 10% YoY
- Gross margin in the low to mid 30% range
- Adjusted EBITDA margin between 10 to 12%
For full-year 2025, management maintained guidance on:
- Net sales, gross margin, and adjusted EBITDA margin, pending further tariff developments
Management highlighted several factors that will shape H2:
- Tariff-related cost headwinds will be most acute in Q3, with margin improvement expected in Q4 as new sourcing matures
- New business from large national chains and SKU expansion on Cisco Marketplace are expected to drive double-digit sales growth
Takeaways
KRT’s strategic supply chain shift and operational discipline are enabling it to absorb external shocks and sustain growth. The company’s multi-channel approach and logistics upgrades provide a clear path to margin recovery and continued top-line expansion in H2.
- Sourcing Agility: Rapid reduction in China exposure and expansion in Asia and Latin America are cushioning tariff shocks and positioning KRT for Q4 margin rebound.
- Channel Resilience: New chain wins, retail recovery, and online momentum via Cisco Marketplace diversify revenue and support pricing power.
- Execution Watchpoint: Investors should monitor Q4 gross margin recovery, online growth, and the impact of further tariff actions on cost structure.
Conclusion
KRT’s Q2 demonstrates the power of supply chain agility and disciplined execution in volatile markets. With new sourcing, logistics, and channel initiatives gaining traction, the company is well positioned for profitable growth and margin recovery as external headwinds moderate.
Industry Read-Through
KRT’s rapid sourcing diversification and logistics investment offer a playbook for packaging and broader manufacturing peers facing tariff and FX volatility. The shift away from China and toward multi-region procurement is likely to accelerate across the sector, while in-house e-commerce fulfillment is set to become a key margin lever for distributors. Channel mix management and disciplined M&A remain essential as competitive intensity and cost inflation persist industry-wide.