Financial Data and Key Metrics Changes - For Q3 2021, net sales increased by 35% year-over-year to $103 million, with adjusted EBITDA at $8.2 million, down from $9.1 million a year ago [15][24] - Gross margin for Q3 2021 was 29%, a decline of 120 basis points compared to 30.2% in the same period last year, primarily due to increased freight costs [19][23] - Operating income decreased by 24% to $5 million, with an operating margin of 5.2% compared to 9.2% for the same period last year [22] Business Line Data and Key Metrics Changes - Sales from distributors, the largest channel, grew by 44%, while sales from national chains expanded by 24% [16] - Online sales rose by 64% year-over-year, reflecting strong demand and continued investment in this channel [11][17] - Retail channel sales fell by 14% as some sales shifted to online channels [17] Market Data and Key Metrics Changes - The company experienced inventory shortages due to tight labor conditions and port delays, impacting sales capacity [11] - Gross margin was negatively affected by increased landed costs, including freight and duty fees of approximately $1.8 million [12][19] Company Strategy and Development Direction - The company is targeting net sales in the range of $93 million to $96 million for Q4 2021, representing a 34% increase at the midpoint compared to the same period last year [14] - To mitigate supply constraints, the company is increasing imports from overseas and finding new vendors [34][55] - The company is investing in additional manufacturing capacity, including new machines and hiring more staff to meet demand [63] Management's Comments on Operating Environment and Future Outlook - Management noted that demand remains strong, particularly for environmentally friendly products, and expects continued growth despite supply constraints [8][26] - The company anticipates improvements in gross margins in Q4 due to price increases and lower landed costs from inventory [13][40] - Management expressed concerns about ongoing supply chain challenges and inflationary pressures impacting costs [46][68] Other Important Information - Net income for Q3 2021 was $4.1 million, down from $4.6 million in the same period last year, with diluted earnings per share of $0.19 compared to $0.26 [23] - The effective tax rate was 24% for both periods, with expectations to remain in the mid-20% range for 2021 [22] Q&A Session Summary Question: Supply constraints and seasonality impact - Management confirmed that demand is currently higher than supply, which may lessen the typical seasonal decline in Q4 [30][31] Question: Future supply improvements - Management indicated that supply constraints are expected to persist into 2022, particularly for paper products, but they are working to increase inventory from overseas [33][34] Question: Gross margin expectations - Management expects gross margins to improve in Q4 due to price increases and lower costs from inventory [40][41] Question: Restaurant customer insights - Management reported strong demand for takeout and delivery, with some customers seeing a 30% to 40% increase in holiday season takeout [43][44] Question: Year-over-year price inflation - Management noted significant price increases due to rising labor and freight costs, with no signs of price stability [45][46] Question: EBITDA margin guidance - Management reaffirmed the target of 9% to 11% EBITDA margin for the year-end, expecting strong performance in Q4 [50][51] Question: Manufacturing capacity expansion - Management is actively adding manufacturing capacity and hiring more staff to meet increased demand [63] Question: Impact of port penalties - Management estimated that potential penalties from the Port of Los Angeles could add significant costs, impacting overall inflation [65][68]
Karat(KRT) - 2021 Q3 - Earnings Call Transcript