American Outdoor Brands, Inc.

Good day, everyone, and welcome to American Outdoor Brands, Inc. Third Quarter Fiscal 2021 Financial Results Conference Call. This call is being recorded. At this time, I would like to turn the call over to Liz Sharp, Vice President of Investor Relations, for some information about today's call.

Thank you, and good afternoon. Our comments today may contain predictions, estimates, and other forward-looking statements. Our use of words like anticipate, project, estimate, expect, intend, should, indicate, suggest, believe, and other similar expressions is intended to identify those forward-looking statements. Forward-looking statements also include statements regarding our product development, focus, objectives, strategies, and vision, our strategic evolution, our market share and market demand for our products, market and inventory conditions related to our products and in our industry in general, and growth opportunities and trends. Our forward-looking statements represent our current judgment about the future and they are subject to various risks and uncertainties. Risk factors and other considerations that could cause our actual results to be materially different are described in our securities filings. You can find those documents as well as a replay of this call on our website at AOB.com. Today's call contains time-sensitive information that is accurate only as of this time and we assume no obligation to update any forward-looking statements. Our actual results could differ materially from our statements today. I have a few important items to note about our comments on today's call. First, we referenced certain non-GAAP financial measures. Our non-GAAP results exclude amortization of acquired intangible assets, stock compensation, transition costs, COVID-19 expenses, related party interest income, and the tax effect related to all those adjustments. The reconciliations of GAAP financial measures to non-GAAP financial measures, whether or not they are discussed on today's call, can be found in our filings as well as today's earnings press release, which are posted on our website. Also, when we reference EPS, we are always referencing fully diluted EPS. Joining us on today's call is Brian Murphy, President and CEO, and Andy Fulmer, Chief Financial Officer. And with that, I will turn it over to Brian.

Thanks, Liz, and thanks, everyone, for joining us. Today I'm excited to share our third quarter results, which exceeded our expectations for both net sales and net income. I believe our performance reflects not only the ongoing strength of the outdoor market, but more importantly, the value of our highly authentic brand portfolio, our unique dock and unlock strategy, the harvesting of our strong new product pipeline, and investments we made in our business two to three years ago that are beginning to bear fruit. These elements have long been core to our strategy and they underlie the great results we're reporting today. With a focus on the future, five and even 10 years out, we will continue to make forward-looking investments that we believe will unlock the brand's full potential as they progress along their exciting path from niche to known, regardless of the direction the outdoor market takes in our post-pandemic world. Overall, however, it looks as though the floor has been raised for outdoor participation and we expect a portion of those new entrants to continue recreating in our categories well past the current pandemic. Because of that, we're very excited to continue engaging with a much larger consumer base than we did before 2020. With that, let's talk about the quarter. Highlights include order strength for products across all four of our brand lanes, growth in both our e-commerce and traditional sales channels, the first million-dollar-plus quarter from our recently launched D2C brand, Meet Your Maker, the largest product launch ever from our Crimson Trace brands, an exceptional cash flow generation which further strengthens our balance sheet. Based on our performance and our outlook for the balance of the year, we are again raising our guidance for fiscal 2021, which ends April 30th. Before I address our performance specifically, let me update you on our markets. By now, I think we're all aware of the significant impact the pandemic has had on so many aspects of our world and community. When it comes to the outdoor industry, that impact has been truly profound, and we believe has resulted in a higher foundational level of consumer participation. Whether personal protection, shooting sports, camping, hunting, or fishing, each one has delivered meaningful growth year over year. In camping, the Outdoor Industry Association estimates that camping participation increased 28% in 2020, with nearly 8 million new participants. Millennials represented the strongest increase in participation, with 19% camping for the first time ever, We are excited about what this trend could mean for our Adventurer brand line, which includes Schrade as well as UST, our growing line of camping gear that we recently rebranded with an exciting new youthful, inclusive, and energetic personality. You can check out our recently launched tents, sleeping bags, and mats at USTgear.com. In hunting, according to data issued this week by the NSSF and Southwick Associates, hunting license sales were up an estimated 7.5% in 2020. The brands within our harvester brand lane, particularly Hooey Man, Bog, Uncle Henry, Oldtimer, and our internally developed Meet Your Maker brand, are in a great position to address a variety of pre-hunt, hunt, and post-hunt activities for these new, and in some cases renewed, participants. In fishing, the Recreational Boating and Fishing Foundation reported there were 3 million more fishing licenses sold in 2020 than in 2019. an increase of 14% year over year. Within the Adventurer brand line, our Bubba brand is ready to provide these new anglers with must-have tools to capture the ultimate lifestyle of adventure from water to plate. You'll find new fishing shears, stainless steel pliers, and diving knives at Bubba.com. And lastly, strong participation in firearms ownership led to a record 8 million new entrants in calendar 2020, according to the NSSF. This new and larger installed base of owners suggests strong future participation in shooting sports and the need for new products and accessories, where we are uniquely positioned. In addition to benefiting Crimson Trace, Lockdown, and the licensed Smith & Wesson-related brands in our Defender brand lane, these new consumers are also potential long-term customers for Caldwell, Wheeler, Tipton, and Frankfurt Arsenal, all situated in our Marksman brand lane. Our award-winning puck monitoring device, along with other innovative safety products from our lockdown brand, are especially relevant and offer peace of mind for these 8 million new firearm owners. Turning to our financial performance in the quarter, net sales across our portfolio brands grew an extraordinary 91% in the third quarter, and gross margins expanded by 110 basis points to over 45%. Growth in the quarter occurred in nearly all of our 20 brands, Furthermore, of our top four selling products in the quarter, each came from one of four brand lanes, yet again, demonstrating the diversity we have built across the business. We believe that sales growth across both our traditional and e-commerce channels in the quarter demonstrates the investments we have made over time continue to pay off, allowing us to place our brands wherever the consumer expects to find us, whether that's a physical store or online. The investment we've made in our e-commerce platform was an initiative we began well in advance of the pandemic and positioned us well for the acceleration of consumer shopping online. We believe our e-commerce and traditional platforms will both play an important role in our long-term growth, so we are pleased that our e-commerce channels generated 44% of our total net sales in the third quarter. This represented 129% growth compared to the prior year, and included a sizable increase in our direct-to-consumer sales. Net sales in our traditional channels grew as well, increasing by over 68% year-over-year. Turning to profitability, our adjusted EBITDA performance for the quarter was particularly strong, with adjusted EBITDA margins improving 1,120 basis points year-over-year. In addition to higher gross margins, we delivered greater profitability to the bottom line, demonstrating, we believe, the tremendous leverageability of our business, thanks to the unique structure of our brand lanes and our focus on organic growth through our dock and unlock strategy. This quarter, I'm excited to share another example of our dock and unlock process in action. When we purchased Crimson Trace almost five years ago, it had long been a leader in the market for laser size for self-defense. Essentially, a red or green laser attached to the frame of a firearm allowing the user to aim more rapidly and accurately. Interestingly, when we plugged the brand into our dock and unlock process, we learned that consumers had come to view it as a trusted provider of not only laser sights, but aiming solutions more broadly. We thought, wow, where else could Crimson Trace go with this increased permission to play? So our Defender brand team went to work, expanding the Crimson Trace offering in 2018 to include red dot sights and a small assortment of rifle scopes. but their work didn't stop there. Ongoing research hinted to us what we believe consumers wanted most, and in this third quarter, we announced the launch of over 50 optics in our newly established Hardline and Brushline series of rifle scopes. Like the rest of our Crimson Trace products, the new scopes have undergone what we believe to be the most rigorous and hardcore testing in the industry, which is why they're backed by a lifetime warranty. They have the strength of IP behind a variety of features, and they preview the new design aesthetic that we are incorporating into future Crimson Trace products. Our scopes include aggressive knurling on the magnification ring and turrets, Crimson Trace MOC coatings, and robust aerospace-grade construction. Our pro models feature zero-stop and exposed turrets, larger objective diameters, first and second focal plane options, and a variety of illumination options you'd come to expect from a brand rooted in electro-optics technology. You can find our new scopes at CrimsonTrace.com. New products are core to our strategy, and historically, companies in our industry showcase new products each year at SHOT Show. This year, however, SHOT Show, like so many shows, was canceled. But that didn't slow us down, and we went digital. We redirected our SHOT Show budget towards rich media content and secured two full episodes on the 2021 SHOT Show New Product Premiere, which aired on the Outdoor Channel and Sportsman Channel. Both episodes were basically an American outdoor brand takeover. They were dedicated entirely to new products from across our brand portfolio. This programming included groundbreaking optics, hunting blinds, game cameras, meat processing equipment, revolutionary tools for the reloader and gunsmith, the latest fillet knives and gear for the most desiring of anglers, a complete assortment of land management tools, a brand new line of smart security products, and much more. The reach for these episodes has been tremendous. We estimate that the programs have generated over 35 million impressions across television, print, digital, and social media, and those programs are scheduled to air again in July. The shift we made from a physical event to a digital venue for SHOT Show seemed natural, since our internal capabilities, which include a modern approach to product marketing, content generation, and digital marketing, are core strengths that allow our brands to establish lasting relationships with consumers. We intend to further utilize these internal digital capabilities as we launch more than 300 new products in the coming year. In addition to organic growth objectives, Andy and I continually scan the landscape for potential acquisitions that are a fit with our business. We are currently seeing an uptick in the number of acquisition opportunities, likely for a variety of reasons. That said, we continue to maintain a very disciplined approach when we look at these targets. In particular, we're looking for strong brands that complement our current portfolio and have runway for growth, targets that have large, total addressable markets, and brands where our dock and unlock strategy can provide untapped value for our shareholders. Before I hand it off, I want to especially thank our employees who helped us deliver these tremendous results. Their commitment to our success as a new company Their dedication to the health and safety of their coworkers and their passion for building an exciting and innovative product portfolio made it possible for consumers to continue exploring their connection with the outdoors and our products during these challenging times. Andy?

Thanks, Brian. I'm excited to share details of our strong third quarter results. We delivered significant growth in net sales and adjusted EBITDAs that exceeded our expectations. as well as exceptional cash flow generation. Net sales for the quarter were $82.6 million compared to $43.3 million in the prior year, an increase of approximately 91%, driven by favorable consumer trends and a consumer preference for our strong brand portfolio. In fact, seven of our brands grew revenue more than 100% over the prior Q3. Historically, our second quarter sales have represented the highest point in our annual seasonality. This year, however, Q3 will likely stand as our highest quarter, aligning with very robust POS trends that were occurring at the time, combined with retailer load-ins of inventory on new products from our Crimson Trace and UST brands, new customer additions for Crimson Trace and Hooey Man, and strong channel inventory replenishment made possible by effective inventory planning. Sales in our traditional channels were $46.2 million, an increase of 68.5% over the prior year quarter. Net sales in our e-commerce channels were $36.5 million, an increase of 129% over the prior year. Our e-commerce channels include our direct to consumer sales, as well as sales to retail customers that do not traditionally operate a physical brick-and-mortar store, but rather generate most of their sales on their own retail websites. Our Q3 gross margins were 45.2%, a 110 basis point increase over the prior year, and in line with our expectations. The favorable impacts of product mix and fewer promotional programs were partially offset by higher tariff costs and sales of discounted slow-moving inventory to certain retailers, both of which were expected. As a reminder, last quarter we said we would be working to sell $5 to $6 million of certain slow-moving inventory at low margin in order to convert that product to cash. Our efforts have been successful, and in Q3, we sold approximately $3 million of this inventory. In Q4, We expect to complete the sale of the remaining $2 to $3 million of inventory, and the impact of those sales has been incorporated into our guidance. In the quarter, gap operating expenses were $27.2 million compared to $20.9 million in Q3 last year. The $6.3 million increase was driven primarily by $3.6 million of variable selling and distribution costs, and approximately $1.4 million of compensation-related expenses, all of which resulted from our higher net sales. Those costs were netted by a decrease in intangible amortization of approximately $600,000. Non-GAAP operating expenses in Q3 were $22.2 million compared to $16.6 million last year. Non-GAAP operating expenses exclude intangible amortization, stock compensation, and certain non-recurring expenses as they occur. For the third quarter, GAAP EPS was 56 cents as compared with an EPS loss of one cent last year. Our non-GAAP EPS was 82 cents as compared to 13 cents in the year-ago quarter. These figures are based on our fully diluted share count of approximately 14 million shares. Adjusted EBITDAs of $15.8 million represents an increase of approximately 360% over prior year at a margin of 19.1% compared to 7.9% in the prior year quarter. This great result was favorably impacted by a combination of the absence of promotions required in the current environment, reduced OPACs from travel and trade shows, and the significant leverage of fixed cost at that net sales level. Turning to the balance sheet and cash flow. Our balance sheet became even stronger in Q3, enhancing our ability to invest in organic growth and seek complementary brands for our portfolio through acquisitions. We ended the quarter with cash of $45.5 million and no borrowings on our line of credit. Our cash position was primarily driven by very strong operating cash inflow of $12.6 million for the quarter, netted by cash outflows of $1 million for capital expenditures and patent costs. We continue to expect approximately $4 million in total capex spending for the current fiscal year, with a portion of that being non-recurring in nature related to the spinoff from our former parent company in August 2020. I want to note that the spinoff included a transition services agreement under which we received two years of IT support while we stand up our own independent IT infrastructure, including an ERP system. We are just now embarking on that process, so the related CapEx will primarily occur in our fiscal 22. Our new IT infrastructure is an important and meaningful opportunity to implement a system that truly fits our needs. It will provide immense value to our business by further strengthening our analytic capabilities and preparing us for future growth. I look forward to sharing more as we get this project underway. Turning to accounts receivable. We decreased AR by approximately $2 million from Q2 to Q3. Even though we delivered a sequential increase in quarterly net sales, of roughly $3 million. We are pleased with this reduction, which is the result of two specific initiatives we discussed in our last call. We remain focused on identifying additional opportunities to reduce DSOs in the future. During the quarter, our team did a great job working with suppliers to ensure a consistent inflow of inventory, despite some constraints with shipping capacity and port-related delays that we faced with certain inbound product. We utilized air freight on occasion when the margin impact was acceptable, and this helped us maintain what we believe to be excellent service levels for our retailers. We held our inventory relatively flat from Q2 to Q3, largely by moving the slower inventory I discussed earlier and balancing our internal inventory with increased demand. Starting in Q4, we expect our inventory to increase due to a few factors. First, like many companies, we're seeing unprecedented port congestion. For instance, the Port of Long Beach reported its busiest February ever, with 43% more shipping containers processed than prior February. In order to help mitigate transportation risk, we intend to increase safety stock in some of our high-volume SKUs. Second, as Brian mentioned, we're in the process of launching over 300 new products in calendar 2021, and we plan to increase inventory in support of those launches. It's worth noting that several of these new products are manufactured outside of China, helping us continue to diversify our supplier base and reflecting our progress toward our long-term commitment to mitigate supply chain risk. Lastly, We've shared in the past our strategy to evolve some of our brands toward higher ASP products. As a result of our progress on this initiative, many of the new products Brian referenced will reflect higher ASPs, and that will inherently increase our inventory value. Examples of this important evolution include our new scopes from Crimson Trace, tents from UST, and grinders from Meet Your Maker. These new products represent an exciting investment we're making in our business. As we do so, we remain focused on effectively managing our inventories through our robust S&OP and product lifecycle management processes. We ended the quarter with no bank debt and the full capacity available on our $50 million line of credit. This facility provides an additional $15 million of availability under certain conditions. Between our revolver capacity and our cash balance, our total available capital at the end of Q3 was over $110 million. This access to capital provides us with a menu of options as we identify opportunities for the organic and inorganic investments that Brian mentioned. Now turning to our guidance. Based on our financial performance through Q3 and our expectations for continued growth in Q4, we are increasing our net sales, EPS, and adjusted EBITDAs guidance for fiscal 21. We are now estimating full-year net sales in the range of $268 to $272 million, which would represent growth of roughly 60 to 62% year over year. With net sales in that range, we would expect full-year gap EPS in the range of $1.07 to $1.14 and non-GAAP EPS in the range of $2.08 to $2.15. We would also expect adjusted EBITDAs in the range of $43.5 to $44.5 million, which would represent growth of approximately 254 to 262 percent year over year. I'd like to make a few comments on our guidance. Our tax rate in Q3 was about 22%, and we expect our tax rate in Q4 to be roughly 25%. In addition, all our estimates are based on our forecasted fully diluted share count of approximately 14.2 million shares. At the midpoint, our guidance implies healthy fourth quarter net sales growth of about 34% over the year-ago quarter, and second half growth of about 62% over the year-ago period. This outlook takes into account current POS trends, which remain favorable, but which have come off Q3 levels. With regard to gross margin, we expect Q4 to be very similar to Q3 as a percentage, and that result would include the low-margin inventory sales I referenced earlier. In terms of OPEX, we expect fixed selling and marketing costs to increase from Q3 to Q4 as we redirect travel and trade show-related savings from early fiscal 21 to strategic initiatives in Q4. These investments include product launch activities, advertising programs with key retailers, and other important initiatives that serve as seeds we are planting for future growth, fueling our brands in their transition from niche to known. With that, operator, we're ready to open the call for questions from our analysts.

Ladies and gentlemen, if you'd like to ask a question at this time, please press the star, then the number one key on your touch-tone telephone. To withdraw your question, press the pound key. Again, that is star, then one, if you'd like to ask a question at this time. Our first question comes from John Kernan with Cowan.

Wow, guys. Congrats. Phenomenal quarter. Really great start since the spin. Yeah, thanks, John. You gave a lot of compelling stats on growth across a broad range of outdoor activities, hunting, fishing, camping. I guess what does the growth of this installed base of consumers and this new interest across all of these activities mean for your long-term organic growth rate? It feels like you're looking at a multi-year path to fairly significant organic top-line growth. I'm just curious. how things have changed maybe as we get into post-pandemic?

Sure. So certainly with the increased participation with that installed base, which is much higher than it was in 2019, and our business being squarely in the center of some of the more popular activities that you mentioned, I do think it bodes well for us going forward, especially as we come out with New products, we mentioned we're coming up with 300 new products this year. Overall, our portfolio is at a higher ASP. So reaching out to those new consumers, engaging with them, we're doing that in our direct-to-consumer efforts and all of our digital marketing efforts. So we haven't given any top-line growth, which you know, beyond this year. But certainly it's exciting for us. We're as optimistic as we can be that this new installed base will continue to, will be able to tap into that new base in a much larger way going forward. Andy, is there anything you want to add to that?

No, yeah, just, you know, we're very excited with our overall, our new product portfolio and really, you know, servicing the needs of those, this new base of consumers we have.

Yeah, then maybe, Andy, another question for you is, based on the guidance, you're now looking at a mid-teen EBITDA margin or so based on the high and low end. What do you think the long-term margin of this business should look like, not just in fiscal 22, but as we think model out a few years? What's a normalized EBITDA margin as you scale this business?

Yeah, unfortunately, I can't really get into much detail there beyond kind of what Brian and I talked about. about the fact that we're very excited moving forward. I would also point out that, as we've seen throughout this year, that we've really been able to leverage our fixed costs in a meaningful way. Outside of that, I can't really give you much more.

We plan to give our FY22 guidance at the next earnings call.

Understood. And I would imagine that the model, you know, there's still a lot of fixed costs in this model. Given the growth potential in the industry, that's still a margin-driving story going into fiscal 22 and beyond. It's just the operating leverage in the business that you see even beyond what you've already generated this year. Yeah, I think that's a fair statement. Okay. And then just on, you know, the cash balance is building on the balance sheet. Next year, you know, There's going to be more cash, it looks like, certainly given the economics of the business right now. What are you seeing in terms of capital allocation at M&A?

Yeah, we're definitely looking at, first and foremost, organic growth. So Andy mentioned some of the investments that we'll be making here shortly, looking ahead at a new ERP system, which we're really excited about. It will give us increased analytics potential. And then also, like you said, M&A. I said in my prepared remarks that we are seeing an uptick in M&A right now. I've been in this industry for a while, and I can't say I've seen as much M&A as we're seeing right now, which is great. There's lots of opportunities out there. The thing that Andy and I, I think, do really well is remain very disciplined in looking at these acquisitions. Multiples have risen a little bit. And we need to make sure it's the right deal for us, the right deal for our shareholders, can plug into our dock and unlock strategy. So a few different areas, but those are the two primary ones.

Excellent. Thanks, guys. Best of luck.

Thank you. Thank you.

Our next question comes from Scott Stember with CL King.

Good evening, guys, and congrats on a great quarter. And thanks for taking my questions. Thanks, Scott. I'm just trying to dimensionalize. You talked about POS has come off of the elevated levels of Q3, and I'm just trying to, you know, talk about or just figure out, you know, the size of the drop-off and maybe try to figure out some of that due to the fall-off in NICs that we saw, you know, with attachments and things like that. Maybe just give us a little more detail on that.

Yeah, Scott, this is Andy. So for Q3, we had three of the things that I talked about in my comments that really helped drive Q3 the way that we looked at it. The retailer load-ins, so that was pretty much Crimson Trace Scopes, our new product line launched there. And UST, we had a load-in of some of our tent sleeping bags and mattress pads. Those are really out-of-season load-ins, so that definitely helped us drive new customers. We have a new OEM relationship with Crimson Trace that, again, when we look back, that's really a result of the spinoff. I don't believe we would have been able to have that relationship prior to the spinoff. And then also, HuiMan, we were able to load in into the home and hardware channel, which is a new channel for HuiMan. And then finally, that inventory replenishment, we really had the inventory to be able to service our customers. Our customers consistently say that our service levels stand out to them, so we really had strong replenishment. Then when you look at Q4 and what we guided into Q4, that really kind of takes into account the POS trends we're seeing now. And again, they're off the Q3 levels, as you said, but really very strong with our implied guidance.

All right, and just maybe just tying into some of the reasons why it could be off. Do you think that with NICS kind of flattening out this last month, that that had an impact, like I was saying before, with attachment sales and things like that?

I don't know. I think it could impact it, yes. I think that's more closely tied with some of the brands in our defender lane like Crimson Trace, but also the cold weather that whipped through the middle of the U.S. and southern U.S. I think had a part in that as well in February. So quite a few places were closed I think for a week. So I can't discount that as well.

Okay, that's all I have for right now. Thanks a lot. Yeah, thank you, Doug.

Our next question comes from Eric Bold with B. Reilly Securities.

Thank you. Good afternoon, guys.

A couple of questions. I guess one just follow up on the last one kind of around inventory. You kind of talked about some of the strength in the quarter was the kind of non-seasonal or kind of out-of-season load into the new product. I guess, you know, excluding that, how would you think about channel inventory levels in general heading into spring, summer versus, you know, maybe normal kind of non-pandemic years and how, you know, what behaviors are you seeing from the retailers in terms of desire to restock inventory, you know, versus normal periods? Are they as aggressive before? Are they getting a little cautious or really no change?

Hey, Eric, this is Brian. So what I would tell you is we're, We've talked about in calls in the past that we've kind of shortened the lead time between what we're seeing in POS data. Again, we can see about 50% or so of our sales in POS with our own supply chain. And so what we're seeing there in POS is very well tied into the orders that we're getting from our customer base. So strong correlation. And I'm not getting a sense from our customers that they're stocking up. I still think that there's healthy replenishment that's going on right now that's going out the door, where consumers are pulling that through at a rate that's consistent with what we're seeing in our data.

Yeah, and one thing I would add to that, Eric, is that I mentioned in my piece the investments that we were making in Q4 on those marketing programs and some of the advertising with retailers. We're really doing our best to really pull that inventory through the channel. Um, as that marketing machine to drive that demand, um, to obviously pull in more replenishment.

Perfect. And then, and then final question, you know, obviously, you know, big spike in, in, in participation, you know, during the pandemic, obviously optimism that, you know, a lot of these people, you know, do stay with these activities as the economy starts to reopen and they kind of get, get more engaged. I guess it may be tough on the retail side of it, maybe within your own e-commerce platform. you know, what have you seen in terms of, you know, returning customers, repeat purchases, maybe an ability to kind of shift something that comes into one brand lane into another brand lane, you know, how engaged are these kind of new customers being with the various activities?

Yeah, Eric, this is Brian. It's a good question. So we are seeing what we call internally kind of a daisy chain sort of behavior with some of our consumers. So we have We have over 500 micro-influencers that we use, and a lot of times they will use several of our brands. And that's really a good starting point for somebody who's getting into the industry, no matter where they're coming in, whether it's a new firearm or they're getting into hunting or they're getting into fishing or camping. So there's kind of this ecosystem of micro-influencers that we leverage pretty heavily. And they kind of travel, you know, kind of move the consumer and introduce them to some of the brands through that, in addition to our own websites. So you'll see, like, for example, Lockdown, I think right now, our Lockdown brand is doing a big launch for some new products, and you'll see several of our brands being incorporated into that. Not in an intrusive way, but in a complimentary, you know, some giveaways, things like that. And then we're seeing those purchase patterns across at least our websites, which we have good visibility into. So we do think that there's upside there, and we're seeing customers come back.

That's helpful.

Thank you, guys.

Appreciate it. Yeah, thank you.

Our next question comes from James Hardiman with Wedbush Securities.

Hi, good evening, and congrats on another strong quarter here. So it's come up, but you spoke to a significant replenishment in the quarter. I just want to make sure I understand where we are. Is that replenishment essentially complete and ultimately exiting the quarter? How correlated are point-of-sales retail trends and the wholesale trends that you're seeing right now? If you see an uptick or a downtick, Is that going to be pretty quickly reflected in your shipment patterns?

Yeah, James, this is Andy. So I'm trying to think of how to answer. So our guidance, again, is really reflective of the POS trends that we're seeing right now as compared to Q3. I don't know if that helps.

Yeah, it's pretty well correlated, the exceptions being because we're launching so many new products this year, and we've got some load-ins in Q4. So some Bubba products, for example, some of those more spring, seasonal type brands, that's going to skew the data a little bit.

But ultimately, load-ins aside, where we are in the upcoming quarter, we shouldn't think about incremental shipments being made to get inventory levels higher. That's already been completed in the previous quarter.

Is that the way to think about it? Yeah, I think that's a valid assumption.

Okay, perfect. And then, Brian, a couple times you've talked about the M&A environment picking up, and you alluded to a variety of reasons why you're seeing that uptick. Can you maybe give us some color as to what those reasons might be?

Sure. Again, I haven't seen this much activity in a long time. I think that there's a record amount of funds on the sidelines with private equity that needs to be put to work. I think the fact that the industry is doing well has increased visibility for a lot of those financial buyers. So we're seeing more competition from, in particular, financial buyers that are stepping up. And in some cases, they may own a big portfolio company and have really began backing them and getting into the industry. So increased, I would say, demand. And then as a result of that as well, and the performance of some folks in the industry, they recognize that demand and they want to take some chips off the table, so they're coming to market as well. So it's created an environment where we are seeing quite a bit more than we have in the past. With that said, obviously we're looking at those deals that come to market, But a big part of our strategy is Andy and I do a lot of outbound and cultivate our own pipeline of targets. So that continues on as planned, and like I said earlier, we'll remain disciplined. So while it's exciting, it's really exciting that there's a lot of activity out there. We're going to be patient. We're going to find the right deal.

Got it. And then just real quick clarification, Andy, if I do the math, on the fourth quarter EBITDA margin, it seems like we're going from what had been sort of high team, 20%, to maybe 5% to 7%. Obviously, there's some leverage there, right? You're guiding to lower sales sequentially, so that's going to hurt margin a little bit. Is that it, or is there anything else in there that we should be cognizant of?

Yeah, so I would say in Q4, there's a couple different factors. So, we have that additional two to three million of low margin inventory that will impact margins. So I said in my comments, we expect gross margins to be kind of close as a percentage-wise to Q3. So then if you look back into Q1 and Q2, the margins were higher. And the fixed investments that we talked about, it's not a permanent change in fixed. they are targeted advertising brand awareness initiatives, new product launch initiatives, that when you look at Q4 revenue, just the leverage doesn't pan out. But again, we're kind of looking at it on a long-term basis, so we don't want to not invest in those types of projects because they are going to yield gains for us going forward.

Makes a lot of sense. Thanks, Andy. Thanks, Brian. Thank you.

As a reminder, ladies and gentlemen, if you'd like to ask a question at this time, that's star, then 1. Our next question comes from Mark Smith with Lake Street Capital Markets.

Hi, guys. I just wanted to ask quickly about e-commerce strength. It's been pretty phenomenal here the last couple quarters. But talk about kind of how you can keep this momentum going kind of post-pandemic as people get out and shop more in stores, perhaps more than ordering online.

Yeah. Hey, Mark. This is Brian. So at a very basic level, we just launched these sites in the last, you know, call it 18 months, 24 months. And so I think we're still in the early innings of our e-com growth, specifically direct-to-consumer. We really haven't... We haven't, like, cross-sold many of the brands across the different websites, and so there's some low-hanging fruit there that I think we can continue to go after. But overall, again, I think it's in the early innings here. So as if behaviors do begin to change... I think, again, we're doing our best to have that conversation with the consumer. And also, like we said in the past, we want to make sure we are where the consumer expects to find us. So having that dialogue with the consumer just increases their loyalty with our brands. And if they buy from us, great. If they buy from a retailer, great. We want to be there as well.

Perfect. Let's talk about new products. You know, you launched a lot of really neat products, but a lot of this would have been probably late, you know, around shot show time period. But can you talk about during Q3 how the new product mix was and then kind of maybe the next few months or year what the cadence for new launches looks like?

Hey, Mark, this is Andy. I'll take the percentage and then Brian can talk kind of more long term. So, yeah, we were about 12.8%, which was down a little bit historically. But that really is interesting. That really reflects just timing of launches and actually where we're launching. So if we come out with a new product that may be out of season for a traditional retailer, but we're selling that through e-commerce, that may affect kind of that new product. And, you know, we look at that at kind of a 12- and 24-month basis and it makes more sense over the long term.

Yeah, and then I can speak to the longer term. Sorry, Mark, did you have another question?

No, just following up on that, like the Crimson Trace products that launched during the quarter, can you talk about kind of the timing of when those were available for customers and if that's something that's really impacting Q4 from a new product perspective much more than Q3?

Mark, are you talking about the scopes?

Exactly, yep.

Yeah, so the scopes That's one of those where we launched, you know, very exciting launch, couldn't be more thrilled with those 50 new products. And when you look at kind of timeline, the timing of that is kind of out of season. So we did have that load in we talked about. And then, you know, we'll see some replenishment and other product or other customer activity into Q4, but that's an exciting product. that we're really happy about going into fiscal 22.

Mark, this is Brian. On the rest of your question related to launches at SHOT versus other times more broadly, last year we began testing with certain brands. Bubba is a good example. Bubba and a lot of fishing brands launched their new products at ICAST, which is like the SHOT Show for fishing. And that happens in the summertime. But we have been launching new products throughout the year as a way to just continually engage with that consumer. And we found that it's very, very impactful and has led to not only higher e-commerce sales for us, but also better pull-through for our retailers. So this year, you're going to see more of that across our brands. So you'll see some Products are hitting shelves in kind of the spring, summer time frame, and then you'll see some more kind of throughout the summer and into the fall that would have traditionally had a big launch right around SHOT Show.

Okay. And then as we look at kind of the strategy on new products, you know, is the Crimson Trace a good example where we did see more high-priced higher-priced products that you launched in the optics line? Or will we see more of a kind of good, better, best? Or how do you feel about the pricing and what consumer and price points you want to go after across all your brands with these products?

Yeah, that's a great question, Mark. This is Brian. So this is a strategy that we put into place a few years ago, so it's kind of working its way through our product development pipeline. And this has been a strategy I think we've executed very well on. So Scopes was a part of that strategy. Grinders, getting into some of the Meet Your Maker products was definitely part of that strategy. Tents and sleeping bags, other parts. Other products, we kind of teased that. I mentioned in my prepared remarks about the SHOT Show new product premiere. So getting into categories like smart vault doors that you can install in a closet. and essentially turned your closet into a vault. And that's going to be at a much higher ASP. So we're going to continue to launch products that are higher ASPs. We're not as focused on the good. You said good, better, best. We're really not as focused on the good side of things. I would say that most of our brands play in that better to best. And that certainly helps us out with our ASP strategy.

Perfect. That's helpful. Thank you guys.

Yep.

Thank you.

As a reminder, ladies and gentlemen, that is star than one to ask a question. Our next question is a follow-up from Scott Stemberg with CL King.

Yeah. Um, in your opening remarks, you guys talked about, uh, you expect a portion of the people that have come into the market during COVID to, to stick. Um, just, uh, Can you frame that out? Do you think the lion's share will stay in this? Because later on you talked about this new foundational layer of growth which offers a huge opportunity. So I'm just trying to, are you seeing anything, hearing anything that people are leaving as they're starting to fly in the last couple weeks? Just try to nail that down.

Hey Scott, this is Brian. I can start with the last part. I haven't seen anything that indicates that people are leaving. I've seen some studies out there. They've polled parts of the population, folks that have gotten into the outdoors for the first time, and the majority of those individuals said that they intend to continue recreating outdoors. They didn't necessarily state at the same level, but a larger percentage of those did intend to continue to do those activities outdoors. So that's the best data that we have right now. It's kind of coming out in real time. But that's all I can, I don't know, Andy, anything else that we've talked about that you can think of?

Yeah, I think that, and I guess the only other thing I would add, and we talked about this a little bit last call, is going forward, on top of that, what we believe is a new foundational level, we're focusing on new product categories new customers and channels, and those new large total addressable markets to help us grow going forward.

Scott, I'm going to hijack your question for a second, and I was hoping it would come up here, but there are parts of our business that really haven't begun to be explored. Like we talked about e-com, we talked about the ability to cross-sell our brands. International for us is hardly tapped at this point. Our brands, you know, in their infancy and where they have permission to play or where we believe they have permission to play is a mess. And we've talked about getting into some of these larger total addressable markets. And in some cases, outside of our traditional, you know, called the traditional outdoors. Clean Run is a good example of that. Lockdown is another great example of that. Meet Your Maker. So it's people are very focused on outdoor participation. And that's great. That's our core consumer. But there are also some other pieces of our strategy that we've really focused on that we believe can be tapped into going forward.

Got it.

That was very helpful. Thank you. Yeah. Thanks, Scott.

I'm showing no further questions in queue at this time. I'd like to turn the call back to Mr. Murphy for closing remarks.

All right. Well, thank you, Operator, and thanks, everyone, for joining us today. We look forward to speaking with you again next quarter. Happy St. Patrick's Day.