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Brian Murphy

Thanks, Liz, and thanks, everyone, for joining us. I'm extremely pleased with our third quarter results, which came in ahead of our expectations. We delivered net sales of over $58 million, a 9.5% increase over last year. We delivered growth in both our Outdoor Lifestyle and our Shooting Sports categories, supported by year-over-year increases in our Traditional, E-commerce, and Domestic sales channels. We delivered a significant increase in non-GAAP Adjusted EBITDAS, which nearly doubled year-over-year.
And similar to last quarter, our growth was driven mostly by in-line products, well ahead of several new product launches that we teased out during our last call and showcased publicly in the third quarter. We believe our strong performance demonstrates the effectiveness of our long-term strategy to leverage our innovation advantage to broaden our distribution opportunities, expand awareness of our brands, and strengthen our margins, all while remaining agile and asset-light. We delivered results in each of these areas in the third quarter, so let's jump in. First, let me share how we're leveraging our innovation advantage. At AOB, we often say that the greatest opportunity is the one that's right in front of us, and that means the growth potential in our existing brands.
That growth potential comes from new products, which form the core of our innovation advantage. New products provide the oxygen that allows our brands to grow, and they create larger addressable markets to house that growth. They deepen consumer loyalty, and they attract entirely new consumers. They drive retail foot traffic, and they drive retailers to choose us as a unique cross-category innovation partner. And most importantly, new products fuel our long-term growth by adding layers of IP-protected revenue to a platform that stacks up over time.
While I plan to highlight some of these new products on today's call, I want to be clear that they represent just a couple of exciting examples in a very deep, very wide pipeline that spans many brands and runs several years into the future. Our internal teams are incredibly collaborative and resourceful, and they drive a process that continually replenishes that pipeline, which is why new products typically generate over 20% of our net sales each year. In January, we unveiled several new products that showcase our ability to leverage our innovation advantage, to drive brand awareness and expand our markets by developing disruptive products that make outdoor activities more accessible to a broader audience of enthusiasts. Two prime examples come from our BUBBA and Caldwell brands. First, from BUBBA.
We're bringing fishing gamification to a much larger market of everyday anglers, allowing them to compete like the pros with the BUBBA Smart Fish Scale or SFS Lite. Originally, our BUBBA brand played only in the saltwater market, which represents about 10 million anglers. So when we decided to expand into the much larger freshwater market of about 40 million anglers, we had a clear strategy in mind, develop a premium fish scale and app with a level of accuracy and reliability that pros will trust. Then use that earned trust to win over the everyday angler. We launched the Pro series in June 2023 and by January 2024, it was named the official scale of Major League Fishing, putting BUBBA on the map with an achievement that set the stage for this year's launch of the SFS Lite.
The new SFS Lite offers some of the same pro-grade features and gamification capabilities for casual fishing trips with buddies, all at a price that everyday anglers can appreciate. While it's still a premium product at $69, it's a scale purposely designed and built to grow with anglers, offering configurations that support their journey and push the boundaries of what's possible. Anglers can track their biggest catches and most successful days on the water or they can turn their time on the lake into a competition with friends. And when it's time to level up, anglers can upgrade their app to the BUBBA Pro subscription, unleashing the full potential of the SFS Lite. The strategy we employed with BUBBA is one that was several years in the making, but only now is visible with the launch of the SFS Lite.
It's one example of our multiyear product development approach. Let me share one more. Last quarter, you may recall, we said that Caldwell was about to put a new spin on shotgun sports, and some of you probably wondered what we meant. Well, Caldwell is reshaping how millions of clay shooters take game. In Q3, we introduced a revolutionary new target system called the ClayCopter, which includes an easy-to-use handheld electronic launcher that propels a set of biodegradable disks up to 100 yards in an endless variety of flight patterns, challenging shooters like never before.
With the ClayCopter system, taking a thrower and targets to the range couldn't be easier and more fun. For nearly 150 years, traditional clay targets have been the most practical option for shotgun sports enthusiasts eager to hone their wing shooting skills. But traditional clay targets typically require heavy throwers that are bulky and cumbersome to store and transport. Clays are notoriously fragile. They fly in predictable patterns, and they come in heavy containers that often make transportation a real challenge.
In fact, clays cannot be purchased at all online due to their weight and breakage. Enter the ClayCopter. Designed entirely in-house and surrounded by pending IP, the portable launcher weighs just 3 pounds and packs the same power of a traditional thrower in a handheld motorized design, small enough to fit in a range bag or backpack. The ClayCopter target disks are 70% lighter than traditional clays and designed to break only when shot. They can be purchased in a lightweight compact tube of 50 disks, and they're inexpensive to transport, freeing retailers in our Caldwell brand to ship directly to consumers and opening up a highly attractive consumable revenue stream.
Next, let me turn to our achievements in widening our distribution and expanding awareness of our brands. We continued to gain traction and momentum with the retailers in the third quarter, proving our value as a cross-category innovation partner by demonstrating our ability to provide them with instant access to innovation and excitement. This capability is a true differentiator for us since we're often competing against organizations that can provide great efficiency across multiple categories, but often lack innovation or that can provide innovation, but only in a single category. We have cracked that code and found a way to give retailers both efficiency and innovation across an entire portfolio. This provides new distribution opportunities for our brands and products.
For example, during the quarter, we secured new and expanded retail placement for our BOG, Caldwell, Grilla and MEAT! Your Maker brands. This broader distribution is important because it generates brand awareness among consumers who often represent entirely new audiences. Lastly, I'll address our focus on increasing profitability while remaining agile and asset-light, both of which are equally important to our growth strategy. We continued to embrace our long-term model for net sales and profitability, and I'm extremely pleased with our ability to demonstrate growth and margin expansion in the third quarter, particularly given the recent environment of inflation, consumer uncertainty and ever-evolving tariffs.
Despite these environmental challenges, we believe we have a number of levers available to us in support of our model. First, because new products are such a high percentage of our revenue, they are a tremendous tool in preserving and strengthening our margin profile by allowing us to feather in new higher-margin, often IP-protected products as well as subscription revenue services such as the BUBBA app that accompanies the fish scales we discussed today. Second, we continue to maintain a healthy direct-to-consumer business, which is complementary to our B2B strategy and gives us the option to introduce new products directly to consumers when appropriate, building loyalty and demand prior to introducing them into the retail channel. It's a strategy we've successfully executed in the past with our Grilla and MEAT! Your Maker brands.
Third, because we own our product designs and the tooling required to make those products, we have some flexibility with regard to where those products are made. That said, we have strong and long-lasting supplier partnerships. Those partnerships are proving valuable as we work together to assess our optimal responses to the dynamic tariff landscape. Lastly, our strong balance sheet and asset-light model provide agility, allowing us to make those decisions that are best for the long-term health of our business. We believe we have the tools necessary to successfully navigate the future.
We have encountered tariffs before and demonstrated that we have levers we can pull and have pulled. As a result, we believe we have optionality as we continue to grow while embracing our long-term model for profitability. With our innovation advantage in hand and our flexible asset-light platform already in place, we remain excited about our ability to deliver sustainable growth and profitability in fiscal 2025 and beyond. With that, I'll turn it over to Andy to discuss our financial results.

H. Andrew Fulmer

Thanks, Brian. We're very pleased with our results for the third quarter. Net sales and profitability came in ahead of our expectations. We further strengthened our balance sheet, and we continue to return capital to shareholders through our share repurchase program. Let me walk you through some of the details.
Net sales for Q3 were $58.5 million, a 9.5% increase over Q3 last year. We delivered growth in both our Outdoor Lifestyle category and our Shooting Sports category and benefited from the timing of approximately $1 million in orders that were originally slated for the fourth quarter. In our Outdoor Lifestyle category, which consists of products related to hunting, fishing, outdoor cooking and rugged outdoor activities, net sales grew by 15.1%, driven mainly by sales in our MEAT! Your Maker and BOG brands as well as our Knife and Tool brands. In our Shooting Sports category, which includes solutions for target shooting, aiming solutions, safe storage, cleaning and maintenance and personal protection, net sales grew by almost 3% compared to our third quarter last year.
Within the category, shooting accessories sales increased due in part to promotional sales of some slower-moving inventory. Personal protection product sales were down slightly compared to last year, consistent with the decrease in adjusted NICS checks for the same period. Turning now to our distribution channels. Our traditional channel net sales increased by 9.6% and our E-commerce net sales increased by 9.5% compared to Q3 last year. As a reminder, our E-commerce channel includes direct-to-consumer sales from our own websites as well as sales by online retailers that do not have brick-and-mortar stores.
We believe this high single-digit growth across both categories continues to underscore the connection that our brands have, both at retail and with consumers. With regard to gross margin, GAAP gross margin for Q3 was 44.7%, a 200-basis point increase from 42.7% in Q3 last year. On a non-GAAP basis, gross margin for Q3 was 45%. The increase was driven largely by higher sales volumes and lower inbound freight costs in the quarter, partially offset by the sale of the slower-moving inventory I mentioned before. Turning to operating expenses.
GAAP operating expenses for the quarter were relatively flat compared to Q3 of last year at $25.8 million. On a non-GAAP basis, which removes amortization, stock compensation and nonrecurring expenses, operating expenses in Q3 were up slightly in terms of dollars to $22.7 million compared to $21.5 million in Q3 of last year. However, non-GAAP OpEx decreased as a percentage of net sales to 38.8% compared to 40.3% last year, a great result. We remain disciplined with the cost management philosophy we employ in the ordinary course of business as we look for ways to avoid building in unnecessary costs. It's an approach that helps us maintain a lower level of expense over the long-term, allowing us to be agile and asset-light when responding to changes in our environment without resorting to large and sudden cost cuts.
Turning to EPS. GAAP EPS was $0.01 for the third quarter compared to a negative $0.23 in the third quarter last year. On a non-GAAP basis, EPS was $0.21 in Q3 compared to $0.08 in the prior year. Our Q3 figures are based on our fully diluted share count of approximately 13.1 million shares, and we expect that share count to remain consistent through fiscal year-end outside of any share buybacks that may occur. Adjusted EBITDAS for the quarter was $4.7 million compared to $2.4 million last year.
On a trailing 12-month basis, Adjusted EBITDAS was $15.2 million, up an impressive 45% from $10.5 million for the trailing 12-month period a year ago. Turning now to the balance sheet and cash flow. We continue to strengthen our balance sheet, ending the quarter with cash of $17.1 million and no debt after repurchasing approximately $1.2 million of our common stock. We generated cash from operations of $5.9 million in Q3, driven by a decrease in accounts receivable of $11.6 million, which was partially offset by a decrease in accounts payable and a planned increase in inventory. We continue to expect our inventory levels to end the fiscal year at approximately $110 million to support net sales growth in fiscal 2026.
Turning to capital expenditures. We spent $1.8 million on CapEx for ongoing product tooling and patent costs in the third quarter and the completion of the factory outlet store in our Missouri facility. For full year fiscal 2025, we expect to spend $4 million to $4.5 million. Our operating model is designed to require annual CapEx of roughly 2% of net sales for patents, tooling and maintenance investments. And our expectations for fiscal 2025 are right in line with that model.
We've discussed in the past our 3 capital allocation priorities, which are organic growth, disciplined M&A and returning capital to stockholders with share repurchases. With regard to organic growth, as Brian detailed in his remarks, the investments we make in innovation form the core of our growth strategy. Those investments strengthen our brands with consumers, deepen our relationships with retailers and broaden our distribution opportunities. They drove the growth we have delivered in Q3 and throughout the year. As a result, organic growth remains our top priority.
Next, we seek out M&A opportunities that fit our criteria and supplement that growth. And lastly, we opportunistically return capital to our stockholders through buybacks. Now turning to our outlook. We remain excited about the opportunities that lie ahead, given the strength in our existing product lines, the success of our recent new product launches and incremental distribution opportunities that we've secured. As we approach the end of fiscal 2025, we are narrowing the range of our net sales guidance and raising the midpoint.
We expect net sales for fiscal 2025 in a range of $207 million to $210 million. Net sales at the midpoint of that range would imply growth of 3.7% for the full year. Turning to gross margins. We expect GAAP gross margins for the full year fiscal 2025 to come in at approximately 45%, right on target. As expected, second half gross margins will be lower than first half gross margins, driven by the increased amortization of tariff and freight variances in the fourth quarter related to higher inventory purchases we made in the first half of the year.
As a reminder, in our business, tariff and freight variances are capitalized when inventory is purchased and amortized based on inventory turns. While I'm on the subject of tariffs, I want to point out here that our strong profit performance this year incorporates tariffs already embedded into our business for many years now. So while we are not yet giving gross margin guidance for fiscal 2026, we remain confident in our ability to utilize the levers we have built into our business, as Brian outlined, to address ongoing tariff developments. With regard to operating expense, we expect overall OpEx in fiscal 2025 to increase slightly over the prior year due to higher variable selling and distribution costs driven by the higher net sales we expect. Based on all these factors, we are increasing the range of our estimate for Adjusted EBITDAS for fiscal 2025.
We now expect Adjusted EBITDAS will be between $14.5 million and $15.5 million. At the midpoint, this would represent year-over-year Adjusted EBITDAS growth of almost 54%. Turning now to fiscal 2026. Last quarter, we discussed that early order indications we received from retailers for both our in-line products and our new products provided us greater visibility into the future and supported our fiscal 2026 growth expectations. Since then, we've attended SHOT Show where positive feedback reinforced our expectation for net sales of between $220 million and $230 million for fiscal 2026, which would represent growth of 7.9% from the midpoint of fiscal '25 to the midpoint of fiscal '26.
We believe this acceleration in growth rate demonstrates the potential of our innovation advantage to deliver long-term sustainable growth. With that, operator, please open the call for questions from our analysts.

Question and Answer Session

Operator

(Operator Instructions) Mark Smith, Lake Street Capital Markets.

Mark Smith

I'll apologize if some of my questions are -- you hit on the call as I missed some of it. But I wanted to just ask broadly about new products. Any insights you can give us on kind of the mix, the impact to sales? But also, I want to hear just kind of long-term kind of how the pipeline looks and how you think about new product introductions and kind of the planning process behind that?

Brian Murphy

Sure. Mark, it's Brian. Yes, so new products, obviously, is a big part of our go-forward plan being an innovation company. And historically, for us has represented between 20% and 25% of our total net sales. And we have the new slide in our investor deck that shows the stacking of that over time.
So going forward, the pipeline continues to be a major contributor for us and frankly, is a big contributor going forward into this next year, just showing an acceleration of some of that growth. And in terms of sales mix, things like that, we've talked about Outdoor Lifestyle becoming a bigger part of our overall portfolio just given the nature of the opportunity and the size of some of those markets. So that continues to be the case. With that said, coming out of SHOT Show last month, which you were there and saw some of the neat products that we had, in particular, the ClayCopter and some other products from Caldwell, Tipton, Wheeler, is really in the Shooting Sports side is continuing to diversify into large markets that are more sustainable over time, have less fluctuation and frankly, a strong user base. So overall, continue to move towards Outdoor Lifestyle, but in the meantime, also have some very exciting good long-term categories that we continue to expand into.

Mark Smith

Excellent. And then it might be a repeat from some of the script. But if you want to talk about kind of the topic du jour here of tariffs, it's changing daily. But maybe talk about your expected exposure, especially as we think about a mix of China, Canada, Mexico. It sounds like it's maybe built into guidance, but walk us through kind of how you're looking at that and anything that may be changes in your strategy going forward?

Brian Murphy

Yes. So Mark, Brian, again, obviously. Yes, tariffs are continuing to change, not only daily, but by the minute, it seems. If you're tracking the Wall Street Journal, they've got a live coverage and update by the minute. I think that's how you know that this is a fast-evolving situation.
So I think our approach, just taking a step back, remains the same, which is we tried to make ourselves as nimble as possible and built up a very strong balance sheet where we can make the right long-term decision. That's part of what we talked about in the prepared remarks because ultimately, we're seeing there might be tariffs and there is right now, increased tariffs on Chinese goods and then we're going back and forth on Canada versus Mexico and there's even talk of potentially some other countries. So ultimately, we want to measure twice and cut once and make the right long-term decision because moving a supply chain and making some of those changes, it's not a switch you can just flip. There are other things you need to take into consider quality, which is a big one. We want to make sure we maintain our reputation of no recalls.
For a company that produces as many new products as we do each year, it's imperative that we maintain our quality standards and the team does a phenomenal job with that. So for us, tariffs is obviously very top of mind. And we do -- because we're an asset-light company, we do manufacture our products overseas and in China, our Chinese partners play a big part of that. But we truly are leveraging our innovation advantage, and we've got a number of levers to pull, whether it's feathering a new -- feathering in margin with new products because new products are such a large percentage for us. Our IP protection gives us tremendous protection for our existing lines and obviously, future ones.
We've got a meaningful direct-to-consumer business. We've got some very exciting recurring revenue streams that are high margin. So we feel really good. And we'll -- as the situation continues to unfold, we'll -- we have plenty of levers that we can pull.

Mark Smith

And then kind of the other hot topic, obviously, consumer behavior. Any update on changes, anything that you've seen even as we think about maybe the last 30 days? Obviously, we've seen mix fluctuate a fair amount here January to February. But any thoughts around on the ground changes in consumer behavior that you guys are seeing?

Brian Murphy

Yes. We're seeing -- I mean, just coming out of SHOT Show and talking with retailers, we are hearing and seeing consumers continue to be cautious in making their purchases. But it's also on the flip side, one of the reasons we've been so successful and seeing that strong pull-through in POS at the stores is because consumers continue to be starved of innovation and they're really being selective about where they're buying. So we're benefiting from that fact, but certainly, there is some cautiousness. And then I think specifically to, you think about the kind of low, mid, high-level price point structure, we play in that higher price point.
Most of our products are premium. And so we have a little bit of insulation there that is less price sensitive and tends to be more affluent consumer. And that consumer still shows strong signs of resiliency.

Operator

Matt Koranda, Roth Capital.

It's Joseph on for Matt today. We're just looking at your guidance. I wanted to see, does it seem like a slight step up. Does this guidance for 2025 capture 3Q outperformance and which would growth might slow down a bit sequentially? So I just wanted to ask about quarter-to-date trends in both channels and where you're seeing this mid-single-digit growth.

H. Andrew Fulmer

Joe, it's Andy. So yes, so overall, on the net sales side, we kind of narrowed the range to $207 million to $210 million. So the midpoint is up about $1 million. In the quarter, we talked about kind of some timing of about $1 million that we thought was going to ship in Q4 that we shipped in Q3. And that's kind of normal quarter-to-quarter timing.
But yes, overall, we feel really good about the year, the $207 million to $210 million. We're able to increase the Adjusted EBITDAS guidance as well. So we're really happy with the quarter.

And just staying on the consumer and then guidance. We see that you're reiterating your 2026 guidance. Is there any visibility you can give us in terms of long-term growth for your retail partners and your order books?

Brian Murphy

What do you mean by long -- when you say long-term growth? What are you -- are you referring to post FY26 or?

Sorry, just for F26 --

Brian Murphy

Yes. This is Brian. I mean the best detail I can give you is we had -- coming out of line interviews last quarter, we had some strong indications from our retail partners that they were going to double down on AOB and really sought to bring in more innovation into their stores. And so the story -- you saw in the prepared remarks, the story of really giving them instant access to innovation and excitement is real, and they're seeing that success. So coming out of SHOT Show, which would have been between our last call and where we are today, those same retailers just really reiterated and strengthened their commitment to bringing in these products.
Many of them are new and will hit in FY26. So I -- not really a change of any kind there other than just more conviction that those orders are there and there's strong demand for them.

And then just my final question here on your concerning M&A funnel. I just want to see if you guys could provide us any commentary on what you're seeing out there in the M&A market? And if you could provide any color on what you're looking for and what's the best interest for AOUT?

Brian Murphy

Yes. So Brian here. I'll answer first, Andy, feel free to chime in. Yes, M&A is near and dear to our heart. I mean it's a big part of my background, and we've done a lot of -- a few deals here together, Andy and I.
We -- we just will continue to be very disciplined. We look at a ton of deals. We've seen the ice break a little bit before the tariffs with more companies seeming to come to market, so more sell-side deals with investment bankers. I do think that the tariff -- I think there are lots of companies out there that have not really protected themselves. I think that have as many levers to pull.
And so we are seeing, I think, a little bit of a maybe a stutter step where they need to figure some things out first before they officially come to market. But ultimately, I think it's going to continue to unfold. Honestly, I think the next 3 years is just going to continue to be an evolution and new things will emerge. So it's how adaptable are the companies -- how adaptable are they and when they come to market. So I wouldn't be surprised if there's a little bit of a kind of pause on some deals coming to market.
But we're still ready. We're very excited looking at deals. We love, love deals that have a perspective on recurring revenue, subscription revenue. We have more in our own pipeline related to subscription revenue and recurring revenue. So really just trying to find the right deal that fits for our model and allow us to maintain asset -- agile and asset-light infrastructure.

Operator

This concludes our question-and-answer session. I would now like to turn the call back over to Mr. Murphy for closing remarks.

Brian Murphy

Thank you, operator. Before we close, I want to let everyone know that we'll be participating in the ROTH Conference in California on March 17 and the Lake Street Virtual Conference on April 3, and we hope to see some of you there. I want to thank our employees whose tireless commitment to innovation allows us to remain focused on executing our long-term vision. Thank you to everyone who joined us today. We look forward to speaking with you again next quarter.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.