It's always difficult for a business to mount a successful turnaround. Surplus retailer Liquidity Services (NASDAQ: LQDT) has worked hard to try to make a substantial change to its business model, looking for ways to boost sales volume and expand its services to include higher-margin offerings. Yet the progress that Liquidity Services has made has been modest, and the company's financial results haven't reflected the potential benefits that achieving its goals could bring.
Coming into Thursday's fiscal fourth-quarter financial report, Liquidity Services investors knew that sales would once again fall sharply and weren't sure whether the company could turn a profit. The surplus retailer's actual results were far from convincing for skeptical investors, but some still have hope that the long-term strategy Liquidity Services is following will pay off eventually.
Image source: Liquidity Services.
The latest from Liquidity Services
Liquidity Services' fiscal fourth-quarter results showed how difficult the turnaround has been. Sales were down 14% to $52.7 million, but the pace of decline slowed slightly from the fiscal third quarter, and the drop was quite a bit less than the 21% plunge in revenue that most of those following the stock had expected to see. Liquidity Services didn't make any money, but its adjusted net loss of $4.6 million was less than half what it lost in the year-earlier period, working out to $0.14 per share in red ink.
Despite those discouraging results, Liquidity Services did have some signs of fundamental strength. Gross merchandise volume was higher by more than $10 million, coming in at $155.3 million. However, most of that growth came in the low-margin GovDeals segment, where each dollar of volume generally generates $0.10 or less of revenue for the company. More encouraging was the rise in performance from the retail supply chain group, where a modest 10% increase in gross merchandise volume translated into a revenue boost of nearly 23%. Also, Liquidity Services attracted new registered buyers, with its current total of 3.357 million having climbed by 186,000 over the past 12 months.
Yet there was also continued weakness in key areas. The critical capital asset group saw its revenue slashed nearly in half, weighing on Liquidity Services' entire business. The culprit there was the retailer's now-completed contract with the Defense Department, without which the segment would have seen double-digit percentage growth year over year. In addition, auction participation rates were down again, with the 2.079 million participants representing a 211,000 decrease from where Liquidity Services ended fiscal 2017. Completed transactions were down 49,000 to 481,000 over the same period.
Can Liquidity Services keep making progress?
CEO Bill Angrick tried to keep his eyes squarely on the future. "In [the fourth quarter], we achieved stronger growth," Angrick said, "and we began to reap the benefits of our business transformation, restructuring efforts, new service offerings and increased efficiencies in our operations." The CEO noted that when you take out the negative impact of the Defense Department surplus contract, organic quarterly gross merchandise volume was up by 19%, the highest level in six years.
Liquidity Services sees a combination of factors contributing toward its future success. The retailer has invested heavily in technology as part of initiatives to bolster sales, accompanied by marketing efforts to highlight its new focus. At the same time, the company's also being as efficient as possible from an operating standpoint to keep costs lower. That's started to show up in certain business metrics on an adjusted basis, and Angrick believes that "this notable improvement reflects the successful execution of our realignment and growth strategies, which we expect should continue to drive improved results over time."
Yet guidance for the first quarter of fiscal 2019 shows few encouraging signs. Gross merchandise volume for the period should be between $150 million and $170 million, compared to the roughly $155 million it had in the first quarter of the just-ended fiscal year. Liquidity Services will keep losing money, with expected losses of $0.13 to $0.17 per share on an adjusted basis -- roughly in line with year-earlier losses.
Investors understand that a full turnaround for Liquidity Services will take time, but the question is how much longer they'll give the company to execute fully on its strategic plan. The stock has performed well in 2018, and there are some signs that the tide could finally be turning in the company's favor with respect to its business strategy. But those share-price gains could quickly disappear if investors lose confidence in Liquidity Services' long-term vision.
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