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Liquidity Services Posts Losses, Sees Difficult Quarter Ahead

By Dan Caplinger – Nov 17, 2016 at 12:42PM

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Most expect red ink to keep flowing for the surplus-asset seller.

Surplus stores can give shoppers big bargains, and Liquidity Services (LQDT 1.55%) has sought to help give more customers the chance to get great deals by working with government and private-sector companies that want to make the most of unwanted surplus inventory. Yet Liquidity Services has run into difficulties with its business recently, and coming into Thursday's fiscal fourth-quarter financial report, few investors in the company were expecting it to be able to avoid declining revenue and net losses. Liquidity Services' results were somewhat better than most investors had expected, but projections for the fiscal first quarter renewed ongoing concerns about Liquidity Services' ability to be consistently profitable. Let's take a closer look at the latest from Liquidity Services to see what investors should prepare for looking ahead.

Stores like this Uncle Sam's Retail Outlet location are just one way Liquidity Services sells surplus goods. Image source: Liquidity Services.

Liquidity Services suffers a loss

Liquidity Services' fiscal fourth-quarter results didn't look very good. Revenue fell 1% to $78.5 million, which had the virtue of being a less dramatic decline than we've seen in some past quarters and was also better than the consensus forecast for a nearly 3% sales drop. After taking into account extraordinary items like goodwill impairments, valuation allowances, and stock compensation expenses, Liquidity Services had an adjusted loss of $638,000, reversing a more-than-$18-million adjusted profit in the year-ago period and working out to a loss of $0.02 per share. That was far less than the $0.08-per-share loss that most investors were expecting.

Taking a closer look at Liquidity Services' numbers, some but not all of the trends in its underlying business segments continued to develop in line with past periods. The municipal government business continued to perform well, posting gross market value gains of 12%. Of even more interest is the bounce-back in the energy sector, which helped drive the company's energy marketplace GMV higher by 45%. However, Liquidity Services continued to see challenges in its relationship with the Department of Defense, with DoD marketplace GMV falling 12% due to falling volumes of inventory and a poorer mix of products from a sales perspective. Registered buyers climbed 5% to 2.986 million, and completed transactions were up 1% to 574,000, but auction participant counts were just 2.42 million, down by about 3% from year-ago levels.

Still, Liquidity Services also took steps to find new potential markets. During the quarter, the company launched its IronDirect marketplace, which sells heavy equipment, attachments, undercarriage parts, and various accessories to customers in the global construction business. This business provides an outlet for construction equipment manufacturers, many of which have seen extremely challenging industry conditions in recent years.

CEO Bill Angrick was pleased with the company's overall performance. "Better than expected bottom line results [were] driven by improved pricing in our scrap and energy marketplaces and higher services revenues," Angrick said, and he was also happy with progress in the company's LiquidityOne corporate restructuring initiative.

What's next for Liquidity Services?

Liquidity Services still thinks that it can find better ways to grow and return to earning a profit. In the words of Angrick, "Our strategy remains focused on the long term growth of our commercial and municipal government marketplaces on a global scale." That means that the Defense Department will likely play a smaller role going forward, but Liquidity Services thinks it can make up the difference in more promising areas.

Still, Liquidity Services didn't give the financial guidance that suggested a short-term turnaround is imminent. The company said that fiscal first-quarter gross market value would be between $150 million to $170 million, which doesn't look that much more promising than the $159 million it posted during the fiscal fourth quarter. Adjusted losses of $0.22 to $0.31 per share would also be far worse than investors currently expect, indicating further challenges for the company.

Liquidity Services' shareholders didn't respond all that much to the news, falling just over 1% at midday following the announcement. However, it will be important for Liquidity Services to keep getting results from its restructuring initiatives if it wants to return to profitability and convince investors that it has the staying power to produce long-term growth.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Liquidity Services. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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