For a long time, Liquidity Services (LQDT 0.34%) has had to deal with the dual challenge of tough conditions in the overall retail industry as well as weakness among the customer base that most often makes use of its reverse supply chain services. That combination has led to falling sales and net losses for the company on repeated occasions recently.

Coming into Thursday's fiscal first-quarter financial report, Liquidity Services investors weren't necessarily thinking that conditions were likely to get much better for the business surplus seller. Yet even though the company posted another loss for the quarter, some signs of a recovery within key areas that Liquidity Services serves could point to better times ahead. Let's look more closely at Liquidity Services and why shareholders are optimistic.

Liquidity Services logo.

Image source: Liquidity Services.

Liquidity Services keeps fighting

Liquidity Services' fiscal first-quarter results told a familiar story to investors. Revenue fell 14% to $61.1 million, which was quite a bit worse than the roughly $65 million that most of those following the stock had hoped to see from the company. Yet even though Liquidity Services posted an adjusted net loss of $4.6 million, the resulting $0.14 per share loss figure was less than half the amount of red ink that the $0.33 per share consensus forecast had projected.

The fundamental metrics that Liquidity Services tracks remained somewhat mixed, reflecting the cross-currents affecting the business. Gross merchandise value overall for the quarter was down about 3% to $155.4 million, and gross profit dropped at a more than 10% clip. Registered buyers jumped by about 200,000 to 3.2 million, but auction participants were down 25,000 to 519,000. Completed transactions also fell about 5% to 122,000.

As we've seen in past quarters, Liquidity Services' different segments saw big disparities in performance. The GovDeals state and local government marketplace saw a huge jump of $15 million in gross merchandise revenue, but that only added $1.2 million in revenue for the business. By contrast, the capital asset group suffered a nearly 30% drop in GMV, and that cost the company more than $10 million in lost sales.

More generally, Liquidity Services said the GovDeals and retail supply chain group saw solid gains, especially from the winding down of the Truckcenter live auction business, and restructuring helped to reduce costs. Yet lower volume and less favorable product mix in the Defense Department scrap contract weighed on performance, as did the poor sales in the capital asset group.

What's ahead for Liquidity Services?

Yet the big focus in many investors' eyes was the status of the surplus contract with the Defense Department. As CEO Bill Angrick explained:

Given that the terms of the new DoD surplus contract are far more onerous than our current surplus contract, bidding any higher by Liquidity Services to win the new contract in the December recompete would have been damaging to shareholders. Therefore, we have finalized our wind-down plan for the DoD surplus contract.

Liquidity Services expects to rebound in several ways. First, cutting expenses and restructuring its business will help the company integrate their marketplaces together to boost their productivity. Second, not having to focus so much on low-margin Defense Department surplus business will essentially force Liquidity Services to concentrate on higher-value alternatives. The ongoing effort to consolidate on the LiquidityOne e-commerce platform by the end of the year should represent the culmination of those efforts.

The turnaround won't be instantaneous. In the fiscal second quarter, Liquidity Services expects gross merchandise volume of between $150 million and $170 million, with adjusted losses of $0.16 to $0.23 per share. Those figures are better than the consensus among those following the stock, showing some signs of progress, but they still show the need for continuing diligence to keep up positive momentum.

Liquidity Services' shareholders were encouraged by the news, and the stock soared 35% on Thursday following the announcement. The surplus retailer has a long way to go before it can recover all of its lost ground in recent years, but some think this could be the first step on the way to a more prosperous future for the company.