The entire retail industry has gone through a huge transformation in recent years, as the rise of e-commerce has been a game-changer for major retailers. Even in the small surplus-retail niche that Liquidity Services (LQDT 2.50%) operates in, shifting business trends have had a major impact on the company's business model. Liquidity Services has had to adapt aggressively in order to seek out a potential pathway through tough times.
Coming into Thursday's fiscal second-quarter financial report, Liquidity Services investors didn't have particularly high hopes, expecting further losses and declines in sales. Yet Liquidity Services' results also expressed caution about the surplus retailer's outlook, and it wasn't immediately clear that the company's leaders have found a surefire way to overcome the challenges that the business has faced for several years now.
What Liquidity Services had to say
Liquidity Services' fiscal second-quarter results showed only minimal strategic progress toward returning to growth. Sales dropped 17% to $60.1 million, accelerating their pace of decline from the fiscal first quarter but just about matching the expectations that investors had. Net losses came in at $3.9 million on an adjusted basis, or $0.12 per share, which was a bit less severe than the $0.14-per-share loss that represented the consensus forecast among those following the stock.
Liquidity Services continued to see mixed performance across its business lines. The key capital assets group, where the translation from gross merchandise volume (GMV) and revenue is most favorable to the surplus seller, saw GMV drop 30% from year-ago levels, cutting revenue by almost a third. The retail supply chain group fared better on a GMV standpoint with growth of 13%, but resulting revenue actually fell slightly. Only in the GovDeals segment did GMV and revenue both rise, and the problem there is that relatively large GMV figures produce only small amounts of revenue for Liquidity Services.
Overall, business performance for Liquidity Services was mixed. Total GMV was down 7%, and although gross margin improved a fraction of a percentage point, gross profit levels were still down 16%. Registered buyer counts were up 7% to 3.25 million, but auction participants dropped 11% to 549,000, and completed transactions were down by almost a fifth to 118,000.
As has been the case in past quarters, lower volume in the company's two Defense Department contracts weighed on performance, as did weak volumes in industrial and energy goods within the capital assets group. Restructuring efforts helped lower expenses, however, and the winding down of its live auction business also contributed to better financials overall.
Can Liquidity Services really bounce back?
CEO Bill Angrick tried to keep everyone looking forward and upward. "We continue to make steady progress driving growth in our RSCG and GovDeals segments," Angrick explained, and the CEO noted that restructuring efforts have freed up resources that Liquidity Services can use more effectively in promoting the strongest parts of its continuing operations.
Yet Liquidity Services is taking a measured approach in its outlook. In Angrick's words, "We remain cautious with our CAG segment outlook because both the energy and industrial verticals are experiencing low volumes of available supply in the secondary markets." Seasonally favorable trends in the GovDeals segment should help, and a strong pipeline of deals in the retail supply chain business should also reflect a successful expansion of the company's list of sellers who are clients.
Still, investors will have to wait longer to see profits. Gross merchandise volume should be between $150 million and $170 million, with adjusted losses of $0.19 to $0.26 per share. Those numbers are worse than Liquidity Services' initial projections for the previous quarter, and it looks like there's little tangible progress in sight for the company from a purely financial standpoint.
Liquidity Services' shareholders weren't happy with the results, and the stock plunged more than 13% on Thursday following the morning announcement. Unless it can get itself back on track for the spring season, Liquidity Services will have a tough time convincing investors that its long-term prospects remain encouraging.