Most people who think about retail focus on the hot products that are always in demand. Yet at the other end of the spectrum are the products that perhaps were once needed but now find themselves either out of fashion or no longer necessary for the typical customer. That's where Liquidity Services (NASDAQ:LQDT) comes in, offering a way for government and private sector clients to dispose of surplus inventory effectively and efficiently. That niche has challenges of its own, but the company has been making moves to build its business back up and hopefully return to profitability.

Coming into Thursday's fiscal third-quarter financial report, Liquidity Services investors weren't all that optimistic about the company's chances to make much progress. Revenue once again plunged during the quarter, but Liquidity Services did manage to narrow its losses substantially. That suggests that some of its strategies are working out, and investors responded with some new enthusiasm after seeing the results.

Liquidity Services logo.

Image source: Liquidity Services.

How Liquidity Services made progress

Liquidity Services' fiscal third-quarter results still reflected the difficult conditions the company faces. Revenue plunged 23% to $50.6 million, accelerating the pace of its descent from recent quarters and also falling short of the projections of those following the stock. Yet after making allowances for extraordinary items, adjusted net losses amounted to $2.3 million, or $0.07 per share. That was quite a bit better than the consensus forecast for a $0.22-per-share loss.

Fundamentally, Liquidity Services saw some ups and downs. Gross merchandise volume was incrementally higher by about 2%, but gross profit fell nearly 10%. The number of registered buyers weighed in at 3.275 million, up 25,000 from three months ago and higher by more than 5% from year-ago levels. Auction participant counts continued to wane, falling by 11% year over year to 512,000. The number of completed transaction was also down, with the 121,000 figure representing a 10% drop from the third quarter of fiscal 2017.

Many of the trends that Liquidity Services has seen for a while stayed in place during the most recent period. The capital assets group continued to be the major detractor from performance, with a 20% drop in gross merchandise volume resulting in a plunge of more than half in segment revenue, and gross profit from the unit also fell substantially. By contrast, the GovDeals government segment and the retail supply chain group enjoyed modest gains in GMV, revenue, and gross profit.

Liquidity Services also noted that expenses were down substantially, thanks in large part to various restructuring and realignment efforts internally. Overhead expenses were down 23%, and big drops in costs of goods sold and in technology spending helped the company cushion the blow to its bottom line and narrow its losses.

What's ahead for Liquidity Services?

CEO Bill Angrick emphasized the fact that Liquidity Services had to overcome the downward pressure from the completion of its Defense Department surplus contract. "We are pleased with our performance," Angrick said, "as we focus on driving higher recovery through technology and innovation that improves the customer experience."

Acquisitions are playing a role in mapping out Liquidity Services' future. In July, the company said it would acquire online equipment-listing marketplace Machinio, which boasts 10 million user visits and 1.2 million assets for sale on its platform. As the surplus retailer looks at expanding into new categories like construction, machine tools, transportation, printing, and agriculture, such strategic moves could become more frequent in the future.

Unfortunately, Liquidity Services doesn't think that its push toward narrower losses is likely to last. In its guidance for the fiscal fourth quarter, the company said it sees GMV of between $140 million and $160 million, reflecting a seasonal slowdown in some of its business units. Adjusted losses should once again widen to between $0.12 and $0.20 per share.

Liquidity Services' shareholders were quite pleased with the results at first, but the stock's initial 10% rise immediately following the announcement eventually eroded to just a 1% gain by the end of the day on Thursday. Even though its performance shows that the company can be successful when it executes well, Liquidity Services has more work to do to become consistently profitable.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends Liquidity Services. The Motley Fool has a disclosure policy.