Liquidity Services (NASDAQ:LQDT) has been in the business of surplus retail for a long time, and it understands the challenges of that business all too well. Though it has been working on a turnaround for a couple of years now, the company is still dealing with the need to successfully transition past its loss of a key Defense Department contract and diversify its business in a more balanced way. Progress has been slow, but the company has made some headway.

Coming into Thursday morning's fiscal third-quarter financial report, shareholders wanted to see solid revenue growth even as they were prepared for losses to continue at prior levels. However, the surplus retailer actually managed to narrow its losses, which gave investors some reason to be more upbeat about the potential for Liquidity Services to recover fully in the long run.

Liquidity Services logo in blue and green.

Image source: Liquidity Services.

Some relief for Liquidity Services

Liquidity Services' fiscal Q3 results delivered some welcome surprises. Revenue of $56.9 million was up 12% from year-ago levels -- a far greater gain than the 3% that most analysts following the stock had expected. The retailer posted an adjusted loss of $1.5 million, translating to $0.05 per share, but that was less severe than analysts' consensus forecast for a $0.07 per share loss.

Gains in Liquidity Services' fundamental performance remained encouraging. Gross merchandise volume (GMV) rose by 3% to $168.1 million. The number of registered buyers at the surplus retailer's auctions climbed almost 11% to 3.63 million, while the number of auction participants rose 3% to 528,000. And the 160,000 transactions it completed marked a 10% rise from the year-ago quarter.

Liquidity Services got good results from two of its three main segments. The GovDeals and retail supply chain group segments delivered GMV gains of 6% and 18%, respectively, as well as double-digit percentage revenue growth. Gross profit also rose for both of those groups. However, the capital asset group was weak, in line with its ongoing trend. Yet even there, a 14% drop in GMV led to only a 1% drop in revenue.

Can Liquidity Services build positive momentum?

CEO Bill Angrick kept his focus on the long term. "The continued execution of our RISE strategy," he said, "focused on recovery maximization, increasing sales, service expansion, and expense leverage, delivered another solid quarter." He went on to note that although lower-value assets coming from its contract with the Defense Department were putting pressure on the company's results, gains elsewhere were enough to offset those declines.

The company also announced that it had completed its LiquidityOne strategic initiative with the rollout of a new core e-commerce technology platform. The platform unifies marketing, customer services, sales, and operations teams, which should help the surplus retailer become more efficient.

Even so, Liquidity Services' fiscal Q4 guidance reflected an anticipated measured pace of gains. GMV is forecast to come in between $150 million to $170 million -- an identical range to its projections for fiscal Q3. The company expects adjusted losses of $0.04 per share to $0.11 per share, so it's not entirely sure its bottom-line performance will even match this past quarter's numbers.

Investors took the report in stride, although after an initial pop at the stock market's opening Thursday, shares quickly gave up their gains to trade roughly flat. A quarter of respite was a good thing for Liquidity Services to achieve, but it will need to ramp up its growth efforts if it wants to get shareholders firmly on board with its long-range recovery plan.

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