Consumers are always looking for ways to save, and companies that can offer great bargains always have a strong chance of success. For years, Liquidity Services (NASDAQ:LQDT) has thrived by taking clearance items from government agencies and private companies and getting them into consumers' hands. Yet coming into Thursday morning's fiscal-first-quarter financial report, investors were already struggling with the news of yet another major contract loss and how that might impact the company's future. Let's look at Liquidity Services' results for the quarter and what they said about the company's strategy going forward.
Mixed news for Liquidity Services
Looking solely at Liquidity Services' headline numbers, the company's results actually had some bright spots. Revenue rose 2.6% to $125.1 million, defying investors' gloomier expectation for a 10% sales drop. On an adjusted basis, earnings of $0.38 per share more than doubled the consensus estimate among those following the stock.
Liquidity Services also posted some operational gains. Registered buyer counts rose by 7%, and the number of participants in its auctions climbed by 5%. Completed transactions grew at an even faster 13% pace.
Yet the company's major problem during the quarter was the termination of a key contract with Wal-Mart (NYSE:WMT) in December. Under the agreement, Wal-Mart had allowed Liquidity Services to sell "certain consumer products ... that have been removed from the sales stream of its retail operations." With Wal-Mart representing more than 10% of Liquidity Services' gross merchandise volume in fiscal 2014, the stock plunged more than 25% following the announcement of the contract termination.
Largely as a result of the contract termination, Liquidity Services took a massive impairment charge of more than $96 million. That charge led to the company taking a $2.14-per-share net loss on a generally accepted accounting principles basis.
CEO Bill Angrick tried to put the best spin possible on the situation. "During the quarter," Angrick said, "our commercial sales team signed over 40 new clients and client programs, demonstrating the strong market demand for our proven, scalable reverse supply chain solution." Given the uncertainty from changes in its relationship not only with Wal-Mart but also with the Department of Defense, with which it has an equally important surplus contract, investors need as many details as they can get about Liquidity Services' future direction.
What's next for Liquidity Services?
The company, though, expressed difficulty in giving reliable forecasts. Changes in the amount and type of products the Pentagon is selling through Liquidity Services have adversely affected its results and could continue to do so. With what guidance it gave, Liquidity Services is keeping expectations low, with projections for fiscal second-quarter earnings of $0.05 to $0.10 per share well below the $0.15 per share investors expect.
Still, Liquidity Services will continue to execute its broader strategic plan in hopes of recovering some lost ground. The company's Liquidity One transformation plan remains a key element of that strategy, and Liquidity Services believes it will benefit from business customers' efforts to reduce inventory-management costs, as well as from rising consumer demand for low-cost items.
No one can question the sincerity of Liquidity Services' efforts to recast its business in light of the massive setbacks it has faced recently. Yet the company faced considerable difficulties with its performance even before the Wal-Mart news added more fuel to bearish investors' arguments against the stock. Despite its best efforts, Liquidity Services will have trouble returning to a growth footing without some major contract wins to make up for what it has lost in the recent past.