The government has always been a huge consumer of goods, and often, it ends up with more than it knows what to do with. As a result, outlets like Army-Navy surplus stores have become staples for bargain hunters, and Liquidity Services (LQDT -2.40%) largely took that business model and applied it not only to a wider array of government agencies but also some private companies. Coming into Thursday morning's fiscal second-quarter financial report, investors in Liquidity Services were nervous about the company's uncertainty regarding its immediate future, with its having already suffered major setbacks that endangered its future growth. As it turned out, though, the company was able to top lowered expectations, giving shareholders some confidence that the worst might be over. Let's look more closely at Liquidity Services to see why so many investors are pleased about its latest report.
Liquidity Services: Smaller, but still fighting
Liquidity Services' fiscal second-quarter results included some scary-looking figures. Revenue slumped nearly 20% to $102.9 million, yet investors had been expecting an even worse 25% drop in sales for the quarter. Earnings took an even bigger hit, with adjusted net income of $2.4 million falling 70% from year-ago levels and resulting in adjusted earnings of $0.08 per share, a penny better than the consensus among those following the stock.
Liquidity Services' operating metrics were a bit more upbeat. The number of auction participants fell 4% from last year's fiscal second quarter to 640,000, but the number of registered buyers rose almost 7% to $2.69 million. Moreover, Liquidity Services saw a greater number of completed transactions during the quarter, with gains of about 11%.
Yet a look at Liquidity Services' business mix reveals some of the troubles with the company recently. The surplus-seller's consignment model has represented an increasing percentage of Liquidity Services' total business from a sales-volume standpoint, with the GovDeals business now making up almost a quarter of total volume. Yet that business brings in only a tiny amount of revenue for the company, and the much more lucrative purchase-model sales marked declines in volume over the past year.
CEO Bill Angrick discussed the mixed environment that Liquidity Services is dealing with. Angrick cited "strong performance in our municipal government and retail industry vertical marketplaces and better than expected property mix in our DoD business," but he cited continued macroeconomic weakness, especially in its energy and industrial areas.
Will Liquidity Services keep recovering?
The outlook for Liquidity Services is still quite cloudy, as the transition between the company's current Defense Department contract and a new one taking effect for fiscal 2016 is still ongoing. Improving economic conditions could help the company see better performance, though, and efforts from the private sector to cut costs could result in more inventory for Liquidity Services to sell.
Specifically, Liquidity Services gave guidance for the fiscal third quarter that once again was below what most investors were looking for. The company picked a range for adjusted earnings of $0.05 to $0.10 per share, and given that the company accurately projected its earnings this quarter, you'd think that investors would give the guidance some added weight.
Still, Liquidity Services is aiming at improving its position. Large investments in sales and marketing led to more than 50 new clients during the quarter, and the launch of the new Liquidity Services brand should help customers understand the value of the company's services more transparently. By unifying its marketplace platform and improving technology, Liquidity Services hopes to serve more shoppers in a more cost-effective way, adding value and making its service even more attractive to sellers.
Surprisingly, Liquidity Services stock soared in the aftermath of the release of the report, with shares jumping more than 20% in the first hour of pre-market trading following the announcement. Given how far the stock has fallen in recent years, the idea of a turnaround finally taking shape is clearly attractive to value investors. The big question that Liquidity Services still needs to answer is whether it can make good on its business-boosting initiatives quickly enough to satisfy investors who are growing increasingly impatient about the company's future. If it can keep finding opportunities to obtain attractive merchandise, though, Liquidity Services has the potential to rebound sharply from its losses.