The retail industry has been under pressure lately, and well-known players like department stores aren't the only ones feeling the pain. Liquidity Services (NASDAQ:LQDT) and its surplus-resale business has also seen substantial sales declines, and coming into its fiscal fourth-quarter financial report on Thursday, investors feared that the company might see some of the same problems that peer Overstock.com (NASDAQ:OSTK) has had to endure in its most recent quarter. Liquidity Services actually did better on the bottom line than many had expected, but a cautious outlook on the coming fiscal year sent shares sharply downward. Let's look more closely at how Liquidity Services did this quarter and what it sees ahead in the surplus-retail industry.
Liquidity Services earns a little green
Liquidity Services' fiscal fourth-quarter results were mixed, which was a step up from recent reports. Revenue once again dropped substantially, falling a worse-than-expected 33% to $79.3 million. On the profit front, adjusted net income came in at $2 million, which was down by more than half from year-ago figures. That produced adjusted earnings of $0.07 per share, which was far better than the breakeven results that represented the consensus forecast among those following the stock.
Looking more closely at Liquidity Services' numbers, the company cited strong performance in the state and local government marketplace as well as its industrial capital assets sales, both of which saw double-digit percentage growth. Holding the company back was a drop in consumer electronics and energy-related sales. The surplus seller signed more than 40 new commercial accounts, with substantial growth in the Asia-Pacific region and a successful expansion into the Canadian market.
Still, Liquidity Services' operating metrics once again showed the pressure it faces. The number of participants in the company's auctions fell 2% to 601,000, and completed transactions were flat compared to the year-ago quarter at 139,000. Registered buyer counts jumped 9% to almost 2.85 million, but those higher numbers haven't translated to better sales.
In addition, Liquidity Services continues to suffer from a sales mix that threatens its profitability. Nearly a third of its gross market value in sales came from its GovDeals consignment model, but those sales only brought in about 7% of its overall revenue. By contrast, the commercial purchase model brought in twice the proportion of revenue as it represented in gross market value.
CEO Bill Angrick was optimistic about the company. "Our customers are playing an active role in the development and testing of our new LiquidityOne platform," Angrick said, "and the initial feedback is very positive." Angrick thinks that responding to what its customers want is the key to Liquidity Services' overall success.
Can Liquidity Services move higher again?
Despite that positive mood, Liquidity Services is still having trouble predicting its future prospects. Even though the company started operating under a new Defense Department contract in October, it is still negotiating some of its terms. In addition, poor macroeconomic conditions in the energy and industrial sectors are likely to weigh on fiscal 2016 results, and the Defense Department uncertainties are only exacerbating the difficulty in providing useful guidance for the coming year.
The limited guidance that Liquidity Services did give didn't inspire huge confidence in its outlook. Gross market value for sales in the fiscal first quarter is likely to come in between $140 million and $160 million, which would represent a 6% to 18% sequential decline from the corresponding fiscal fourth-quarter results. On the bottom line, adjusted earnings in a range of breakeven to a loss of $0.09 per share are far below the $0.19-per-share consensus forecast among investors for the fiscal first quarter.
Those concerns are consistent with what we've seen throughout the retail industry. Overstock.com initially sought to capitalize on the same resale market that Liquidity Services serves, buying up inventory of failed companies and selling it at a discount. Overstock has gone beyond that business to sell new merchandise as well, and recent revenue trends have been positive, with the company reporting an 11% rise in sales in its most recent quarter. Still, by posting its first loss in nearly four years, Overstock is seeing some of the same challenges that Liquidity Services has experienced.
Liquidity Services' results sent the stock down to its worst levels since the 2009 market meltdown, with shares falling 15% in the first few hours of trading following the announcement. Without a clear guide toward future gains, the company faces a big challenge in pulling itself back up from its recent woes.