Lqdt Uncle Sam Retail
Image source: Liquidity Services.

The commodities markets have been extremely weak throughout the past year, and the pain has extended beyond the companies that seek and produce those materials. Liquidity Services (NASDAQ:LQDT) specializes in taking surplus assets and reselling them, and coming into its fiscal first-quarter financial report on Thursday, investors fully understand that it was struggling under the weight of poor economic conditions in its core business. Even though it has a different focus from the more consumer-oriented Overstock.com (NASDAQ:OSTK), Liquidity Services faces similar challenges in finding sources for inventory at good prices and customers to buy them at a profit. Let's take a closer look at Liquidity Services and why investors remain worried about the surplus reseller.

Why Liquidity Services is struggling
Liquidity Services' fiscal first-quarter results showed the challenges that the company is facing. Revenue plunged 47% to $65.9 million, doing far worse even than the already-ugly 40% decline that most investors were expecting the company to post. The company lost $5.2 million during the quarter, and even after making some accounting-related tweaks, adjusted losses of $3.5 million worked out to $0.11 per share, more than double the loss projected in the consensus forecast among investors.

Liquidity Services is still trying to focus on its strengths, and the state and local government marketplace managed to post double-digit percentage growth in gross market value. Signing more than 200 new government clients was an important element in Liquidity Services' expansion, but weakness in the retail segment held the company back.

More notably, unfavorable industry and pricing trends in the energy and defense areas showed the exposure to commodity prices. With prices for scrap metal down, Liquidity Services hasn't generated as much volume from the Department of Defense, and that has had a marked impact on results.

A look at Liquidity Services' operating metrics shows some of the damage. The number of participants in the company's auctions fell 11% to 561,000, and completed transactions dropped 9% to 133,000. Those weak numbers came despite a 9% rise in registered buyers to 2.88 million. Liquidity Services' sales mix also keeps holding it back, as the two-thirds of its gross market value from its consignment model brings in less than a quarter of its revenue.

Even with the tough news, CEO Bill Angrick looked ahead. "Our focus remains on the long-term growth of our commercial business and building the most innovative services and capabilities in the global reverse supply chain industry," Angrick said. The CEO expects the ongoing development of the LiquidityOne platform to pay off with better information for its customers to use.

What's ahead for Liquidity Services?
As we've seen before, Liquidity Services isn't comfortable making firm projections about its future. The company is working under wind-down provisions of its previous Defense Department contract, and the weakness in the energy and commodity sectors makes it hard for Liquidity Services to give solid guidance about the current fiscal year.

Nevertheless, Liquidity Services doesn't see an immediate turnaround coming. Its fiscal second-quarter guidance includes calls for gross market value of $140 million to $160 million, and the company expects breakeven results at best and a loss of $0.11 per share at the lower end of its range. That's quite a bit weaker than the small profit that investors had expected.

In light of Overstock.com's experience, Liquidity Services' emphasis on its platform and service make sense. Overstock.com has received criticism for poor customer service and an inefficient distribution system that doesn't allow it to take full advantage of its business opportunity. The LiquidityOne platform will hopefully help Liquidity Services avoid Overstock's fate, but the surplus-seller still has to be careful.

Nevertheless, Liquidity Services' results sent the stock down sharply, falling 13% immediately following the announcement. Until its situation becomes clearer, Liquidity Services isn't getting a vote of confidence from shareholders.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Liquidity Services. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.