Liquidity Services Keeps Struggling Despite Transformation Efforts

By Dan Caplinger Markets Fool.com

Many shoppers like getting deals on items that their original owners no longer want, and Liquidity Services (NASDAQ: LQDT) has made a market of selling surplus assets by a variety of different means. Yet the company has had difficulty producing growth or making a profit, and that has required it to take on a transformation plan to try to return to a sustainable growth trajectory.

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Coming into Thursday's fiscal second-quarter financial report, Liquidity Services investors still expected to see further contraction in revenue as well as net losses. The surplus specialist's results didn't inspire much confidence in the success of the turnaround so far, even though company executives remain optimistic for the future. Let's take a closer look at Liquidity Services and what its results say about its recent efforts.

Image source: Liquidity Services.

Liquidity Services can't get back into the black

Liquidity Services' fiscal second-quarter results showed continuing deterioration in fundamental performance. Revenue was down 17% from year-ago levels to $72.3 million, and that was far worse than the $81 million in sales that most investors had expected to see. Liquidity Services lost $8.25 million, and that worked out to a per-share loss of $0.26, comparing unfavorably to the consensus forecast for a loss of $0.23 per share.

Taking a closer look at how Liquidity Services did, the company's fundamental numbers were again mixed. Registered buyer counts rose 4% to about 3.03 million. However, the number of actual participants at auctions dropped by 3% to 619,000, and the number of completed transactions was down at a sharper 6% rate, amounting to 144,000 finalized deals.

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Nevertheless, Liquidity Services reported some organic growth in key areas. The company pointed to particular pockets of strength, including a 30% rise in gross market value in the GovDeals state and local government marketplace segment, and gross market value from Liquidity Services' international energy marketplace more than doubled from year-ago figures. More broadly, retail gross market value moved higher by 7%. Interestingly, sales shifted more toward the consignment model of the business, which tends to command greater gross market value but comes with a less attractive mix from a revenue standpoint.

CEO Bill Angrick said he was pleased with Liquidity Services' results, arguing that they establish the success of the transformation plan. "Investments in our global sales organization, enhanced service offerings, and buyer network," Angrick said, "have resulted in continued organic growth across our commercial and GovDeals marketplaces." The CEO also praised the way the company's labor force is pushing onward and contributing to the success of the business.

What's next for Liquidity Services?

Liquidity Services sees the potential for positive momentum ahead, especially with respect to its LiquidityOne transformation initiative. In Angrick's words, "This is an exciting time, as we are on the cusp of delivering new, mobile-first e-commerce solution that will integrate our business processes and expand our ability to provide our clients and buyers with a streamlined user experience, enhanced functionality, and greater access to buy and sell surplus assets on a global scale." New sales platforms should help the company launch forward and try to capture a bigger piece of the surplus pie going forward.

These initiatives will carry a cost. The company expects fiscal third-quarter expenses to rise because of the anticipated launch of its new platform. In addition, higher costs of goods sold and new pricing terms and lower volume in the key Defense Department surplus contract could offset advances on the commercial side of the business.

Liquidity Services therefore expects fiscal third-quarter results to include gross market value of $170 million to $190 million and adjusted net losses of $0.19 to $0.29 per share. Those figures are worse than investors were expecting, reflecting higher anticipated spending on LiquidityOne and other potentially negative factors.

Liquidity Services' shareholders took the news in stride, but the stock dropped almost 4% in the two trading sessions following the announcement. There's little sign that Liquidity Services will be able to recover as quickly as it had hoped, and many investors want to see more concrete evidence of a rebound in the company's fundamentals before committing any more capital toward their investment positions.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Liquidity Services. The Motley Fool has a disclosure policy.