Liquidity Services (NASDAQ:LQDT) saw its share price lose roughly 21% in the last two trading days of last week after releasing quarterly results on Feb. 3rd. The provider of business-to-business e-commerce selling platforms focused on surplus, return, and used goods turned in decent results, but after soaring 167% last year, the stock unsurprisingly succumbed to a bit of profit-taking.
For investors with a long-term horizon, Wednesday’s report provided some tangible insight into future profitability. Recent gross margin trends visible in the fiscal first-quarter 2021 report are indicative of an important business shift that’s perhaps lost in the noise of a single quarter’s earnings.
Liquidity Services revealed a fairly strong first quarter: Gross merchandise volume, or GMV, improved by 28% year over year to $190 million. GMV is the total amount of dollar volume transacted across the company’s platforms — it generates revenue from transaction fees applied to GMV. GMV growth was especially pronounced in the company’s government-focused “GovDeals” segment, rising 36% against the prior-year quarter. GMV in the “Retail Supply Chain Group” segment, or RSCG, exhibited similar strength, jumping by 30%.
As for revenue, the company’s top line advanced by 13% to $56 million against fiscal Q1 2020. Revenue in GovDeals rose by 35% year over year to $11 million, while RSCG revenue improved by 10% to $35 million. The equipment-focused “Capital Assets Group” recorded flat revenue of $8 million, and the company’s smallest segment, “Machinio” (which facilitates sales of machinery, tools, heavy equipment, and trucks) increased sales by 10% to $2 million.
Liquidity Services’ double-digit top-line growth resulted in a favorable bottom-line swing between periods. It generated net income of $4.5 million in the current period, versus a loss of $5.2 million in the first quarter of fiscal 2020.
A margin-building shift
The organization’s healthier top line and climbing profits are partially explained by the heightened level of e-commerce activity jump-started by the COVID-pandemic. Liquidity Services has enjoyed a surge in its retail platform activity, since the RSCG segment specializes in reverse supply chain solutions (i.e. the flow of products back to a retailer or vendor from a customer).
In addition, the pandemic has increased the comfort of businesses and governmental entities with selling used equipment and surplus inventory via online platforms. And it’s similarly improved the comfort level of buyers in these areas in purchasing items online without physical inspection.
Robust sales have been accompanied by a vigorous increase in gross profitability — in Q1 2021, gross margin jumped by 9 percentage points year over year to 60%. Higher gross margin is the result of an emphasis that management is placing on consignment sales. When Liquidity Services sells goods on behalf of businesses or governmental entities via consignment, it typically doesn’t handle the inventory — the goods remain in place at the seller’s location. Thus, consignment sales require fewer touches on Liquidity Services’ part, and less capital (as often, Liquidity Services doesn’t take title in the assets). As a result, consignment tends to be more profitable than sales in which the company has purchased inventory and moved it to its own warehouse space.
Shifting product mix toward consignment will result in higher future profits for each dollar of sales, but it will also undermine a key metric that investors follow each quarter: GMV growth. This is because the company only records the fees applied to a consignment sale as GMV (as opposed to recording the value of the merchandise sold).
On the e-commerce technology innovator’s first-quarter earnings conference call, CEO Bill Angrick observed the following: “So [the consignment] evolution has resulted in revenue being a smaller percentage of GMV but it’s a much more profitable stream for us because we don’t touch the assets…” Management indicated on the call that in the coming quarters, measures like total gross profit and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) would become increasingly important due to the consignment shift, and also due to the rise of other non-GMV revenue streams (like subscription services within the Machinio segment).
GMV will continue to exist as a vital metric that investors follow throughout each fiscal year. But if current trends are any indication, Liquidity Services’ earnings growth in the coming years may lie more firmly within direct fee revenue generated from its customer base. So, investors will need to take a broader view of the company’s earnings toolkit in the near future.
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