Liquidity Services (NASDAQ:LQDT) is positioned to benefit from number secular trends as a result of the Covid-19 pandemic: (1) the reflation trade and boom in infrastructure spending; (2) tight supply chains for equipment and consumer goods; (3) focus on value and sustainability in the circular economy, resulting in higher demand for used equipment; (4) budgetary constraints at corporate and government level resulting in desire to monetize surplus/idle assets; and (5) consumer shift to online shopping resulting in higher levels of returned goods which need to be resold on the secondary market.
All of these factors are resulting in higher levels of gross merchandise value (GMV) flowing through Liquidity Services platforms:
- allsurplus.com
- liquidation.com
- machinio.com
- secondipity.com, Secondipity eBay store and Amazon Renewed
All Surplus — eBay for Used Equipment
As I pointed out in my last LQDT article, All Surplus enjoyed a good March quarter, coming in at 69.7k closed auctions with the benefit of two abnormally large deals, a $2.4M crane and a $3.5M private treaty for the state of Hawaii. This compares to 70.3k closed auctions for the December quarter, which included a $1M sale as the largest auction. To that end, the March quarter should be fairly similar to December with potentially a slight uplift in average deal size. I'm expecting $140-$145M GMV.
Yet stocks are forward looking. And the pace of transactions accelerated in March and continued through April. May and June are historically strong months as well, and it is showing up in the number of active listings on All Surplus which is a leading indicator of closed auctions. All told, April had 29k closed auctions, and I'm expecting the pace of activity to continue and finish the June quarter with 90k closed auctions. That suggests a 30% increase over the 70k closed auctions the past two quarters, yielding $180M GMV for the June quarter for All Surplus.
Here is a list of all the activity in the March quarter. And here is a list of all the April auctions (except for a few Canadian deals that haven't matriculated from the GovDeals to the All Surplus site). The All Surplus site is missing some larger ticket items, like these two Caterpillar (CAT) 627H scrapers which sold for CDN $1.05M before a recent site update which incorporates Canadian assets.
The blended take-rate on the All Surplus business is about 13.5% (buyers premiums + seller commissions) and the gross margin percentage is about 90%, so a $40M increase in GMV will result in about $5.5M incremental revenue, about $5M incremental gross profit dollars and an incremental $0.13-$0.15 EPS holding operating costs flat and assuming 34.5M shares outstanding.
Reverse Supply Chain Business — Adding customers and expanding relationships
While I don’t have as granular level of detail on the reverse supply chain business for reselling returned goods into the secondary market, I do track the number of live auctions on Liquidation.com on a daily basis. Historically the post-Christmas holiday shopping period is the seasonally strong quarter, but adding and expanding customers could offset some of this seasonality. For example, the number of live auctions on Liquidation.com this weekend reached 2,850, the highest number I’ve seen since tracking data early in the year.
Moreover, LQDT also operates direct to consumer sites Secondipity.com, an eBay store, and sells through Amazon (AMZN) Renewed. One indication of a ramp in the direct to consumer business is checking the number of reviews on the Secondipity eBay Store. Over the past 12 months, there were 15.5k reviews; over the past 6 months, 14.5k and over the past month, 3.5k. This seems to indicate that the sales volumes through the eBay store could be up triple digits in recent months which makes sense when you consider Target (TGT) is a new, large customer as of 8 months ago that is providing lots of product to drive more volume. Live auctions for Target on Liquidation.com recently ramped to 550-600 from 150-200 I normally see when I review the data.
In terms of economics in the reverse supply chain, Liquidity Services records about 67.5% of GMV to revenue. The mix in sales between purchase model and consignment model dictates if LQDT records the full sale as revenue and deducts associated COGS of purchased inventory or if it records straight 100% margin commission revenue with no associated COGS for a brokered sale between Liquidity Services’ seller and buyer network.
As more GMV has moved to self-service consignment model, recorded revenue has lagged, but gross margin percentage has steadily increased and now stands about 43%. So for a $10M increase in GMV, I’m estimating a $6.7M increase in revenue and about $2.8M increase in gross profit dollars, or about $0.08 EPS.
In terms of the growth potential and EPS leverage in this reverse supply chain business, Walmart (WMT) recently returned as a RSCG customer after leaving in 2015. In 2011, Liquidity Services bought Jacobs Trading for $140M (plus a $30M earn out), primarily for the Walmart liquidation contractual relationship for returned goods and shelf pulls. LQDT disclosed that Walmart was an 11% customer when it was doing nearly $1B annual GMV in 2013 (about $100M Walmart GMV), so I believe both Target and Walmart can grow into $100M+ GMV per year customers over the next few years. The earnings leverage on an incremental $200M in RSCG GMV would yield an incremental $1.50 EPS at that scale.
Conclusion
Liquidity Services is seeing strength across all of its businesses. This is not conjecture, it is fact and can be seen in objective data in the public domain on its various eCommerce platforms.
To that end, the sell side consensus is far too low for both the March and June quarters and I’m expecting beats on the top and bottom line in March, and a massive upward revisions in analyst models for June 2021 and 2022 estimates. Current consensus estimates are $56M and 11c EPS for March and 13c EPS for June. I think LQDT should come in at 35-40c EPS in June, when I input $230-$240M GMV into my model ($175-$180M for All Surplus and $55-$60M for RSCG).
One key risk I see is if management decides not to give forward commentary, instead deciding they are too early in the quarter or cite an uneven government CV-19 response as reasons not to provide guidance. When investors are given no guidance, they automatically assume it is bad. But that is not what happened in the March quarter, at least reviewing the data on AllSurplus.com and Liquidation.com. And it is clear Liquidity Services is going to put up a strong June quarter at this point given the data available through May 1 and the current trends that are visible on the platforms.
In my view, management needs to provide clearer investor messaging so that consensus expectations more closely match the strength in the underlying business. Having the sell side analysts off by 200%+ in EPS estimates is too wide a gap to reality, even for a lightly followed story. Closing that gap should lead to an appreciably higher stock price to better reflect the earnings power of LQDT businesses on a go-forward basis.
The company appears to have aggressively bought back $12M in the March quarter ($2M from old authorization and a new $10M authorization). The trading activity from March 8 through March 17 suggested the company was aggressively buying stock when large 5-20k bids popped up on Level 2.
Given LQDT only had about $25M in working capital as of December 31, I would expect that they company generated at least $10-$12 million in free cash flow/adjusted earnings in the March quarter to give the company confidence to buy back that much stock that quickly given the tight working capital.
Given these data points, I think the company is ready to have a big coming out party on May 6 when they report earnings.
