The economic recovery may be stalling, but that hasn’t helped the liquidation business of Great American Group Inc., which has been suffering through an extended drought.
Now, the publicly traded Woodland Hills business that made big money selling off the inventory of struggling and bankrupt companies during the recession is taking more risk to boost growth.
Great American announced this month that one of its subsidiaries purchased secured debt issued by TJ Hughes, a bankrupt U.K. discount retailer.
The debt deal allows the subsidiary, GA Europe, to take possession of TJ Hughes’ assets – mostly unsold merchandise. If Great American can sell the inventory for more than the price of the debt, it can make more money than if it simply acted as an auctioneer and took a small fee.
Robert Cohen, president of bankruptcy consulting firm Alternative Bankruptcy Concepts in Buena Park, said the deal is similar to what happens when an investor buys a nonperforming mortgage and forecloses on the property. But it carries some risk.
“For the liquidator, it’s a hit-or-miss proposition,” Cohen said. “They can hit a grand slam or they can lose money, whereas if they just conduct the auction they always make a little money.”
The company is taking that risk because its liquidation business has slowed, even with the uneven recovery.
Two years ago, Great American was at the top of its game and auctioned off the remains of Circuit City Stores, with an inventory estimated at $3.7 billion, and Linens n’ Things, which had $1.7 billion. Great American also supervised the close-out sales at Mervyn’s department stores.
However, in its first quarter earnings report, the company stated that its liquidation revenue fell last year, when it lost $11.4 million or 39 cents per share. Just 50 percent of its revenue was derived from liquidation, compared with 74 percent in 2009.
The problem: The financial crisis and economic meltdown of 2008-09 forced many asset-rich retailers out of business, and now most such inventory has been sold off.
The company also makes money on appraisals, auctions and related services. But Michael Crawford, an analyst at West L.A. brokerage B. Riley & Co. who follows Great American, said the decrease in liquidations has forced the company to be more creative.
“Great American is enduring a near-unprecedented lull in North American retail liquidations while striving to ignite new growth,” wrote Crawford in a note to investors May 17.
(B. Riley & Co. owner Bryant Riley sits on Great American’s board.)
Great American did not make an executive available to comment.
However, it’s not as though the company’s liquidation business has dried up completely. Last month, it auctioned off the remaining assets of Rock & Republic Enterprises Inc., a high-profile L.A. apparel maker.
Also, Great American is one of five liquidators that are selling the remaining inventory of Borders Group Inc., which recently closed 399 stores with an estimated inventory worth $700 million.
But as liquidations have slowed, Great American’s stock price has withered.
In November 2009, shares traded for more than $4. Since then it has consistently declined and by mid-July it was trading for around 30 cents. In the last three weeks, since the announcements of the TJ Hughes and Borders deals, it has fallen again. It closed at 11 cents Aug. 10.
One bright spot has been the company’s European business. During the first quarter, the company earned $3.3 million in revenue from liquidations in Europe. That represented 25 percent of the company’s total quarterly revenue of $13 million, and helped narrow its quarterly loss to $526,000 compared with $3 million a year earlier.
Indeed, despite the challenges, Crawford rates the stock a “buy” and maintains a target price of $1.50 per share. That conclusion is based on the belief the company has enough financial strength to weather its current slowdown.
“Great American’s liquidations business is bumpy,” acknowledged Crawford in his note to investors.
