In Saskatoon, as befitting a boomtown, most of the major North American retailers have erected shiny new stores along the beltway that encircles the growing city. Retail follows rooftops, they say, and the big chains are where Saskatoon's new houses have popped up.
Then, by contrast, there is Liquidation World . To get to that chain's sole Saskatoon outlet, you must head north of downtown, through an industrial area, until 1st Avenue dead-ends at a big, blue, nearly windowless concrete building, where Liquidation World shares space with a storage-unit company. It is just south of the city's cemetery.
Once you walk in, climb some stairs, and squeeze through a narrow passageway with just two lanes for registers, you encounter a cavernous, dimly lit warehouse stuffed with overstock goods.
To Liquidation World's credit, it now knows that it can't succeed with stores like the one in Saskatoon. It's engaged in an ambitious remodelling and rebranding program, with results from the refurbished stores - each called "LW- Everybody's Outlet Store" - proving the worth of the plan.
Liquidation World's problem, however, is that its old stores are performing so poorly, it keeps running out of money while trying to execute. After a series of high-cost, high-dilution financings, it's whacked much of the executive staff to save money and says, as of this week, that it's exploring strategic alternatives, including a sale.
This raises a question for investors interested in high-risk, high-reward speculation: Do Liquidation World's shares, currently trading around 50 cents apiece, offer an opportunity to double or triple your investment in short order? Or is it more likely that Liquidation World will live up to its name?
The company was a marginally profitable business with an exceptionally clean balance sheet heading into the most recent economic downturn. As Canada's Dollarama and the U.S. closeout chain Big Lots have demonstrated, deep-discount retailers can put up outstanding returns for its shareholders when consumers are squeezed.
Instead, it was Liquidation World that nearly got crushed, with a 13.5-per-cent drop in sales and a loss of $17.6-million. Benj Gallander, a private investor, author of the "Contra the Heard" newsletter, and a Globe and Mail contributor, believes the company did a disastrous job of managing its inventory.
A new investor group stepped up and brought in Seth Marks, a former Big Lots executive, as CEO. He drew from Big Lots' philosophy of offering a consistent, yet discounted, merchandise mix in stores located in strip malls and other high-traffic locations.
"My predecessors did not subscribe to the 'location, location, location' retail philosophy … we believe it's important to upgrade the real estate to attract new customers and get the incremental traffic that you don't get at the end of a dead-end road," Mr. Marks told me last summer when I asked him about his plans and my visit to the Saskatoon store. (He has since stopped returning calls, possibly because Liquidation World seems to have a material announcement every week or so.)
By the end of 2010, 44 of Liquidation World's 92 stores were new or had been upgraded. And the results are striking: Same-store sales at the renovated stores were up 12 per cent in the quarter ended Jan. 2; they were down 4.5 per cent in those that had not been upgraded.
Alas, the overhaul has been expensive and, coupled with continuing losses, has left the company in an exceptionally weakened state. A series of equity financings have nearly tripled Liquidation World's shares outstanding, to 22 million, in the last two years. The latest deal raised $8.1-million at 11-per-cent interest, plus almost 650,000 warrants.
The company's announcement Monday that it has retained RBC Dominion Securities with a goal of "enhancing shareholder value" suggests a sale is possible. However, a company that admits half its locations are unacceptable isn't a likely candidate for a buyer that wants to retain it as a going concern.
Its current enterprise value (the total market value of its stock and debt minus cash) is just $27-million, even though it has $38-million of inventory on the balance sheet and presumably some leases that another retailer, Canadian or U.S.-based, might want to assume, notes Mr. Gallander, who bought in at $2.80 a share. He's sticking around to see how this plays out; a risk-embracing investor can get into this game at a much lower entry point, with profit - or liquidation - possible.