Big Lots posts lots of big improvements

Discount and close-out retailer Big Lots Inc. (NYSE: BIG) posted overall good earnings last week. Income from continuing operations doubled to $29 million, $.26 per share diluted. This is good news. Comparable store sales were up 5% and operating profit nearly doubled from 2% to 3.8%. Net sales increased 3.4% to $1,128.4 million. Net interest income, NOT expense, was $2.9 million for the quarter. Big Lots management has taken the hard decision to close 130 underperforming stores and develop a more economical distribution system.

Senior management at Big Lots is very proactive. The company recently developed a financial supply chain management system to help its vendors gain more efficient access to capital, thus keeping deliveries of merchandise to stores on time and at competitive prices. This financial supply chain management system is directly responsible for better inventory control and, more importantly, much quicker inventory turnover. Cost of sales has dropped and Big Lots has no debt. Total cash and investments increased by $136 million to $210 million. Such improvements in its balance sheet have convinced senior management to buy back up to $600 million of Big Lots stock.

Second quarter guidance forecasts diluted EPS of $.07-$10, double the figure for 2Q 2006. FY 2007 diluted EPS of $1.25-$1.30, an increase of 24-29%, with annual cash flow in excess of $190 million. Big Lots pales in comparison to Target (NYSE: TGT) and Wal-Mart ((NYSE: WMT), but is a much better investment than other much smaller and more limited merchandise closeout chains. The stock began the year trading at $22.84 and closed recently at $31.01, a nice bit of capital appreciation.