When the Bureau of Economic Research declared that the recession had officially begun in December 2007, the entire retail sector shrugged its shoulders and said, "No kidding."

Shares of companies that deal directly with the consumer, except for the deep discount retailers, have known for some time that the economy was struggling. Sales have been declining steadily and, with the deteriorating operating environment, shares of the retail stocks have been absolutely crushed.

The entire retail group is one of the biggest losers in the market this year, with some stocks down 80% to 90%.

That said, those retailers that offer big discounts, including Wal-Mart (NYSE: WMT) and Big Lots (NYSE: BIG), are doing much better on a relative basis.

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.

There are plenty of discount and closeout retailers out there, but Big Lots Inc. (NYSE: BIG) has developed a competitive advantage that allows it to compete more effectively and efficiently. Rather than concentrating just on supply chain management to get products where they need to go, on time and at an acceptable price, Big Lots, with 1400 stores, has also developed a financial supply chain to help its vendors, while at the same time helping itself.

Several years ago, Big Lots realized that many of its vendors were having cash flow problems of their own, sometimes affecting their abilities to get products into stores. The vendor's cost of borrowing and lack of access to capital delayed production and shipment. Utilizing a third party, PrimeRevenue, Big Lots partnered with its vendors. All invoices are now posted online within 24 hours through PrimeRevenue. A vendor knows exactly when it will get paid and how much. Vendors can either sell the invoices to a participating financial institution and receive money within 24 hours or wait for full payment. Vendors also get to borrow money based on Big Lots' good credit rating, driving the cost of borrowing down for many vendors. This, in turn, means Big Lots lowers its own cost of goods.

Integrating vendors into its financial supply chain means that Big Lot buyers, who want the best possible price for goods, and vendors who were once reluctant to lower their prices, now work within the same system. Vendors know exactly what and when they will get paid, negating their need to push prices up to cover cash shortfalls. Big Lots estimates it has shaved 4% off the price of goods by eliminating financial inefficiencies in its supply chain. Both sides benefit. Big Lots buyers get better terms and long-term vendor relationships. Vendors get improved cash flow. So far, the program is a success. Big Lots 1Q 2007 comparable sales were up 4.9%, and total sales were up 3.5% to just over $1 billion.