Discount retailer Big Lots Inc. (NYSE: BIG) reported good 2Q 2007 earnings, driven in large measure by dramatic improvements in inventory control and distribution. Big Lots has gotten better at getting merchandise into stores on time and then moving it out the door faster. Big Lots reduced cost of inventory 13% to $714 million, still a hefty amount. But Big Lots has also increased its inventory turnover rate, which resulted in a 5% increase in same-store sales. Lots of retailers would like to post such an increase for just one quarter. Big Lots has posted 5% or better increases in same-store sales for the last two quarters.

Big Lots' strategy to concentrate on its supply chain management is beginning to pay off handsomely. Net sales increased 2.7% to $1,084.9 million or diluted EPS of $0.21, 5 times the amount of 2Q 2006. Operating profit also increased 3% to $33.4 million even though Big Lots is selling lower-margin merchandise. In addition to distribution system enhancements, Big Lots also kept the lid of insurance-related costs and cut back on advertising spending.

There are many discount retailers for investors to choose from. Big Lots is more attractive than most because the company carries NO long-term debt obligations, and presently has cash and cash equivalents of $109 million on hand. The company spent $215 million of the $600 million authorized on stock repurchases in 2Q, and will continue its buyback in the following quarters.

Given the good numbers from the previous two quarters, and 3Q and 4Q predicted comparable-store sales increases of 1%-3% per quarter, Big Lots management increased FY 2007 guidance EPS to $1.43-$1.48. Cash flow is expected to increase to $240 million, and inventory turnover rate will continue to climb. Big Lots wants to sell more merchandise more quickly. Lucky investors in the stock were up 9% on Wednesday as a result of the earnings release. The stock closed on August 29 at $28.91, up $2.61.

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.