Shares of catalog and Internet retailer Lands' End (NYSE: LE) jumped 16% after the company posted strong third-quarter net income, far above analyst estimates. The company reported total revenue of $376 million, 4% higher than $362 million a year ago, while net income came in at $12.1 million, compared with $4.4 million a year ago. CEO David Dyer said better expense control and healthy sales of merchandise at full price contributed to the strong results.

Fashion, as all investors know, is a fickle business. When products are selling crisply, as they are at Lands' End, everything looks great. When they're not, as is currently the case at Gap (NYSE: GPS), everything looks lousy.

Lands' End has done a good job righting the ship since 1998 (fiscal 1999), when profits plunged. The company slashed prices to reduce excess inventory, and a new management team was brought in, including past executive Dyer, who returned to the company as president and CEO at the request of the board. Dyer streamlined management and cut out businesses that weren't turning profits.

The results have been good. Through the first nine months of this year, Lands' End generated $973 million in sales, up 24% from the same period in 1997. At the same time, the company's asset base has grown just 12%, which means the company is efficiently turning its assets into sales.

More to the point, Lands' End has gotten a better handle on its inventory over the last few years. This is critical for a retailer, since inventory is often the biggest asset category. At the end of the third quarter in 1997, the company had $321 million in inventory, representing 62% of total assets. Inventory had expanded because the company was caught short the year before and was unable to fulfill some orders on time. By the third quarter of 1998, however, the company's inventory had grown to $379 million, which led to price reductions, lower gross margins, and weaker profits. The key for any retailer, of course, is to find the right balance.

Fast-forward to this year, and the company has $294 million of inventory, less than it had at this point in 1997. As long as it's able to fulfill orders during the Christmas season, then it's clear management has done a good job producing higher sales with a lower inventory base.

In fact, were it not for the fact that the company owed more money on its credit line in 1997 than it does today, its working capital needs would actually be less now than they were four years ago. Inventory levels must fluctuate with expected demand and economic conditions, but -- at least at this point -- better inventory management has made the company less expensive to run on a day-to-day basis.

Richard McCaffery doesn't own shares in any company mentioned in this report. The Motley Fool is investors writing for investors.