Discount retailer Big Lots (NYSE:BIG) this week posted quarterly results that showed a sales decline for the first time in over three years. The company managed to set a record for earnings, though, thanks to a mix of pricing strength and expense discipline. Big Lots also hinted at a sales rebound in the quarters ahead.

More on that brightening forecast in a moment. First, here's how the headline results stacked up against the prior-year period:

 Metric

Q1 2017 Actual

Q1 2016 Actual

Change (YOY)

Revenue

$1.30 billion

$1.31 billion

(1%)

Net income

$51.5 million

$38.7 million

33%

EPS

$1.15

$0.82

40%

Data source: Big Lots' financial filings.

What happened this quarter?

Big Lots slightly underperformed management's sales growth forecast for a quarter that proved difficult for most retailers. Yet operating trends improved as the quarter progressed, which gave management confidence they can hit their full-year targets.

A Big Lots sectional couch.

Image source: Big Lots.

Here are the highlights of the quarter.

  • Comparable-store sales fell 0.9%, the company's first contraction on that metric since the fourth quarter of 2013. At the midpoint, Big Lots' guidance had forecast growth of 1%.
  • Gross profit margin rose by a full percentage point to 40.4% of sales.
  • Expenses ticked down to 32.1% of sales from 32.4% a year ago.
  • Thanks to higher prices and lower expenses, net income jumped 33%, and bottom-line margin improved to 4% of sales from 2.9%.
  • Operating cash flow was $85 million, up year over year from $79 million.

What management had to say

"I'm pleased to report record earnings per share for Q1 despite a very challenging environment for most traditional retailers," CEO David Campisi said in a press release.

Executives noted that the chain's Q1 began on a weak note, but improved from there. "After a slow start to the quarter in February, our ownable and winnable merchandise strategy demonstrated its resiliency by bouncing back with low to mid-single digit comps in March and April," Campisi said, referring to Big Lots' focus on high-margin merchandise categories like furniture.

Looking forward

Comps trends continued to improve in the beginning of Big Lots' current quarter. That led the company to project a quick return to sales growth in Q2, with earnings forecast to rise by as much as 21% to $0.63 per share.

For the full fiscal year, comps are still expected to tick higher by between 1% and 2%, which would keep the retailer on the same annual growth pace it has recorded since 2014. Campisi and his team believe they'll generate faster earnings gains, though, and so they raised their net income outlook to a 13% boost from the prior target of 11%. These results are expected to produce strong cash flow of between $180 million and $190 million.

Big Lots has been slow to join the e-commerce revolution -- it only  recently launched a national sales website. So digital sales aren't expected to contribute much to the business this year, when the retailer will be carefully scaling up its online inventory. But management understands that e-commerce will grow into a much more important segment for the company over time.

Its focus on bulky home-furnishing products, meanwhile, is providing it with some protection from online-centric rivals right now. Thus, Big Lots intends to return to growth this year mainly through investments in stores to improve the customer experience, with higher-quality products and better customer service. That strategy delivered significant profit growth this past quarter despite the rare step backward on the top line.

Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool recommends Big Lots. The Motley Fool has a disclosure policy.