Closeout retailer Big Lots (NYSE:BLI) operates in a strange sub-segment of the retail industry: Its more than 1,400 stores sell discontinued products, merchandise obtained after production overruns, returns, and other "happy accidents." (On one pre-Halloween visit back in college days -- a friend and I were able to assemble the legendary Alien Control Team costume all at Big Lots -- I was struck by the impressive selection of woven wooden deer.)

You might think a difficult retail environment would benefit a store like Big Lots, and generally it has. Sales, powered in good part by expansion, have risen for several years running. But investors have had a bumpy ride these last few years, as the company's shares have jumped around like a woven wooden deer brought clumsily to life.

Results for the company's fiscal third quarter (ended Nov. 1) illustrate why: Despite sales growth, the company is losing money. For the first nine months of the year, sales and same-store sales were up on increased transactions and value per sale, but decreased gross margins and a rise in selling, general, and administrative (SG&A) expenses -- as well as significant interest expense -- caused the company to lose more than $4 million on some $2.85 billion in revenue.

But there's some good news in Big Lots' quarterly results, too. Among the highlights were a quarterly same-store sales increase of 4.3% (the company measures this using stores open for at least two years, rather than the more usual one year), news of improved November sales, reduced debt, and controlled inventory growth.

All in all, though, Big Lots has much to prove. In a difficult competitive environment -- included among its competitors are discount retailers Wal-Mart (NYSE:WMT), Target (NYSE:TGT), and Kmart (NASDAQ:KMRT), as well as drugstores and other value-oriented chains -- uneven financial results and an uneven history of free cash flow generation don't impress. The company is optimistic that it can begin leveraging its revenue in 2004, but investors may want to wait for hard evidence.

Dave Marino-Nachison can be reached at