You gotta hand it to Big Lots (NYSE:BIG), the broad-line close-out retailer. Once again, it has trumped analyst expectations, and done so spectacularly. With sales pretty much in line with forecasts, profits came in 30% higher than predicted at $0.26 per share.
Undoubtedly, it was the dynamic duo of a compressed selling season featuring two high-volume holidays -- Valentine's Day and Easter -- that pushed metrics higher. It was a similar story at Dollar Tree (NASDAQ:DLTR), another deep discount retailer that reported better than expected results Wednesday. Yet where Big Lots has been offering multiple-price-point products as a regular part of its business plan, Dollar Tree has only just entered the more-than-a-dollar market for its products.
And Big Lots' stock has been attracting a lot of short seller attention recently. Some 27% of its shares are sold short, a number that has been steadily rising since the beginning of the year. That coincides with the stock's rise -- it's up more than 50% year to date. With yet another strong quarterly showing, shorts might be feeling a little squeezed.
A short seller is someone who bets the price of the stock will go down. The seller borrows shares at a high price, hoping to sell them back later on at a lower price for a profit. If things don't go the short's way, however, the price can continue to climb and the seller will have to "cover" them for a loss. That creates more pressure on the price to rise, fueling what's called a short squeeze. It can oftentimes make for dramatic gains.
In addition to the seasonal effects on Big Lots' operations, the discounter also benefited from higher same-store sales, which climbed nearly 5%, as well as a smaller loss from discontinued operations. The loss was only $260,000, compared with $791,000 last year. Still, operating profits doubled to $42.5 million, or 3.8% of sales, compared with 2% of sales a year ago.
Although operating from a small store base, Big Lots has been able to cut costs, seeing its operating expenses improve by 240 basis points. That, however, masked slight pressure on gross margins, which declined year over year because customers purchased lower-margin products. That had been more of a problem when Big Lots had freezers and coolers in its store, since those consumables tend to bring tighter profit margins. Interestingly, Dollar Tree and Family Dollar (NYSE:FDO) have both been adding them to their stores with much greater success.
Tighter inventory control and lower expenses have allowed Big Lots to increase margins -- and maybe prove the short sellers wrong.
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Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
