Big Lots (NYSE:BIG) has investors buzzing, with quarterly results that crushed everybody's expectations -- from Wall Street to Big Lots itself. Investors liked the news enough to push the stock up 10%, as they grabbed up shares as eagerly as kids opening a Christmas present.

The company earned $0.21 a share from continuing operations, far beyond the target of $0.07-$0.10 it set back in May. Driving results were an impressive same-store-sales increase of 5.2% and lower operating expenses, including a decrease in advertising costs. The company also benefited from more efficient distribution and lower insurance costs.

Big Lots has taken a number of steps to improve its performance in the past couple of years, including closing a number of stores that were underperforming and changing its merchandise mix. Those efforts clearly seem to be paying off.

The gross margin did decline by 20 basis points, but this dip seemed to be planned, given the company's lower-margin promotions. The operating margin expanded by 240 basis points, to 3.1%.

Shareholders have to be pleased with Big Lots' use of cash. The company continued to buy back shares -- 7.5 million in the latest quarter -- and remains committed to the practice. I'd definitely look for more repurchases, since management is authorized to spend $271.3 million more to do so.

Speaking of company execs, they're confident about the future and have raised guidance by $0.18 per share for the year. They now expect earnings to fall between $1.43 and $1.48 a share, despite the difficult environment that exists for consumers. In comparison, Fred's (NASDAQ:FRED), another discount retailer, just reported disappointing quarterly results.

Ever since Big Lots announced its new strategy a couple of years ago, results haven't exactly gone up in a straight line, but it is making improvements. Closing the underperforming stores has had its intended effect, but getting the merchandise right remains the key. To get there, Big Lots aims to sell a certain amount of brand-name merchandise -- a move that will place the company somewhere between dollar stores such as Dollar Tree (NASDAQ:DLTR) and warehouse clubs such as BJ's Wholesale Club (NYSE:BJ)). In further tweaking the product mix, Big Lots has also exited the low-margin frozen food business, which Dollar Tree added a year ago.

I would caution, however, that Big Lots' shares trade at 23 times trailing earnings. High expectations already appear built in to the stock. These shares are definitely not on the discount rack.

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Dollar Tree is a former Inside Value pick.

Fool contributor Larry Rothman is happy to receive feedback, and he promises to read it when he's not being wrestled by his three children. Feel free to email him at rothmanviews@comcast.net. He doesn't have any positions in the companies mentioned.