Earlier this week, Big Lots (NYSE:BIG) reported second-quarter earnings per share that were a nickel above analyst estimates. Management also raised its guidance for cash flow for the full year. The upside was driven by higher profit margins, which more than offset the company's same-store sales decrease of 2.4%.

Lots to like
Profit margins will remain the story at Big Lots. The retailer's gross margin has been around the 40% mark for the last few years, and there is nothing to suggest a change anytime soon. However, the closeout retailer has enjoyed a big increase in its operating margin over the last three years. In fiscal 2006, Big Lots had an operating margin of 3.9%. It climbed to 5.1% in fiscal 2007 and 5.5% in fiscal 2008. Based on the company's guidance, Big Lots should sport an operating margin that is flat to slightly higher this year.

No respect
It's not like the market has ignored Big Lots this year; shares are up more than 75% since the beginning of the year. However, the stock trades at just 13 times analyst estimates for fiscal 2009 on future earnings growth that looks a smidge better. That stacks up favorably against its competitors:



Forward P/E

5-Year Future EPS Growth

Op. Margin (TTM)

Big Lots










Dollar Tree (NASDAQ:DLTR)





Family Dollar (NYSE:FDO)










Wal-Mart Stores (NYSE:WMT)





Target (NYSE:TGT)





Sources: Motley Fool CAPS, Capital IQ, and Yahoo! Finance as of Aug. 27, 2009. TTM = trailing 12 months.

Despite the competitive margins at Big Lots, part of the problem is the nonexistent revenue growth. Its revenue has been essentially flat over the last three years at around $4.62 billion, and analysts expect it to continue that way through the remainder of this year. The market likely will not grant its shares a higher P/E until the retailer demonstrates that it can grow its sales and maintain its profit margins.

Revenue growth around the corner
Big Lots is already the largest broadline closeout retailer in the U.S. with nearly 1,350 stores, and the company plans to increase that total. For 2009, management plans to open 50 new stores, up from its prior target of 45, and close 40. The company noted that it is working with landlords who have become more willing to negotiate rental terms to attract tenants. Given the huge number of retail store closings in the last several quarters, Big Lots should continue to see additional opportunities to open new stores on favorable terms.

Big Lots' focus on low-priced and closeout sale items should continue to perform well in the current economic environment as consumers look for sales and discounted items to help stretch their paychecks. And while its operating margin does look good, even relative to behemoths like Wal-Mart, investors should still be wary of its inability to grow revenue. That could well cause shares to tread water, as they've done for almost the last three years.

Additional reading:

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Fool contributor Rob Plaza does not own shares in any of the companies mentioned in this article. Costco is a Stock Advisor and an Inside Value recommendation. The Fool owns shares of Costco and has a disclosure policy.