Image: Wikimedia Commons.

Retail is an extremely competitive business, and Big Lots (NYSE:BIG) has particularly faced a host of challenging trends that have forced the discounter to take decisive strategic action to plot its path forward. Coming into Friday morning's fiscal-first-quarter financial report, Big Lots investors wanted to see signs that the retailer's reduction in store count would pay off in better results. For its part, the company produced the earnings growth investors wanted.

Let's look at what Big Lots said about its most recent quarter and what investors should infer from those results about what is to come.

Big Lots keeps climbing out of its hole
Big Lots continued to see positive results from the steps it has taken to improve its business prospects, even if some of its numbers might make those unfamiliar with the company think the opposite. Revenue fell by 0.1% to $1.28 billion; those who follow the stock had expected relatively flat performance because of the company's store-count reductions over the past year. Comparable-store sales rose by 1.6%, reflecting better performance in its remaining stores, and income from continuing operations jumped by 13% to $32.3 million, producing earnings of $0.60 per share, beating estimates by a penny.

A closer look at Big Lots' results shows that cost control and higher-margin sales were key to the company's gains. Gross margin rose by nearly a full percentage point from the year-ago quarter, and even though overhead expenses climbed at a faster rate than sales, Big Lots grew operating profit by a hefty 11.6%.

Cash flow was also a bright spot. While the company's $87.5 million in positive operating cash flow was down from the year-ago level, Big Lots spent much less on financing activities, leading to an increase in cash and equivalents of almost $15 million during the quarter.

Image: Big Lots.

CEO David Campisi pointed to some of the challenges that the company had to deal with during the quarter. "After a difficult start to the quarter and harsh weather conditions in February," Campisi said in the earnings press release, "sales trends improved in March and April." Campisi also highlighted the discounter's fifth consecutive quarter of comps growth.

What's ahead for Big Lots?
Big Lots offered guidance that many will see as mixed but which bodes well for the retailer's long-term future. For the fiscal second quarter, Big Lots anticipates income from continuing operations of between $0.31 and $0.35 per share, which would represent up to 13% growth from last year's fiscal second quarter. At the same time, Big Lots expects another quarter of positive comparable-store sales; if gains come in somewhere within the expected 2% to 3% range, it would mark a modest acceleration from last year's positive comps.

For full fiscal 2015, Big Lots gave a modest upgrade to its previous guidance, raising the lower end of its initial earnings estimate by a nickel per share to a range of $2.80 to $2.90. The retailer believes overall revenue will remain close to unchanged for the year, due largely to the decline in store counts, but it still expects low single-digit percentage growth in comparable-store sales.

Having apparently gotten through its biggest challenge of returning to a sustainable growth path, Big Lots' next step is to find ways to accelerate its growth prospects and tap into new trends in the discount-retail industry to further bolster profits. Success on that front could send the stock even higher.