Shares of deep-discount retailer Big Lots
Big Lots' income from continuing operations fell substantially during the year: It dropped to $32.3 million from $90.9 million a year ago, as revenue improved about 5% to $4.38 billion and same-store sales were flat. The retailer would rather have investors use adjusted numbers, explained in its press release, that decrease last year's operating income and make this year's growth look better. To the company's credit, that approach is consistent with last year's release -- many companies would have played up the larger number last year and the smaller one this time around.
The profit numbers, while better than Wall Street expected, nevertheless highlight difficult times at Big Lots. Although the company is happy with its cost management, gross margins have taken a hit lately from using markdowns to try clearing out inventory. Good for the top line, bad for the bottom. The challenge at Big Lots, as the company knows, is to find just the right mix of "regular" and closeout merchandise. The former fattens checks and provides credibility with customers, but the latter is what really drives margins.
The downside is that mishandling the merchandising of closeout items can lead to disaster. Management believes it's going to get things right this year: It's directing investors toward significant same-store sales growth, better gross margins, and better operating costs in 2005. If Big Lots meets targets, the company brass believes it can double its earnings per share in 12 months.
That kind of recovery would make Big Lots a retailer worth watching. But it needs to deliver the kind of consistency it hasn't managed in recent years. Management says increasing the number of transactions and the dollar value of those transactions is key to Big Lots' growth. That makes sense -- but those numbers have moving in the wrong direction in recent years.
Fool contributor Dave Marino-Nachison doesn't own shares of Big Lots.