Not long ago, in search of dishwasher detergent and various other sundries, I was reminded of just how difficult it can be for deep-discount retailers to differentiate themselves. Not far from my house, clustered in a one-mile stretch, were Dollar Tree (NASDAQ:DLTR), Dollar General (NYSE:DG), and Family Dollar (NYSE:FDO). I'm sure that I could have picked up detergent of the same quality at the same price in the same amount of time at any of the three. For the price-conscious consumer who has only a few minutes to cross off each item on the shopping list -- and I fit that description -- what is there to distinguish one from the other?

To make the decision even tougher, plenty of other retailers along the same road -- Walgreen (NYSE:WAG) and other major pharmacies, grocery stores like Albertsons (NYSE:ABS), and, of course, Wal-Mart (NYSE:WMT) -- had exactly what I needed. Ultimately, though, I decided out of curiosity to try the one store I had never set foot in: closeout retailer Big Lots (NYSE:BLI). By buying overproduced or discontinued products in bulk and then passing the savings along to shoppers, Big Lots fills its shelves with an eclectic and changing mix of items at prices substantially below other retailers'.

Yesterday, Big Lots' shares soared more than 14% after the company announced major progress on some of the initiatives that management had outlined at the end of last year. After posting flat same-store sales growth in 2004, the company reported a solid 2.4% first-quarter increase. Though continued light store traffic kept transactions down, shoppers were piling up more items in the checkout line, as average basket totals shot up 5.5% -- the sharpest rise in the past three years. Big Lots capped the quarter with an impressive 4.4% increase in April comps, a figure that outpaced fractional monthly gains at Family Dollar and declining recent same-store sales at Dollar Tree. Earnings jumped 40% to $0.07, or $7.8 million, from $0.05 a year ago, on sales that increased nearly 8% to $1.1 billion.

But while the results topped expectations, gross margins -- a concern addressed recently -- showed no improvement. In fact, both gross margins and operating margins contracted slightly during the quarter. However, margins have generally been pressured industrywide in recent quarters because lower-income consumers have stuck to the basics and left higher-margin discretionary items on the shelves.

In recent years, Big Lots has been far less profitable than many rivals, but it appears to be moving in the right direction. Selling, general, and administrative expenses were trimmed during the quarter, and management is forecasting gross margins to expand up to 50 basis points over the year as clearance markdowns are reduced and underperforming hanging apparel is removed from stores.

Ultimately, if Big Lots is to break away from the pack, it would do so by stocking stores with unique and exciting closeout merchandise. The sheer breadth of deep-discount choices available underscores the need for the company to fine-tune its merchandising strategy, and CEO Michael Potter has promised that it is "singularly focused on the task of improving merchandise content."

From cost-cutting to margin expansion, from reduced capital expenditures to increased free cash flows, Big Lots management is anticipating lots of big improvements. Judging by yesterday's results, it seems poised to deliver.

Fool contributor Nathan Slaughter is out of dishwasher detergent again. He owns none of the companies mentioned.