Closeout retailer Big Lots (NYSE:BIG) posted lower profits for its second quarter this year. The chain's results were affected by a charge from its new Canadian operations. Total revenue increased slightly for the quarter, though the key metric of same-store sales was off. (To learn more about retail stocks, check out Analyzing Retail Stocks.)

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Big Lots' Flat Quarter
The closeout king reported net income of $35.7 million, or 50 cents per diluted share, compared to $38.9 million, or 48 cents a share, in last year's second quarter. Fewer shares outstanding due to stock buybacks accounts for this year's different EPS measure. Net sales for this year's quarter were $1.167 billion, compared with $1.142 billion in last year's same quarter, a 2.2% increase. Same-store sales, however, fell by 1.5%.

Big Lots completed its acquisition of Liquidation World, which will now be known as Big Lots Canada. Excluding the impact of Canadian operations, net income would have been $36.9 million or 52 cents a share. Canadian operations were a contributor to inventory growth, which rose to $780 million compared to $740 million in the same quarter a year ago. Higher seasonal markdowns, higher domestic freight costs, and a less favorable merchandise mix contributed to lower margins. Gross margin was down to 39.5% from 40.5% in the year ago quarter, which helped dampen operating profit to $59.8 million from $63.2 million in the year ago quarter.

Discount Sector Thrives
Unlike many retailers, there is not a huge category of direct competitors who do exactly what Big Lots does with the closeout merchandise. There are, however, many competitors in closely related spaces, the discount retail sector. There is a wide array of bargain shopping retail choices. BJ's Wholesale Club (NYSE:BJ), which is going private, and Costco (Nasdaq:COST), provide the wholesale experience for bargain shoppers. BJ's, which is being taken private by Leonard Green & Partners, recently posted a strong second quarter.

The dollar stores are another hot area where customers have flocked to in these uncertain economic times. The sector is attracting takeover interest as well as big name investors. Warren Buffett recently invested in Dollar General (NYSE:DG) through his Berkshire Hathaway (NYSE:BRK.A) holding company, while Bill Ackman has upped his stake in Family Dollar Stores (NYSE:FDO). Family Dollar has already received a buyout offer from Nelson Peltz's Trian Management, while 99 Cents Only Stores (NYSE:NDN) is reportedly the target of Apollo Management Group (NYSE:APO).The discounters and dollar stores have largely been doing well in the poor economy. (For more on why companies privatize read Why Public Companies Go Private.)

Big Lots' Outlook
Big Lots raised the bottom end of its full year guidance and its sales are edging up in the wake of what the company admits was a difficult spring. Its profitability isn't quite as robust right now as the other discounters, though the company sees improvement ahead. Its closeout merchandise model can be a difficult one at times to get right. The company has been emphasizing consumables, with promising results, and continues to fine-tune the merchandise mix. While the upcoming quarter is still expected to be challenging as Big Lots emphasizes its integration of its Canadian operations, the company also continues with expansion plans in the U.S., as well as another share repurchase program.

The Bottom Line
Although Big Lots has experienced a couple of bumpy quarters, chances are good that it is going to get it right. Its management has been responsive to subtle changes in the industry before. Steven Fishman has been a dynamic CEO who has been at the helm for much of the company's success, so the right management and approach are in place; it's really just a matter of fine-tuning their model, integrating their Canadian operations, and going from there. (To help you determine whether Big Lots is the growth stock for your portfolio, see Great Company Or Growing Industry?)

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Tickers in this Article: BIG, BJ, COST, DG, BRK.A, FDO, NDN, APO

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