This column is for investors willing to take more risk and potentially receive more reward.  The stocks mentioned in this column are not recommended to buy or sell.  They're brought to your attention so you can investigate them further to determine if they fit your risk profile.  Most of the stocks will have less than $1 billion of market capitalization, have more volatility than other stocks, and oftentimes no earnings.  And some will have tremendous stories.

February 12, 2010 - Big Lots, Inc. (BIG-NYSE) through its subsidiaries, operates as a broadline closeout retailer in the United States. The company offers products under various merchandising categories, such as consumables, including food, health and beauty, plastics, paper, chemical, and pet products; home, such as domestics, stationery, and home decorative products; and furniture, comprising upholstery, mattresses, and ready-to-assemble products, as well as case goods products, such as bedroom, dining room, and occasional furniture.

What struck me about this stock was that earnings went up while revenues went down. In particular, sales in 2006 were $4.743 billion, then $4.656 billion. In '08, they slid a little more to $4.645 billion. 2009 finished up slightly to $4.67 billion. Next year analysts see $4.91 billion. In the same time frame, earnings were $1.01, $1.48, $1.89 with '09 finishing at $2.32 (if the analysts' consensus estimate is correct). 13 analysts following the company see 2010 at $2.60. (Fiscal year ends January 31.)

As I mentioned, it's unusual to see a company continue to grow earnings in a meaningful way (over the last 5 years, earning per share averaged annual growth of 26.12%) while sales go down or stay flat. But BIG did it. For the next 5 years, analysts see slower annual earnings growth but still a respectable 12.55%.

Third quarter results exemplify how well the company is doing. Sales were $1.04 billion, higher than analysts' expected. But the earnings was the big surprise: 27 cents a share, 50% better than the 18 cents consensus from the analysts. Management explained the pleasant surprise by saying they've focused on improving the in-store execution. Fourth quarter results, recently released, echoed the third quarter. Sales from stores open at least 2 years increased by 5.1%, above the company's earlier forecast. Best improvement in sales came from the home and furniture offerings, up 10%. Total sales were up 6.9% to $1.45 billion compared to the fourth quarter of last year at $1.36 billion. For the full year, sales were up 1.5% to $4.67 billion. The company will release its fourth quarter and annual report on March 3.

The company is taking advantage of the real estate slump and buying properties to open new stores. It's also selling on the Internet. While total stores have decreased by 7 over the last year, the ones closed were underperforming, and margins should now improve. The company is also fine-tuning its store formats to improve the customer's shopping experience. Altogether, these initiatives should increase earnings for several years.

The capper for BIG is its market niche: deep discount retail. As long as the current economic crisis continues, more and more consumers will look for better bargains. They'll find them at Big Lots.

The numbers are good here, especially the balance sheet. There's only $1 million of debt (yes, one million). There's $46 million in cash or 55 cents a share. Current ratio is 1.717.

Other numbers: Price to sales is .53. Price to book is 2.72. Book value is
$10.92. Operating margin for the last 12 months was 5.97% while Profit margin was 3.75%. Return on Equity was a notable 22.34%. 52-week low was on February 20, 2009 at $13.72. The 52-week high was on January 19, 2010 at $31.39. In 1998, the stock traded at $46.10. There are 82.66 million shares outstanding with a Float of 81.54 million. Insiders own 11.62% of the stock. Institutions have 98.2% of the float. There is no dividend.

Aggressive investors should find this stock of interest. It's hard to discover flaws in the business model and the execution of it. With the economy trying to turn, consumers will take a long time before they relinquish the bargains at BIG. Even when it does turn, most of those shoppers will continue to buy certain items at great prices from BIG. And management isn't going to let them go easily when times are better. It's already fine tuning the shopping experience, adding new lines, and growing profits. That should make investors stick as well.

- Company Web site: www.biglots.com

- Ted Allrich