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Retailer Big Lots Inc. posted an ugly quarter and announced its CEO will retire. Shares jumped because all that isn't as bad as what Wall Street expected.

The Ohio-based company, which made its entry into Canada in 2011 via the rock-bottom acquisition of Liquidation World, is a discount retailer that is struggling. It sells slightly higher-priced merchandise than the dollar stores, and does it in significantly larger locations. And that combination hasn't been working so well.

Big Lots posted a 10-cents-per-share loss in the third quarter, better than Wall Street's consensus of a 24-cent loss. But same-store sales -- sales at locations open at least one year -- were down 4.6 per cent. The 2.6 per cent decline in gross profit was the worst performance since 2007's fourth quarter, JPMorgan analyst Matthew R. Boss said. Recent borrowings have pushed its debt-to-capital to the highest levels in its history, adds Mr. Boss, who has an "underweight" rating and a $28 (U.S.) price target, below the $31.27 closing price Tuesday. That was up 11.5 per cent on the day.

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CEO Steven S. Fishman, 61, said he will retire in 2013 after about eight years with the company. As it happens, he played a prominent role in a recent Wall Street Journal story on opportunistic stock trades by insiders, as the paper pointed out that he sold more than $10-million worth of shares earlier this year, several weeks before the company revised its guidance and the stock price plunged. (The company told the newspaper the sales were proper, but is also now defending itself from a shareholder lawsuit over the matter.)

The company's Canadian operations are a current drag, but offer promise, analysts say. Third-quarter net sales were $39.0-million, up from $21.5-million in the prior year. The net loss of $4.3-million, or 7 cents per diluted share, was narrower than the $7.1-million, or 11 cents per share, in 2011's third quarter.

Bradley B. Thomas of KeyBanc Capital Markets says Big Lots is targeting an 18-month turnaround for the former Liquidation World, which "struggled over the past four to five years due to poor merchandising and in-store execution."

The company plans to rebrand some Liquidation World stores to Big Lots and open some new stores under the Big Lots name in 2013, Mr. Thomas said, with an eye to 150 Canadian stores in the longer term, up from about 80 now.

"We believe the current number of Canadian locations could benefit EPS (earnings per share) by 26 cents in the long term should management be able to bring the Canadian stores up to par with the company's U.S. operations (which generate a 7 per cent operating margin and over $160 in sales per square foot)," says Mr. Thomas, who has a "hold" rating with no price target.

Still, the company also needs to focus on improving performance at its legacy U.S. stores. "With a CEO transition coming, some investors may be tempted to bet on a reversal of the current slide in fundamentals," says John Zolidis of The Buckingham Research Group, who, despite a "neutral" rating, says "We continue to counsel investors to avoid Big Lots shares."

"We believe Big Lots' problems are structural (diminishing competitive positioning relative to the dollar stores and less access to favorable clo seouts), which will not be easily turned," he says.

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About the Author
Business and investing reporter and columnist

A business journalist since 1994, David Milstead began writing for The Globe and Mail in 2009. During eight years at the Rocky Mountain News in Denver, Colo., he individually or jointly won nine national awards from SABEW, the Society of American Business Editors and Writers. He has also worked at the Wall Street Journal. More


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