UPDATE 4-Dillard's beats Street on cost cuts, shares up

* Q4 EPS $1.04 vs Street view 92 cts

* Q4 sales down 10 pct, same-store sales fall 13 pct

* Closed four stores in Q4; to open two in 2010

* Shares up 16.2 percent (Adds analyst note, updates share rise)

By Phil Wahba

NEW YORK, March 1 (Reuters) - Dillard's Inc (DDS.N) reported a better-than-expected profit for the holiday quarter as higher margins, cost cuts and lower inventories helped the department store chain cope with sharply lower sales, sending its shares up just over 16 percent.

In a statement, Chairman and Chief Executive William Dillard said the company "will maintain our disciplined approach" to inventory management and cost-cutting, and the company noted its efforts to slash payroll and advertising expenses during the quarter.

Faced with falling sales during the economic slowdown, department stores such as Dillard's and rivals including Macy's Inc (M.N) and J.C. Penney Co Inc (JCP.N) drastically lowered inventory levels to avoid having to resort to steep markdowns to move merchandise.

Dillard's inventories were 5 percent lower at the end of the quarter than they were a year earlier, lifting its gross margins, or profit per item, 8.2 percentage points.

Standard & Poor's Equity Research raised its rating on Dillard's shares on Monday to hold from sell. In a research note, analyst Jason Asaeda said he expects Dillard's to "drive further margin recovery through disciplined inventory management and a focus on its most productive brands and stores."

Dillard's shares rose $2.74, or 16.2 percent, to $19.61 in midday trading on the New York Stock Exchange, bringing it back to near a 52-week high of $20.17 reached on Dec. 28.

The Little Rock, Arkansas-based department store operator reported a net profit of $79.5 million, or $1.08 per share, for the fourth quarter that ended Jan. 30. It posted a loss of $149.3 million, or $2.03 a share, a year earlier.

Excluding one-time items, Dillard's reported earnings of $1.04 per share. On that basis, analysts' average forecast was 92 cents, according to Thomson Reuters I/B/E/S.

Dillard's said fourth-quarter interest expense fell $3.5 million, or 16 percent, due to a lower debt load.

Dillard's overall sales fell 10 percent to $1.83 billion, while merchandise sales at stores open at least a year, or same-store sales, fell 13 percent.

While most department store chains, upscale and mid-point, have begun to reverse same-store sales trends, Dillard's has lagged its rivals. It reported last month that January same-store sales fell 5 percent, making it one of the weakest performers among its peers that month.

Dillard's is set to report February sales on Thursday.

The company operated 297 Dillard's stores and 12 clearance centers at the end of the fourth quarter. It closed four stores during the quarter and said it plans to open two new stores, both in Texas, in 2010. (Reporting by Phil Wahba. Editing by Robert MacMillan, Maureen Bavdek, John Wallace and Gunna Dickson)