* 3rd-quarter adjusted profit 63 cents; Street view 60 cents
* Now sees 2012 EPS $2.82-$2.85, Street view $2.86
* Shares drop 5 percent, biggest loser in S&P 500
By Jessica Wohl
Dec 11 (Reuters) - Dollar General Corp said on Tuesday it remained cautious about the rest of the year, as heightened competition in pricing and ramped-up advertising could hurt sales and margins despite an encouraging start to the holiday season.
The discount chain posted a bigger-than-expected increase in quarterly profit and total sales in line with Wall Street expectations. But sales at stores open at least a year rose less than some analysts expected, and its profit forecast suggested this quarter's profit will miss estimates.
Shares of Dollar General slid 5.1 percent to $44.20 after falling to a session low of $43.53. The stock was the worst performer in the S&P 500 index, which the company joined less than two weeks ago. Rival Family Dollar Stores Inc was doing as poorly, with a 5 percent drop.
Dollar General, which prices most of its merchandise below $10, generally does well when economic concerns push those on limited budgets to cut spending.
But competitors including Walmart have stepped up their focus on items priced at $1 or less and have been advertising heavily, putting pressure on stores such as Dollar General that operate on much smaller ad budgets. Dollar General said it would start to lower some prices and use more advertising.
Headlines about potential federal tax increases and spending cuts after the start of the new year also appeared to be having an effect, it said.
"I think the customer is fatigued, they're tired, they're scared," Chairman and Chief Executive Rick Dreiling said on a conference call. "Every time you turn on the television, there's a bunch of guys in suit(s) who are frowning, telling you that the world's going to go over the fiscal cliff."
The company is seeing a more pronounced paycheck cycle, with strong sales when shoppers get paychecks and a drop at other times.
"We've actually coined a phrase here: there's more days than there is dollars" for customers, Dreiling said.
Dollar General will follow Family Dollar's lead and start to sell tobacco products, which should boost sales as its patrons tend to use tobacco more often then consumers overall.
Even so, Dreiling admitted that usage is in decline in what he calls a "dying category," and selling low-margin cigarettes will pressure the chain's level of profitability in 2013.
While Dollar General's latest quarter only ran through Nov. 2, the chain said it was encouraged by results from the Thanksgiving weekend and the start of the holiday season.
Profit rose to $207.7 million, or 62 cents per share, in the fiscal third quarter, from $171.2 million, or 50 cents, a year earlier.
Earnings rose to 63 cents per share, after adjusting for items such as expenses from a secondary offering and debt amendment fees, topping the analysts' average target of 60 cents, according to Thomson Reuters I/B/E/S.
Sales jumped 10.3 percent to $3.96 billion, in line with analysts' expectations.
Sales at stores open at least a year, or same-store sales, rose 4 percent. Sanford Bernstein analyst Colin McGranahan said he looked for an increase of 4.5 percent, while BB&T Capital Markets analyst Anthony Chukumba expected a 5 percent gain.
Chukumba said he was "a bit concerned" about the slowing sales growth.
Same-store sales rose 6.3 percent in the third quarter of last year and 5.1 percent in the second quarter of this year.
The latest increase was not as strong as the 5.4 percent same-store sales increase at rival Family Dollar, but outpaced recent growth of 1.5 percent at Wal-Mart Stores Inc's Walmart U.S. chain and 1.6 percent at Dollar Tree Inc.
More shoppers visited Dollar General's stores during the quarter and spent more, on average, than a year ago, it said.
Dollar General is now calling for a fiscal-year profit of about $2.82 to $2.85 per share, versus a September forecast of about $2.77 to $2.85 per share. Both outlooks included about 4 cents per share from the favorable resolution of tax audits in the second quarter.
Analysts' average estimate is $2.86.
Dollar General now expects sales to rise by 8 percent to 8.5 percent this fiscal year, after an earlier forecast of 8 percent to 9 percent growth. It expects same-store sales to rise 4.5 percent to 5 percent, versus a September forecast of 4 percent to 5 percent.
For the current fourth quarter, it expects same-store sales to rise 3 percent to 4 percent.
Fourth-quarter gross profit, as a percentage of sales, is expected to be flat or modestly lower than a year ago, and would lead to a modest decline in the gross profit rate for the year.