UPDATE 3-Dollar General expects margins to rise in second half of year

Tue Jun 3, 2014 2:17pm EDT

* 1st-qtr earnings/shr $0.72 vs est $0.73

* Net sales $4.52 bln vs est $4.56 bln

* Shares rise as much as 5 pct (Adds details from conference call, updates shares)

By Devika Krishna Kumar

June 3 (Reuters) - Discount retailer Dollar General Corp said it expects gross margins to improve in the second half of the year as it focuses on more profitable products such as accessories and stationery items priced at $1-$5.

Dollar General shares rose as much as 5 percent on Tuesday.

The company reported lower-than-expected profit and sales for the first quarter ended May 2 but reiterated its full-year profit forecast.

It said sales trends started improving in April.

"Some people were expecting the comps to be even weaker than it was and people are very encouraged that they didn't change their guidance for the year at all," Barclays Capital analyst Meredith Adler told Reuters.

The company has been struggling to shore up margins after it slashed prices to keep its lower-income shopper base from being lured by retail giants Wal-Mart Stores Inc and Target Corp and by rival Family Dollar Stores Inc.

Dollar General caters mostly to Americans whose incomes have been hurt as benefits such as food stamps and emergency unemployment assistance have been trimmed.

The company, which started carrying cigarettes in mid-2013, has benefited from pharmacy chain CVS Caremark Corp's decision to stop selling tobacco products.

The retailer said it expects to earn $3.45-$3.55 per share for the year ending January 2015.

Analysts were expecting a profit of $3.51 per share, according to Thomson Reuters I/B/E/S.

The company also expects sales to rise 3-4 percent at stores open for at least a year.

Dollar General's gross margin fell to 30.02 percent in the first quarter from 30.59 percent a year earlier as low-margin consumables such as tobacco products and candies led sales.

The company said it discounted more in the first quarter, a period marked by increased competition and harsh winter.

Net income rose to $222 million, or 72 cents per share, in the first quarter, from $220 million, or 67 cents per share, a year earlier.

Same-store sales increased 1.5 percent, while total sales were up about 7 percent to $4.52 billion.

Analysts had expected a profit of 73 cents per share on revenue of $4.56 billion.

Dollar General shares were up about 4 percent at $56.53 on the New York Stock Exchange on Tuesday afternoon. They rose as much as $57.00 earlier in the day. (Reporting by Devika Krishna Kumar in Bangalore; Editing by Joyjeet Das and Don Sebastian)