UPDATE 1-Fred's Q1 profit rises 18 pct

* Q1 sales fall 1 pct

* Sees Q2 EPS of 12 cents to 15 cents

* Sees Q2 same-store sales flat to up 2 pct

May 28 (Reuters) - Discount-store operator Fred's Inc (FRED.O) posted an 18 percent rise in quarterly profit as lower expenses offset a slight dip in sales, and forecast a bigger second-quarter profit.

Fred's, which sells household cleaning supplies, health and beauty aids, paper products and beverages among other items, earned $8.6 million, or 21 cents a share, compared with $7.3 million or 18 cents a share, a year earlier.

Sales for the quarter ended May 2 were $458.4 million.

Analysts were expecting the company to earn 21 cents a share, before items, on revenue of $451.5 million, according to Reuters Estimates.

Inventory fell 5 percent, while selling, general and administrative expenses fell 4 percent to $108.9 million.

"In the second quarter, we expect to see ongoing improvement in our stores," Chief Executive Bruce Efird said in a statement.

The company expects same-store sales, or sales at stores open at least a year, to be flat to up 2 percent during the quarter.

It sees earnings between 12 cents a share to 15 cents a share, while analysts expect 13 cents a share.

Fred's, which closed 74 underperforming stores and 23 underperforming pharmacies in 2008, expects second-quarter revenue to fall 1 percent to 3 percent.

Shares of the Memphis, Tennessee-based company closed at $13.85 Wednesday on Nasdaq. (Reporting by Nivedita Bhattacharjee in Bangalore; Editing by Anne Pallivathuckal)