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Increased discounting eats into Family Dollar's profit

Traders inquire about the price of the stock for the company "Family Dollar" as they work on the floor of the New York Stock Exchange shortly after the market's opening in New York July 28, 2014. REUTERS/Lucas Jackson

By Yashaswini Swamynathan and Nandita Bose

(Reuters) - Family Dollar Stores Inc (FDO.N), the target of a takeover battle between two U.S. rivals, reported lower-than-expected quarterly earnings after it stepped up discounting and booked more sales of lower-margin items such as food and tobacco.

The company said on Thursday that it was cutting back on promotional activities and focusing on everyday low-prices to arrest a fall in margins. In 2014, it had spent $50 million to reduce prices in key segments.

Gross margins fell to 33.4 percent in the first quarter ended Nov. 29 from 34.3 percent a year earlier.

Sales at stores open at least a year fell 0.4 percent. Analysts on average expected a 1.4 percent increase, according to research firm Consensus Metrix.

"It was a rough holiday season last year," Chief Executive Officer Howard Levine said on a conference call on the results.

Shares of Family Dollar were down 0.6 percent at $78.42 in midday trading.

The company said it had not seen any benefit from lower gasoline prices.

"I think it's coming," Levine said.

Family Dollar is being pursued by both Dollar General Corp (DG.N) and Dollar Tree Inc (DLTR.O), which see an acquisition of the company as way to help fend off rising competition from Wal-Mart Stores Inc (WMT.N) and Amazon.com Inc (AMZN.O).

Family Dollar has accepted a bid of about $8.5 billion in cash and stock from smaller rival Dollar Tree, saying Dollar General's $9.1 billion all-cash offer did not address antitrust concerns.

Dollar General, the biggest U.S. discount retailer, has taken its offer directly to Family Dollar shareholders, who are scheduled to vote on it on Jan. 22.

First-quarter net income fell 47 percent to $41.4 million, or 36 cents per share.

Excluding fees and expenses like an $8.9 million merger-related charge, earnings came to 44 cents per share. Analysts on average had expected 62 cents, according to Thomson Reuters I/B/E/S.

Revenue rose 2.3 percent to $2.56 billion but fell short of analysts' estimates of $2.57 billion.

(Reporting by Yashaswini Swamynathan in Bengaluru and Nandita Bose in Chicago; Editing by Simon Jennings and Lisa Von Ahn)