Dollar General Corp said this year's sales and profit would likely top analysts' expectations as it remodels its stores and sells more food and clothing, sending its shares up over 2 percent.

Dollar General declined to comment on speculation that it might be interested in buying rival Family Dollar Stores Inc . Chief Executive Rick Dreiling called Family Dollar -- which has rebuffed an offer from Trian Group -- a great competitor.

Interest in dollar stores has risen in recent months as lower-income consumers shifted away from pricier stores and even from discounters like Wal-Mart Stores Inc to save on basic goods like food. Dollar General and its rivals have smaller stores that sell everything from snacks to sandals.

A spokesman for Family Dollar, whose shares rose 0.4 percent to $51.34 on Tuesday, declined to comment on the remarks made on Dollar General's conference call. Earlier this month, Family Dollar rejected a $55 to $60 per share offer from Nelson Peltz's Trian Group.

Meanwhile, Leonard Green & Partners teamed up with the family that runs 99 Cents Only Stores to try to take that company private, and Big Lots Inc has reportedly hired a bank to explore options including a potential sale.

Dollar General is majority-owned by private equity firm Kohlberg Kravis Roberts & Co LP , which brought the company back to the public market in November 2009.

SHOPPERS STILL STRESSED

Dollar General prices most of the merchandise at its 9,372 stores below $10 and is updating stores to entice shoppers with better layouts, more food and a wider variety of apparel.

Dreiling said winter storms cut into some shopping in the latter half of the three-month period.

Its core customers are still dealing with tough economic conditions, recently exacerbated by higher gasoline prices, and have cut back on discretionary purchases.

Dreiling, noting that NASCAR fans shop at its stores, went to last Sunday's NASCAR race in Bristol, Tennessee, and said the stands were probably about 30 percent empty.

There's a lot of stress out there still, Dreiling said.

Customers are coming in a little less often but buying more items when they do visit, he said. Also, Dollar General is still seeing higher-income customers visit its stores.

After seeing tremendous growth during the last two years, fundamentals are slowing in the sector as customers who traded down to the stores may be returning to other chains and low-income customers must spend more on food and gas, said MKM Partners analyst Patrick McKeever.

While the dollar stores remain healthy, they largely trade at valuations above other retailers, he said.

4TH-QUARTER SAME-STORE SALES UP LESS THAN EXPECTED

Dollar General forecast earnings of $2.20 to $2.30 per share for the fiscal year ending February 3, 2012, including about 6 cents per share from having an extra week.

Analysts, who generally excluded the 53rd week, were expecting it to earn $2.14 per share.

Dollar General forecast that sales would rise 11 percent to 13 percent, including about 2 percentage points from the extra week. The average analyst revenue forecast of nearly $14.26 billion, according to Thomson Reuters I/B/E/S, would be a 9.3 percent increase.

Same-store sales, or sales at stores open at least a year, should rise 3 percent to 5 percent, based on a comparable 52-week period, the company said.

Fourth-quarter sales rose 9.4 percent to $3.49 billion. Same-store sales rose 3.8 percent, missing the company's forecast of about 5 percent.

Same-store sales increased at the slowest pace of the year, following gains of 4.2 percent in the third quarter, 5.1 percent in the second and 6.7 percent in the first. Same-store sales rose 7.4 percent in the year-ago fourth quarter.

Dollar General earned $222.5 million, or 64 cents per share, in the fourth quarter ended on January 28, up from $87.2 million, or 26 cents per share, a year earlier, helped in part by a lower-than-expected tax rate.

Excluding certain items, Dollar General earned 65 cents per share, beating Wall Street's forecasts of 59 cents.

Dollar General still plans to open 625 stores this year and to relocate about 550 stores.

(Reporting Jessica Wohl in Chicago and Phil Wahba in New York;

Editing by Lisa Von Ahn, Derek Caney and Gunna Dickson)

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