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Increased discounting eats into Family Dollar's first quarter profit

Family Dollar Stores Inc (FDO.N), the target of a heated takeover battle between two rival U.S. dollar store chains, said its quarterly net profit nearly halved due to increased discounting and higher sales of lower-margin items such as food and tobacco.

Same-store sales fell 0.4 percent in the first quarter ended Nov. 29. Analysts on average estimated a 1.4 percent increase, according to research firm Consensus Metrix.

Gross margins fell to 33.4 percent from 34.3 a year earlier.

The company said on Thursday that it is cutting back on promotional activities and focusing on an everyday low-price strategy to arrest the fall in margins.

Revenue rose 2.3 percent to $2.56 billion.

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 agreed to be bought by smaller rival Dollar Tree for about $8.5 billion in cash and stock, saying Dollar General's $9.1 billion all-cash offer does not address anti-trust concerns.

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

Family Dollar's net income fell 47 percent to $41.4 million, or 36 cents per share.

Excluding merger-related expenses, the company earned 44 cents per share.

Analysts on average had expected a profit of 62 cents per share and revenue of $2.57 billion, according to Thomson Reuters I/B/E/S.

Family Dollar shares were down 0.8 percent at $78.20 in premarket trading on Thursday.

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