UPDATE 1-Family Dollar sees growth in stores, new shoppers

* Focused on getting middle-income shoppers to spend more

* Will renovate older stores

* Continues to target double-digit earnings growth

* Will have $5 toys for holiday season

* Shares down 1.5 pct (Adds CEO comments, updates stock price)

By Nicole Maestri

NEW YORK, Nov 3 (Reuters) - Family Dollar Stores Inc(FDO.N: Quote, Profile, Research) said on Tuesday that it will expand its business by opening new stores, renovating older locations and selling more to the middle-income consumers who are looking for bargains.

Chief Executive Howard Levine also said at the retailer's analyst meeting, which was broadcast over the Internet, that Family Dollar continues to target double-digit earnings growth.

The company provided few other financial details and did not update its earnings forecast or comment on sales for the month of October. Many large chain stores will report their monthly sales results on Thursday. [ID:nN01495324]

"We're really talking about some of the things we are working on for the long term, and are going to stay away from some of the shorter-term questions," Levine said.

Shares fell 1.3 percent to $28.36.

Family Dollar, which sells most of its merchandise for $10 or less, caters to lower-income shoppers, with household incomes below $40,000. But the retailer has said it is now attracting more shoppers with household incomes of up to $70,000 as unemployment rises and credit remains tight.

Family Dollar told analysts that it has an opportunity to boost sales by selling more to that higher-income shopper.

"She's coming to our store, but she's not shopping the whole store," said President James Kelly.

To gain customers' trust of its name-brand food selection, it is introducing a new advertising campaign. Ads will show products like Kraft Macaroni & Cheese with the slogan: "Exactly the same as the grocery store. We just price them lower."

To sell more to shoppers during each visit, Family Dollar is grouping similar products, such as baby items, in one location. It is also trying to make its stores easier to navigate by improving signs and removing clutter.

To improve margins, it wants private label merchandise to account for 25 percent of total sales, up from its current 20 percent. Such goods typically sell for less than name-brand goods but provide better margins.

NEW STORE GROWTH

A few years ago, Family Dollar slowed its new store openings to focus on boosting results in existing locations.

It has also worked to implement a new check-out system that allows it to accept more payment types, including food stamps and credit cards. That roll-out is expected to be completed in early spring.

Kelly said Family Dollar, which has more than 6,600 stores, is now "in a better position to focus on new store growth."

It will renovate older stores, too, to make them as productive and easy to shop as the newer locations.

Levine said some investors believe Family Dollar performs best in a recession, when shoppers need to stretch tight household budgets. But he said: "I would much rather operate in a robust economy."

As the economy improves, Levine said shoppers buy more discretionary merchandise, like clothes or holiday decorations, which have higher profit margins than consumable items, like food, that are currently driving the bulk of its sales.

That is good news for Family Dollar because the basket of items that its shoppers buy "becomes more balanced and more profitable," he said.

Levine said he expects the upcoming holiday to be a tough one for shoppers. This year, he said Family Dollar will have a large selection of toys and gifts priced at $5. Wal-Mart Stores Inc (WMT.N: Quote, Profile, Research) is selling 100 toys for $10 each.

When Family Dollar reported fourth-quarter results at the beginning of October, it forecast full-year earnings of $2.15 per share to $2.35 per share and said it planned to open about 200 new stores. For its fiscal year ended Aug. 29, its earnings per share rose almost 25 percent to $2.07. (Reporting by Nicole Maestri, Editing by Maureen Bavdek and Gerald E. McCormick)