Department store owner Dillard's Inc. (DDS) Tuesday reported a smaller-than- expected quarterly loss as its focus on improved merchandise boosted sales and helped it avoid costly markdowns.

Its shares rose 8 percent.

The retailer, which has been expanding its upscale and contemporary fashion offerings to fend off competition and draw shoppers to its stores, said sales at stores opened at least a year -- a key retail indicator known as same-store sales -- rose 2 percent compared with a decline of 4 percent a year ago.

Dillard's said sales were strongest in the Eastern region, and accessories, lingerie, shoes and juniors' apparel were among its best performing items.

"There were a couple good signs in the fact that there was an increase in their same-store sales numbers and their margins improved," said Morningstar retail analyst Kim Picciola. "The big question will be the next quarter and can they sustain this momentum going forward."

Dillard's shares rose $1.77 to $22.47 on the New York Stock Exchange.

Dillard's reported a third-quarter loss of $2.7 million, or 3 cents a share, compared with a loss $18.7 million, or 23 cents a share, a year earlier.

Sales for the 13 weeks ended Oct. 29 rose to $1.73 billion from $1.7 billion a year earlier.

Analysts, on average, were expecting a loss of 21 cents per share on revenue of $1.72 billion, according to Reuters Estimates.

The company said advertising, selling, administrative and general expenses declined $14 million and interest and debt expense declined $9.5 million.

Dillard's said that an amount of $6.5 million estimated to be its share of proceeds from the $3 billion Visa Check/Mastermoney Antitrust litigation settlement is yet to be recognized in its financial statements.

The company also said that, for the quarter, operations in about 60 of its stores were interrupted due to hurricanesKatrina, Rita and Wilma and it expects four stores in the Gulf area to remain closed for the remainder of fiscal 2005.