Dollar Tree earnings up 26 percent. Shares fall.

Discount retailer Dollar Tree Inc. said Thursday that its net income increased nearly 26 percent in the second quarter as consumers spent more at its stores that sell goods for $1 or less.

But investors sold off shares as the results and outlook fell short of Wall Street expectations.

Dollar stores, which offer a wide variety of products from beach toys to vitamins, have done well throughout the recession and its aftermath, attracting budget-conscious customers with low prices. They've also promoted themselves as easy to navigate and easy to get to, since they're much smaller than big-box stores like Wal-Mart and Target, and usually have more locations throughout any given city.

"In our current economy with customers struggling to balance their family budgets in the face of persistently high unemployment and now unpredictable fuel prices, many people are finding Dollar Tree to be a destination for high-value consumer products," CEO Bob Sasser said in a conference call with investors.

The Chesapeake, Va.-based chain said it earned $119.2 million, or 51 cents per share, for the three months ended July 28, up from $94.9 million, or 39 cents per share, a year ago, topping analysts' expectations of 47 cents per share.

Net sales increased 10.5 percent to $1.7 billion from $1.54 billion a year ago. Analysts polled by FactSet expected revenue of $1.71 billion.

Sales at stores open at least one year rose 4.5 percent. That comparison is a key gauge of a retailer's health because it excludes stores that recently opened or closed.

The company operates more than 4,520 stores in the U.S. and Canada. It opened 77 stores, expanded or relocated 21, and closed five during the second quarter.

Top-selling items during the quarter included home products, food and beverages, health care supplies and toys.

Sasser said Dollar Tee continues to deliver consistently strong sales and earnings, but the company said it expects to earn 47 to 51 cents per share on revenue between $1.71 billion and $1.75 billion in the third quarter, short of the 52 cents and $1.77 billion in sales expected by analysts.

Dollar Tree also said it expects 2012 net income between $2.45 and $2.54 per share, on revenue between $7.36 billion and $7.45 billion on low- to mid-single-digit sales growth at stores open at least a year.

The company also executed a two-for-one stock split during the quarter, which it had said would lower its share price and make the stock more attractive to investors.

Dollar Tree shares fell 89 cents to close at $49.11. The stock dropped as low as $38.40 during the session. It has ranged from $30.56 to $56.82 in the last 52 weeks.