Sara Lee Corp posted higher-than-expected quarterly earnings and raised its full-year earnings forecast on Thursday, and its shares rose 3.5 percent.

The company also said it will cut prices and spend more to market selected products, including in the bakery and coffee segments, as commodity prices come down and retail store brands battle with food manufacturers for market share.

You've got lots of people fighting for the consumer dollar right now, Chief Executive Brenda Barnes said during a conference call with analysts. It's just a little more intense right now.

Analysts had questioned whether the food industry was heading into a profit-sapping price war.

Sara Lee executives stressed that the actions the company would take to build market share, which also include promotions behind new products, would be selective.

Where and when and how we take it is a very scientific approach, Barnes said in an interview.

The maker of Sara Lee bread and Jimmy Dean sausage said profit rose to $284 million, or 41 cents a share for the first quarter that ended September 26, compared with $230 million, or 32 cents a share, a year earlier.

Earnings were boosted by a 19 cent-a-share contingency payment related to the 1999 sale of the company's European tobacco business, the last such payment the company is due to receive.

Sara Lee announced in September that it would sell its personal-care brands such as Sanex and Brylcreem to Unilever Group for $1.87 billion. It also said then it had seen significant interest in its household products business, which includes Ambi Pur air freshener and Kiwi shoe polish.

Excluding one-time items and the tobacco payment, earnings were 19 cents a share. Analysts on average forecast 16 cents a share, according to Thomson Reuters I/B/E/S.

EXPENSES FALL

Corporate expenses fell to $58 million in the quarter from $99 million a year earlier, largely due to a $32 million increase in the market value of commodities derivative contracts the company holds.

Sara Lee has cut other costs and pared its business in order to boost profit. Operating margin in the quarter rose to 12.6 percent from 10.5 percent a year earlier.

Sales from continuing operations fell 7.4 percent to $2.59 billion, pressured by unfavorable currency exchange rates, lower volume and planned business exits.

The company said it now expects 2010 earnings per share of 90 to 96 cents a share, excluding one-time items, compared with its previous forecast of 84 to 90 cents a share.

Sara Lee's shares were up 42 cents at $11.82 on the New York Stock Exchange on Thursday afternoon, after rising to $11.91, the highest level in a year, earlier in the session.

(Reporting by Brad Dorfman, editing by Gerald E. McCormick, Maureen Bavdek and Matthew Lewis)