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* Raises non-food profit margin forecast
* Second-quarter non-food sales fall
* Increases interim dividend
* Shares rise more than 4 percent (Adds CEO comments from news conference)
By James Davey
LONDON, Nov 4 (Reuters) - British retailer Marks & Spencer's efforts to boost profitability in its troubled clothingbusiness are starting to pay off even though sales fell again inthe latest quarter.
M&S, a 131-year-old stalwart of Britain's shopping streets,raised guidance for margin growth in its non-food division in2015-16, beat forecasts for overall first-half profit andincreased its dividend, sending its shares up as much as 4.2percent.
The performance provides a boost to Chief Executive MarcBolland, who, rather than chasing unprofitable non-food saleshas focused on growing gross margins - the difference betweenthe price M&S pays for goods and the price it sells them -mainly through sourcing improvements.
Bolland, CEO since 2010, regards general merchandise,spanning clothing, footwear and homewares, as a modest salesgrowth opportunity but a significant one for margin growth.
"We have delivered more sourcing gains and earlier thanplanned," he said on Wednesday, also forecasting further grossmargin growth in 2016-17 and 2017-18 years.
Bolland has spent billions of pounds on the redesign ofproducts, stores, supply chain logistics and the website toaddress decades of under investment at the clothing business.Hopes that this will pay off has contributed to M&S sharesrising by a third over the last year.
But his critics argue increasing gross margins alone is nota source of long-term growth and say M&S is still failing totempt younger shoppers, who can choose from a myriad of fashionbrands including Zara and Next and online-onlyplayers such as ASOS.
"The top line performance is nothing sparkling, but theupside surprise is in the gross margin, where gains aresignificantly better than hoped," one major institutionalinvestor in the retailer said.
M&S's update was its first since Steve Rowe's switch in Julyfrom running the food business to heading generalmerchandise.
ACCELERATION
"The team is really focused to improve sales. However, notat the expense of margin," said Bolland, predicting a "spiky"market in terms of promotions in the run-up to Christmas anddismissing speculation he was considering the acquisition ofthird party brands.
Bolland said Rowe would accelerate improvements to M&S'sclothing design and availability.
General merchandise sales at stores open over a year fell1.9 percent in the 13 weeks to Sept. 26, its fiscal secondquarter - at the bottom end of analysts' forecasts and followinga first-quarter fall of 0.4 percent.
Bolland said this reflected unseasonal conditions and adecision to focus on full price sales.
Over the first half, online sales increased 34.2 percent,while like-for-like sales in stores were down 6 percent.
But the general merchandise division increased its grossmargin by a greater than expected 2.85 percentage points and raised full-year guidance to up 2 to 2.5 percentage points fromup 1 to 1.5 percentage points previously.
"This buys the company some time to rediscover the magicpotion which may tempt younger shoppers into its stores,"Richard Hunter, head of equities at Hargreaves Lansdown, said.
First-half underlying pretax profit rose 6.1 percent to 284million pounds ($438 million), ahead of analysts' averageforecast of 270 million, on total sales up 1.4 percent to 5.0billion.
UK profits rose 14.6 percent, but overall profit growth washeld back by a weak international performance, where profitslumped 52 percent, hurt by currency and macroeconomic issuesparticularly in Russia, Ukraine and Turkey.
In food, M&S is outperforming Britain's grocery industry,benefiting from product innovation and a focus on providing forspecial occasions.
Second quarter like-for-like sales in food rose 0.2 percent,a 24th straight quarterly increase.
Before Wednesday's update analysts' consensus for full2015-16 year profit was 703 million pounds, up from 661 millionin 2014-15. Haitong Research analyst Tony Shiret expects the consensus to rise by 10-15 million pounds.
Bolland declined to say how long he planned to stay as CEObut reiterated he would definitely be around to presentfull-year results in May.
"I'm enjoying this role tremendously," he said.($1 = 0.6488 pounds)
(Reporting by James Davey; editing by Kate Holton and JaneMerriman)
