(Adds comments from Carl Icahn, updates shares)
By Shailaja Sharma and Sruthi Ramakrishnan
July 10 (Reuters) - Discount retailer Family Dollar Stores Inc, under pressure from activist investor Carl Icahn to sell itself, said its profit fell by a third as the company cleared inventory ahead of planned store closures and competition intensified.
Shares of the company, which also reported its third straight quarterly decline in same-store sales, were up slightly in late morning trading after falling as much as 2.6 percent.
Icahn, Family Dollar's largest shareholder with a 9.4 percent stake, wants the company to sell itself to rival Dollar General Corp to help them cope with stiff competition from big-box retailers such as Wal-Mart Stores Inc.
Icahn's proposal was thrown into doubt last month, however, after Dollar General said Chief Executive Rick Dreiling had decided to retire next year.
The billionaire investor told Reuters that Dreiling's retirement was a "setback" to activist investors who want to accelerate the merger between Dollar General and Family Dollar.
"We believe Family Dollar and Dollar General should merge as they would make for perfect partners. It is obvious that Family Dollar, especially in light of its record and the looming competition on the horizon, could use a partner," Icahn said.
Dollar stores such as Family Dollar get most of their business from low-income shoppers, many of whom are struggling with weak wage growth and a cut in food stamp benefits.
But Family Dollar has underperformed the overall sector, largely because of its strategy of maintaining relatively high prices, Edward Jones analyst Brian Yarbrough told Reuters.
Family Dollar said in April it would slash prices on 1,000 basic items, shut 370 underperforming stores and slow its expansion plans to drive growth. The company said on Thursday it would start selling beer and wine from next year.
"We think they are going to have to lower prices on additional items and that's going to weigh on profit margins in the foreseeable future," Yarbrough said.
The company cut its full-year earnings forecast for the third time, to $3.07-$3.17 per share from $3.05-$3.25.
Analysts on average expected a profit of $3.15 per share for the year ending Aug. 30, according to Thomson Reuters I/B/E/S.
Net income for the third quarter fell 33 percent to $81.1 million, or 71 cents per share. Excluding items, earnings amounted to 85 cents per share.
Net sales rose 3.3 percent to $2.66 billion, slightly above the average analyst estimate of $2.61 billion. Same-store sales fell 1.8 percent.
Selling, general and administrative expenses rose nearly 9 percent to $767.04 million, in part due to higher marketing costs.
Family Dollar's shares were down about 0.3 percent at $64.02 in evening trading on the New York Stock Exchange. (Additional reporting by Devika Krishna Kumar in Bangalore; Editing by Sriraj Kalluvila and Ted Kerr)