CHICAGO (Reuters) –
Walgreen Co (WAG.N), the largest U.S. drugstore chain, reported a quarterly profit that topped expectations as it began to benefit from a make-over that includes sprucing up stores and cutting corporate jobs, sending its shares 11 percent higher.

Analysts have lauded Walgreen's efforts, such as cutting back on store openings, reducing clutter in stores and planning a loyalty program, though they expected it would take time for these measures to pay off.

In the latest quarter, the transformation cost 3 cents per share, but yielded 7 cents per share in savings.

The company also unveiled a new plan to promote 90-day prescriptions available at its stores as an alternative to the mail-order programs favored by many insurance programs.

Rival CVS Caremark Corp (CVS.N) has already benefited from its Maintenance Choice program, which allows customers to pick up 90-day prescriptions in CVS stores at the same lower price they would pay if getting the drugs through the mail.

Walgreen had missed analysts' estimates in three out of the four previous quarters and some analysts had lowered their expectations for the fourth quarter after a weak August sales report. Despite the sales slump, Walgreen kept a grip on spending and topped expectations by 5 cents per share.

"Many of the times when Walgreen has missed estimates it has not been because of sales but more because of onerous costs," said Sarah Henry, retail analyst at MFC Global Investment Management. "They seem to have gotten their cost structure more in line."

Shares of Walgreen shot up $3.71, or 10.85 percent, to $37.90 after jumping to $38.44, their highest level since April 2008. CVS, which is due to report quarterly results in early November, rose 3 percent and Rite Aid (RAD.N) gained 2 percent.

PROFIT SLIPS

Walgreen, which leads the drugstore industry with 7,042 stores across the United States, has seen increased prescription sales but weak demand for general merchandise. Last week, Rite Aid said customers were focused on buying items on sale and forecast a wider loss for its fiscal year, sending shares in the sector lower.

Walgreen's profit fell to $436 million, or 44 cents per share, in the fiscal fourth quarter ended August 31, from $443 million, or 45 cents per share, a year earlier.

Analysts, on average, had expected a profit of 39 cents per share, according to Reuters Estimates.

Sales rose 7.6 percent to $15.7 billion, while sales at stores open at least a year rose 2.4 percent. Same-store sales of general merchandise declined 1.4 percent, while pharmacy same-store sales rose 4.5 percent.

U.S. consumer confidence fell unexpectedly in September as people face the worst job prospects in 26 years, the Conference Board said on Tuesday.

"Consumers are concerned about rising unemployment, keeping their homes and paying down their credit cards. They're focused on value and are buying needs versus wants," Walgreen Chief Executive Greg Wasson said during a conference call.

Still, he has seen a bit of a shift in medication usage.

"In the heat of the economic downturn I think we saw people splitting pills and skipping doses, and I think we're beginning to see that soften a little," Wasson said.

Walgreen said it is on track to achieve $1 billion in pre-tax cost savings by 2011.

Wasson said the company would look at acquisitions that may come up in its core strategies. Those could range from "gap fillers" in healthcare to retail acquisitions stemming from expected industry consolidation, he said.

(Reporting by Jessica Wohl; Editing by Derek Caney, Gerald E. McCormick, Dave Zimmerman)

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