Sales rose 8.9 percent to $18.5 billion during its second fiscal quarter, as sales of general merchandise rose during the holidays and Valentine's Day and the drugstore chain filled more prescriptions.
But Walgreen said that despite those gains, its gross margin, which measures the profitability of the products it sells, remained level with a year ago because of rising commodity costs.
Shares were down $3.36 at $38.61 in morning trading.
Walgreen warned investors that shoppers are still grappling with high unemployment and rising gas pricing, meaning it may have to offer more promotions.
As costs rise and jobs remain soft customers continue to look for value, Chief Executive Greg Wasson said on a conference call.
Walgreen also said it may face additional pressure from government payers as states wrestle with balancing their budgets and the need to reduce spending.
We do expect pressure to continue on Medicaid reimbursement, Wasson said.
The company, which earlier this month sold its pharmacy benefits management unit to focus solely on its retail business, said it reached its largest ever share of the in-store prescription market, filling 20.1 percent of U.S. precriptions during the quarter.
Bill Smead, a portfolio manager with Smead Value Fund, which owns Walgreen shares, said that concentrating on its stores would pay off in the long run as the economy improves and more customers come in to have prescriptions filled and pick up household items at the same time.
Those are the kinds of things that warm your heart if you're a long-term investor, Smead said.
Wasson said in a statement, Our center of gravity remains our nearly 7,700 drugstores. Rival CVS Caremark Corp
Sales at Walgreen's stores open at least a year 4.1 percent during the quarter ended on February 28. Same-store sales of general merchandise rose 4.3 percent.
Prescription sales, which account for nearly two-thirds of sales, were up 3.9 percent at drugstores open at least a year. The company filled 205 million prescriptions, an increase of 6.9 percent over last year's second quarter.
Walgreen's profit rose 10.4 percent to $739 million, or 80 cents per share, in Walgreen's second quarter ended on February 28 from $669 million, or 68 cents per share, a year earlier.
That was in line with Wall Street forecasts, according to Thomson Reuters I/B/E/S.
(Reporting by Phil Wahba; Editing by Derek Caney, Dave Zimmerman)