Updated from 9:53 a.m. EST

Shares of Walgreen ( WAG) fell after the company reported that second-quarter profit missed analysts' estimates by a penny, while net income rose 17%, thanks partly to strong pharmacy results.

The company earned $433.5 million, or 42 cents a share, in the quarter ended Feb. 29, compared with $370.9 million, or 36 cents a share, a year ago. Excluding gains from a litigation settlement, the company said it earned $425.6 million, or 41 cents a share, up from the prior year's $370.7 million, or 36 cents a share. On that basis, analysts were calling for 42 cents a share.

Walgreen shares were recently down $1.21, or 3.6%, to $32.30.

Tom Goetzinger, an analyst who covers Walgreen at Morningstar, said: "People have high expectations for their performance," he said. "If you ignore the bottom line EPS number, Walgreen is doing a pretty good business."

Goetzinger added: "All in all, it was a good quarter. I'm not disappointed." (Morningstar does not do investment banking.)

Total sales in the second quarter increased about 16% to a record $9.8 billion, while same-store sales rose 11.5%. The company said inventories were up 11% compared with a year ago. Deerfield, Ill.-based Walgreen said prescriptions made up 60% of sales in the quarter and total prescription sales rose 19%. Prescription sales in comparable stores rose 15.5%.

"Even with these gains, our pharmacies are poised for more growth as the population ages and the Medicare prescription drug benefit begins," said Walgreen Chairman Dave Bernauer.

Front-end same-store sales increased 6.2%, the company said on a prerecorded conference call.

Gross profit margin in the quarter fell 14 basis points to 27.66 as a percentage of sales, vs. 27.8 a year ago. Walgreen said on the call that gross margin was hurt by a bigger amount of sales coming from lower margin pharmacy items and by fewer new generic prescription products introduced in 2004.

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