Walgreen Co posted a steeper-than-expected drop in quarterly profit on Monday as it wrote down the value of items being taken off its shelves as part of store makeover aimed at winning over shoppers.

The drugstore chain's new look, which costs about $30,000 to $50,000 to implement in each store, has lower shelves and a smaller selection of items.

The push to ignite growth comes at a tough time. Chief Executive Gregory Wasson said during a conference call that Walgreen continues to see consumers use credit cards less frequently and shop closer to paydays, when they have cash.

The chain that prided itself on its convenient locations is promoting affordable essentials such as toilet paper to attract shoppers who switched to value-oriented chains such as Wal-Mart Stores Inc .

Walgreen is also cutting jobs and opening fewer stores than originally planned as part of its effort to return to double-digit earnings growth.

Such strategy changes led to 6 cents per share in costs and 6 cents per share in savings in the latest quarter.

Walgreen earned $522 million, or 53 cents per share, in the third quarter that ended May 31, down from $572 million, or 58 cents per share, a year earlier. Analysts on average expected it to earn 56 cents per share, according to Reuters Estimates.

In our view the quarter indicates the continued challenges of fixing the model amid a difficult economy, said UBS analyst Neil Currie, who has a neutral rating on Walgreen shares.

Shares of Walgreen, which had jumped 27 percent since the beginning of the year, were down 5.4 percent in noon trading on Monday, outpacing a 2.6 decline in the Standard & Poor's 500 Index <.SPX>.

The company, which does not issue specific forecasts, said it was on track to save $1 billion annually starting in 2011.

Last month, rival CVS Caremark Corp posted a better-than-expected quarterly profit and issued a slightly brighter profit forecast.

CATEGORY CUTS, PRIVATE LABEL GROWTH

Walgreen is reducing the number of different items it sells. For example, it may keep a smaller variety of super glues in stock, which allows hurried customers to make quicker decisions and frees up space for other products.

Nearly two-thirds of the $99 million Walgreen spent on restructuring, or $65 million, came from writing down the assortment of items, or stock-keeping units, the company shed.

Sales rose 8 percent to $16.21 billion, while sales at stores open at least a year increased 2.8 percent.

Same-store prescription sales rose 3.8 percent. Walgreen said it had filled 8.3 percent more prescriptions in the latest quarter than it did a year earlier, aided by more patients filling 90-day prescriptions. Those prescriptions, which are popular under many insurance plans, are counted as three 30-day prescriptions when they are filled.

Same-store general merchandise sales rose 0.9 percent.

Sales of private label goods rose 13 percent and account for about 20 percent of Walgreen's general merchandise sales, Chief Financial Officer Wade Miquelon said in an interview.

He sees private label goods continuing to grow, echoing what happened in recessionary markets such as Europe, where private label goods can account for about 30 percent to 40 percent of a retailer's sales.

That's probably a good archetype for us, Miquelon said. Could it be in that range? Yeah, it could be.

New areas Walgreen is working on include testing a chronic care management service in four markets and adding beer and wine in more stores.

Walgreen sells beer and wine in just a couple hundred stores now and that level could rise to up to 70 percent of the chain's 6,857 drugstores one day, Miquelon said.

We will be expanding in beer and wine, it certainly could be worth a couple points of growth over time, Miquelon said.

Shares of Walgreen were down $1.71 to $29.72 in noon trade on the New York Stock Exchange. Shares of smaller rival Rite Aid Corp , due to report results later this week, shed 3.1 percent while CVS fell 1.7 percent.

(Reporting by Jessica Wohl; editing by Dave Zimmerman, Lisa Von Ahn, Tim Dobbyn)

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