Walgreen Co gave investors reasons to question its drugstore overhaul strategy on Monday with muted comments about its success, overshadowing a better-than-expected jump in quarterly profit.

The top U.S. drugstore chain also said purchases of discretionary items remain weak in December, when it is less likely to receive a boost from giving flu shots. Shares of the company were up 0.8 percent in late morning after falling as much as 4.2 percent earlier in the day.

Executives were repeatedly questioned during a morning conference call about rising selling, general and administrative costs and whether a consumer-centric retailing plan, which involves updating stores and reducing the number of items they carry, has led to sales growth yet.

You put those two things in combination and all of a sudden the idea that they could earn $2.50, which has kind of been the whisper out there this year, is somewhat far-fetched at this stage, Jefferies & Co analyst Scott Mushkin said of the company's annual earnings per share.

Walgreen does not issue earnings guidance. Analysts on average expect it to earn $2.36 per share this year, according to Thomson Reuters I/B/E/S.

The company, which operates more than 7,140 Walgreens drugstores, earned $489 million, or 49 cents per share, in the fiscal first quarter ended on November 30, up from $408 million, or 41 cents per share, a year earlier.

Results in the latest quarter include a 3 cent per share hit from restructuring and other costs. Analysts, on average, expected Walgreen to earn 48 cents per share.

Walgreen ranks ahead of CVS Caremark Corp and Rite Aid Corp in terms of sales and stores. It has updated its stores, web site and advertising as it faces stepped up competition from Wal-Mart Stores Inc and other chains that have expanded their pharmacy offerings.

Separately, CVS named a new president of its pharmacy benefits management unit and increased its stake in a company that works on genetic benefit management, sending its shares up 4 percent.

SKEPTICISM ON STORE REVAMP

So far, Walgreen has brought its new look to more than 400 stores in Texas. Chief Executive Greg Wasson said on Monday that the company would delay the roll-out to other locations by a couple of weeks so it could include a new decor look.

Wasson said the store update helps improve sales and takes work out of the stores, cutting down on costs. But when asked if the redesign had helped sales in Houston, where it was put in place in mid-October, Wasson said it was a little too early to tell. He also said it was hard to analyze the data since the city had a hurricane impact sales a year earlier.

I don't want a wishy-washy answer, said Pali Capital analyst Robert Summers after the call.

Walgreen has been ahead of rivals in administering seasonal and H1N1 flu shots, which boosted pharmacy sales. Walgreen and its Take Care in-store clinics have handled 5.4 million seasonal flu shots so far this year, compared with 1.2 million for the entire flu season last year, and have already given about 350,000 H1N1 vaccinations.

They are administering vaccinations for H1N1, or swine flu, at about 3,000 stores in 36 U.S. states. Walgreen plans to add more locations as more H1N1 vaccine becomes available, as are other chains. Privately held Duane Reade, the biggest drugstore in New York City, said on Monday that it is giving out H1N1 shots at clinics in five busy stores, and 30 of its other stores have the vaccine.

The flu shot program brought new shoppers to Walgreen, as two-thirds of those who got shots had not filled a prescription at Walgreens in the last six months. Still, Wasson said Walgreen probably will not know how many new customers it retained for another one to three months.

Walgreen previously said first-quarter sales jumped 9.5 percent to $16.36 billion. Sales at stores open at least a year rose 4.9 percent overall, 6.1 percent for prescriptions and 2.7 percent for general merchandise.

Sales of general merchandise, particularly seasonal items, have been hard hit as consumers cut back. The company is adding beer and wine in more stores, which has had a material benefit on same-store sales, Wasson said. A new private label brand of wine also carries higher margins, he added.

The new brand, Southern Point, is available in four varieties and is priced around $2.99 per bottle.

(Reporting by Jessica Wohl; editing by John Wallace, Dave Zimmerman and Matthew Lewis)

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