By Jessica Wohl

Rival CVS Caremark Corp also said it is seeing consumers cut back. CVS, which does not typically give monthly updates, said December sales would be weaker than the past two months, yet stood by its forecast.

Walgreen shares fell 5 percent, while CVS slipped 1.6 percent.

"CVS acknowledged there's been some recent pressures but on the whole they're doing OK," said SunTrust Robinson Humphrey analyst David Magee, who has "buy" ratings on both companies. "They've been outperforming Walgreens all year long."

Walgreen first scaled back its store opening plans in July. In October, it lost out to CVS in buying West Coast chain Longs Drug Stores, and its chief executive left abruptly.

"Walgreens was one of the most consistent growers in the S&P 500" until it posted an unexpected fourth-quarter profit decline just over a year ago, said Morningstar analyst Mitchell Corwin. "Since then things have gotten markedly worse."

In late October, Walgreen unveiled plans to cut costs even as it redesigns stores, adds more groceries to appeal to busy shoppers, and expands into new healthcare areas, such as clinics.

Such changes are pressuring profitability. Selling, general and administrative expenses rose 9.1 percent and gross profit margin fell 0.2 percentage points in the quarter.

Profit fell to $408 million, or 41 cents per share, in the first quarter ended November 30, from $456 million, or 46 cents per share, a year ago. Analysts on average were expecting earnings of 46 cents per share, according to Reuters Estimates.

Sales rose 6.6 percent to $14.9 billion. Sales at stores open at least a year increased just 1.7 percent after rising 5.4 percent a year earlier.

"The numbers weren't horrible viewed relative to most retail but they're certainly a lot less than we'd expect from Walgreens," Magee said.

SLOWING STORE GROWTH

Shares of Walgreen were down $1.35, or 5.2 percent, at $24.73 in midday trade, while CVS fell 1.7 percent to $26.50. Walgreen shares have fared better than those of other drugstore chains this year. Through Friday, Walgreen was down 31.5 percent, while CVS had fallen 32.2 percent and Rite Aid had plummeted 87.5 percent.

"If they can manage to do a better job controlling costs, and gain some traction in some of these secondary businesses, this stock could really work," Sarah Henry, retail analyst at MFC Global, said of Walgreen. She has "buy" ratings on both CVS and Walgreen and the firm owns shares of CVS.

On Monday, Walgreen said it would reduce its store openings to a rate of 4 percent to 4.5 percent in 2010 and 2.5 percent to 3 percent in 2011. In July it set plans to slow store openings to 5 percent by 2011.

"It's a move that's necessary at this point," said Corwin. "What's happening is not only are they suffering from the overall economic environment, but they seem to be getting lower incremental returns from their new stores."

Slowing store openings should save $500 million beyond the $500 million capital expenditure reductions announced in July, Walgreen said.

In the past, drugstores could typically charge more for groceries and other goods because customers shopped there for convenience, not for value.

Now that consumers have curbed spending, Walgreen has cut prices on basic items to keep shoppers from switching to other retailers, such as Wal-Mart Stores Inc . Walgreen has seen cost-conscious consumers buy only items on sale, shop closer to their paydays and use their credit cards less often.

Walgreen has also seen shoppers with little or no insurance sign up for a low-cost drug plan it introduced in late 2007. It said 30 percent of all enrollees were new to its stores. Smaller rival Rite Aid Corp said last week that more than 30 percent of those using its own discount plan were new customers.

A slower expansion rate should give Walgreen the flexibility to spruce up existing stores and invest in areas such as buying prescription files and opening more Take Care clinics at stores and offices, said President Gregory Wasson.

During a conference call, Wasson said he expected the board to make an announcement about its CEO search in early 2009.

Walgreen has traditionally promoted people to the CEO spot from within, but this time it is also looking at external candidates. The company recently brought in a few executives from the outside, including a new chief financial officer and its first chief marketing officer.

On Monday, it added three new vice presidents to help in areas ranging from store format development to healthcare.

(Additional reporting by Martinne Geller in New York; Editing by Lisa Von Ahn and Tim Dobbyn)