UPDATE 3-Walgreen net rises on cost-cutting, extra day

(Adds analyst comment, updates stock activity, adds byline)

By Brad Dorfman

NEW YORK, March 24 (Reuters) - Walgreen Co (WAG.N: Quote, Profile, Research), one of the largest U.S. drugstore chains, posted higher-than-expected quarterly profit on Monday, helped by cost-cutting and an extra day in the quarter because of leap year.

Walgreen also announced a deal with a pharmacy benefits management company, Prime Therapeutics, that expands its business as a provider of specialty pharmacy services.

General merchandise sales improved toward the end of the quarter, boosted by strong Valentine's Day business, after weaker-than-expected Christmas results, Walgreen Chief Executive Jeffrey Rein said during a conference call with analysts.

But the company, whose shares were up 5.5 percent, warned that the industry is becoming more aggressive with margin-sapping promotions to get consumers into stores as the U.S. economy slows.

"They may be able to hold their (sales) comps at a decent level, but it is hurting their margins," said Mitchell Corwin, analyst at Morningstar.

There are also reports of customers trying to stretch prescriptions by splitting pills in half or taking a medicine every other day instead of daily, Rein said.

Walgreen said profit in the fiscal second quarter ended Feb. 29 was $685.9 million, or 69 cents a share, up from $651.9 million, or 65 cents a share, a year earlier.