"Earnings this quarter were powered by solid prescription and general merchandise sales, as well as our second straight quarter of significantly higher gross profit margins," said Dave Bernauer, chairman and CEO of the company, which reported that gross profit margins were up due to better purchasing terms, digital photofinishing and growth in generic drug sales.

The sales surge was led by the company's pharmacies. "Taking a closer look at our sales, front-end comparable store sales rose 6.1%, while comparable pharmacy sales in the quarter were up 11.3%, and total pharmacy sales climbed 14.4%, said Rick Hans, Walgreens' director of finance, during the company's earnings conference call on Monday. All together, prescription sales represent 65% of total sales for the company.

Walgreens has been especially aggressive lately in promoting digital photo reproduction, and now its stores offer 4x6 prints from digital cameras for 29 cents per print, which the company asserts is less expensive than printing at home. "The conversion to more efficient digital photo labs isn't cheap," Hans said. "Besides the price of the new labs, we're also incurring costs from retiring the leases for our old analog labs, and from the added payroll required to bring nearly all of our photofinishing work in-store. Essentially, the move from analog to digital labs reduces our cost of goods, but adds to our labor expense line. But the bottom line is better service, a competitive advantage and better overall net profitability."