If we told you that the largest pharmacies chains in the U.S., CVS Caremark (CVS) and Walgreens (WAG), planned to sell more groceries and produce, would you believe us? If so, you would be right. CVS Caremark plans to double the size of its food section and revamp about 20% of its 7,000 stores to better cater to groceries and quick check outs, and Walgreens started to satiate its appetite for the nation's trillion-dollar food budget by announcing last year that it would add up to 500 food items including salads, sandwiches, frozen meats, soups, juices, yogurts and even sushi to its offering.

How Do Consumers Benefit?

Walgreen Company (WAG), first written about here on February 17, 2009 at a price of $25.46, has powered higher, clearing $40 resistance, and if you're in at/near $25, now may be a good time to consider taking some profits.

Drug store chain giant Walgreen's revenue should rise about 3-5% in FY2011, boosted by the addition of about 300 net new store openings. The front-store traffic trend in this more than 8,000-store chain is being hurt by a slower-than-expected U.S. economic recovery, and back-store (pharmacy) margins are not rising as fast as expected, due to a slower roll-out of higher-margin generic drugs.

Even so, Walgreen locates many of its stores in high-traffic spots, which means WAG is well-positioned when the U.S. economy starts to add jobs in a sustained way, and traffic improves.

Walgreen (WAG) is having a merry Christmas. The stock closed on Thursday at $39.19. The 52-week high for the shares is $40.20. Pretty cool for those who own this name. Something even cooler: the drugstore chain issued a solid fiscal first-quarter report earlier in the week.

The press release begins with three bragging bullet points: the top line gained 6% and came in at $17.3 billion; gross margin expanded by 80 basis points; operating cash flow was $1.2 billion. Nice, but in terms of the latter point, it should be noted that cash from operations was essentially flat compared to last year's number. That's okay, though, it's still respectable.

Walgreen Co. (WAG), which recently began carrying fresh fruit and vegetables in some of its stores, is scheduled to discuss its fourth-quarter fiscal 2010 financial results Tuesday, September 28, in a conference call beginning at 8:30 AM (ET). You can catch a live webcast of the call at the company's website.

During the three months that ended in August, Deerefield, Ill.-based Walgreen launched a social responsibility website and boosted its dividend. Analysts surveyed by Thomson Reuters are looking for the drugstore chain operator to report that its earnings for that period were about the same as a year ago, or 44 cents per share. Revenue is expected to total $16.8 billion, which is a 7.3% increase from the same period of last year. And for the full year, analysts forecast EPS of $2.12 (+4.7%) on revenue of $67.4 billion (+6.4%).

Now that health care reform is a done deal, with the ink from President Obama's signature yesterday still drying, it's time to talk about how to profit from the new legislation.

I know many parts of the legislation may not sit well with some of you -- whether it be the taxes on dividends used to pay for reforms or the general idea of Uncle Sam getting deeper into entitlement spending even as businesses are generally reducing their debt loads. But what's done is done and there's no use grousing about it. As investors, it's not our job to judge how good or bad the news is but only to judge how to cash in.

Walgreen Co. (WAG) announced plans this morning to take over privately-held drugstore chain Duane Reade Holdings for $1.075 billion in cash. Under the deal, WAG will acquire 257 locations, all of which are based in the New York metro area. These stores will continue to operate under the Duane Reade brand after the transaction is finalized.

Duane Reade isn't huge, but it's powerful. According to a release from the Walgreens camp, the chain has the highest sales per square feet among U.S. drugstores. In the 12 months ended December 26, Duane Reade's unaudited sales came in at $1.8 billion.

Walgreen's (WAG - option chain) stock is trading lower today after the company said its same-store sales fell 0.3 percent last month, the first monthly sales decline since February. According to the company, this dip in sales is due to WAG stocking fewer seasonal items, which is better than the alternative of shoppers just not buying anything. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on WAG.

This morning, WAG opened at $36.16. So far today the stock has hit a high of $37.29 and a low of $35.92. As of 12:00, WAG is trading at $36.84, down 16 cents(-0.5%). The chart for WAG looks neutral and S&P gives WAG a neutral 3 STARS (out of 5) hold ranking.

I'm reiterating my buy ratings the nation's two premier drug store chains: CVS Caremark (CVS), first recommended on February 16, 2009, at a price of $27.30; and Walgreen (WAG), first recommended on February 17, 2009, at a price of $25.46. If you bought CVS in February, you're up 25%; WAG, up about 40%.

As expected, each has performed well on increased store traffic stemming from the H1N1 flu virus (trips to purchase hand sanitizers, other disinfecting items, and flu symptom comforts), which has offset reduced traffic for other drug store trips, due to the U.S. recession.

If consumers try a little harder this year, the holiday season has a shot of hiding memories of last year's nightmare for retailers. The retailers are doing their part, with Walmart (WMT), Gap (GPS), RadioShack (RSH), Walgreens (WAG) and many others opening their doors Thanksgiving Day, giving shoppers the opportunity to start their spending early. There's a chance that consumers will spend a bit more this year to thank each other for keeping their belts so tight for so long.

Forecasts of the season's ultimate result remain difficult to pin down. Some expect a year-over-year decline of 3%, and predictions range to an increase of 2%. Credit is harder to come by, and unemployment remains over 10% and at a 26-year high. But, the pressures on spending are offset by pent-up emotion and a stabilizing financial environment -- even if it isn't getting better yet, it doesn't seem to be getting worse.

Wal-Mart Stores Inc. (NYSE: WMT) wants to sell you everything it possibly can. Need funeral arrangements? The world's largest retailer wants to help. $4 prescription drugs? It has you covered. In fact, it's hard to think of any product category that Wal-Mart does not seem at least a little covered with. For good reason, too: Wal-Mart has tapped out much of the short-term growth by virtue of it being almost everywhere in the U.S. and selling everything you can possibly think of.

Walgreen (NYSE: WAG - option chain) shares are rising today after the company announced its September sales rose 10.3% higher than the same period last year. Same-store-sales were up 5.3%, buoyed by pharmacy increases of 7%, while other merchandise saw just a 2% gain. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on WAG.

WAG opened this morning at $38.35. So far today the stock has hit a low of $37.92 and a new 52-week high of $38.75. As of 11:45, WAG is trading at $38.21 up 2 cents (0.05%). The chart for WAG looks neutral and S&P gives WAG a neutral 3 STARS (out of 5) hold ranking.

Walgreen Co (NYSE: WAG - option chain) shares are headed higher today after the company posted a second-quarter profit of $640 million, or 65 cents per share. WAG's adjusted profit of 69 cents per share beat analysts' estimates of 66 cents per share. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on WAG.

UPS opened this morning at $42.70. So far today the stock has hit a low of $42.40 and a high of $45.57. As of 12:40, UPS is trading at $44.69, up $2.27 (5.3%). The chart for WAG looks neutral and S&P gives WAG a 3 STARS (out of 5) hold ranking.

Walgreen Co. (NYSE: WAG - option chain) shares have moved higher today after the company reported December sales that rose upwards of 10%, including a 4.9% gain in same store sales. In times like these, WAG stayed strong with sales of basic necessities, while seasonal items slumped, but the net result was positive. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on WAG.

WAG opened this morning at $25.43. So far today the stock has hit a low of $25.43 and a high of $26.78. As of 12:15, WAG is trading at $26.80, up $1.25 (4.9%). The chart for WAG looks neutral and S&P gives WAG a 3 STARS (out of 5) hold ranking.

For a bullish hedged play on this stock, I would consider an April bull-put credit spread below the $20 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 8.7% return in just three and a half months as long as WAG is above $20 at April expiration. Walgreen would have to fall by more than 25% before we would start to lose money. Learn more about this type of trade here.

WAG hasn't been below $21 at all in the past year and has shown support around $22.50 recently.

Brent Archer is an options analyst and writer at Investors Observer.

DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in WAG.

Walgreen Co (NYSE: WAG - option chain) shares are rising today after the company withdrew its buyout bid for Long's Drug Stores (NYSE: LDG). This clears the way for CVS Caremark (NYSE: CVS) to complete its $2.7 billion buyout offer of LDG, which was a smaller offer than that of Walgreen.

It seems that investors approve of this action, since WAG is up a nice chunk today. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on WAG.

WAG opened this morning at $26.89. So far today the stock has hit a low of $26.44and a high of $27.27. As of 12:30, WAG is trading at $26.80, up 62 cents (2.3%). The chart for WAG looks bearish and S&P gives WAG a 3 STARS (out of 5) hold ranking.

For a bullish hedged play on this stock, I would consider a November bull-put credit spread below the $25 range.

Though the quarter is winding down, there are still earnings reports to come, including Walgreen Co. (NYSE: WAG) and Kroger Co. (NYSE: KR). Both companies are expected to report profit growth this coming week.

Walgreen is expected by analysts surveyed by Thomson Financial to report third-quarter earnings of 59 cents per share, up 6.8% from the same period of last year, on revenue of $15.1 billion. The company has provided positive surprises in four of the past five quarters -- by two cents in the previous quarter.

Based in Deerfield, Ill., Walgreen is the largest drug store chain in the U.S. in terms of sales, and has more than 6,200 stores in the U.S. and Puerto Rico. In the past year, the company's revenues were $53.7 billion and its net income totaled $2.0 billion. Its long-term EPS growth forecast is 14.0%, which is less than the retail industry average, as well as less than that of rival CVS Caremark (NYSE: CVS). The consensus recommendation of analysts has recently shifted from hold to buy Walgreen.

The share price is up 4.0% since the beginning of the year, and up from 11.6% from a year ago. It trades at a P/E ratio of 20.68. Shares closed Friday at $41.35.