Walgreen Co. (NYSE: WAG) is trading down around 14% as of this morning after the drug retailer announced that its fourth quarter net income fell to $396.5 million ($0.40 per share) from $412.3 million ($0.41 per share) in the year ago period. Although net sales rose to $13.42 billion from $12.17 billion, the profit shortfall is being placed squarely on lower generic drug reimbursements and higher employee costs and expenses.

Is Walgreen's feeling the heat from the $4 generic prescription drug program announced by Wal-Mart (NYSE: WMT) just over a year ago? It could certainly be seen that way. Same-store sales did increase by 6.3% during the quarter, so although Walgreen's saw increases in terms of sales and revenues, the chain apparently failed to keep its expenses down during the same time. Couple that with the generic drug situation that's still in flux and you have a down quarter. Or, at least that is the way the market is interpreting the numbers as WAG shares are spiking down big-time this morning.

Walgreen's Chairman Jeffrey Rein stated that "Our expenses weren't in line with the level of reimbursements we were receiving. Managing both expenses and lower reimbursements on some generic drugs is my top priority." Seems reasonable, although it's been a while since the generic price cuts seen around the industry started happening. Although Walgreen's sees $2 billion in capital investments in fiscal 2008, the cost situation seems to be a tad out of hand at this time without even considering the capital improvements soon to come.

WAG shares are at $40.44 as of 11:48, down over 14.3% from Friday's close.