Driven primarily by strong prescription sales, Walgreen (NYSE:WAG) reported a healthy start to its fiscal year this morning. For the first quarter ended Nov. 30, the nation's largest pharmacy retailer saw sales climb 16.5% year over year to $8.7 billion, while net income increased 10% to $254.9 million, or $0.25 per share.

Walgreen benefited from the early flu season this year with enhanced drug sales. For the quarter, prescription sales climbed 18.7% year over year, accounting for 64% of Walgreen's total sales. Those strong pharmacy sales continued into December, jumping 22.7% year over year for the month, and 19.1% on a same-store basis.

The company also saw growth in non-pharmacy products. Front-end same-store sales gained 7.5%, which Walgreen claims is the best gain in more than nine years. Helping on this end is Walgreen's new digital photo processing services, which the company introduced last month at its 4,290 locations.

Gross margins dropped slightly to 26.4%, partially due to pricing pressure from the competition on front-end items. The company sees competition not only from rival drugstore chains such as CVS (NYSE:CVS) and Rite Aid (NYSE:RAD), but also from Wal-Mart (NYSE:WMT) and Target (NYSE:TGT). A portion of the gross-margin decline is also naturally attributable to lower-margin pharmacy sales accounting for a greater portion of overall sales.

Walgreen turned in a solid quarter, but its shares look fully priced at over 25 times this year's earnings. Walgreen shares are down almost 3% to $34.71 in midday trading.

Turn in your thoughts on the Walgreen discussion board. Jeff Hwang can be reached at