UPDATE 3-Walgreen profit slips, hit by inventory revamp

* Walgreen Q3 net profit 53 cents vs Street view 56 cents

* Sales up 8 percent to $16.2 billion

* Consumers still spending cautiously, private label grows

* Shares fall over 5 percent (Recasts; adds company, analyst comments, byline; updates stock movement)

By Jessica Wohl

CHICAGO, June 22 (Reuters) - Walgreen Co (WAG.N) posted a steeper-than-expected drop in quarterly profit on Monday as it wrote down the value of items being taken off its shelves as part of store makeover aimed at winning over shoppers.

The drugstore chain's new look, which costs about $30,000 to $50,000 to implement in each store, has lower shelves and a smaller selection of items.

The push to ignite growth comes at a tough time. Chief Executive Gregory Wasson said during a conference call that Walgreen continues to see consumers use credit cards less frequently and shop closer to paydays, when they have cash.

The chain that prided itself on its convenient locations is promoting "affordable essentials" such as toilet paper to attract shoppers who switched to value-oriented chains such as Wal-Mart Stores Inc (WMT.N).

Walgreen is also cutting jobs and opening fewer stores than originally planned as part of its effort to return to double-digit earnings growth.

Such strategy changes led to 6 cents per share in costs and 6 cents per share in savings in the latest quarter.

Walgreen earned $522 million, or 53 cents per share, in the third quarter that ended May 31, down from $572 million, or 58 cents per share, a year earlier. Analysts on average expected it to earn 56 cents per share, according to Reuters Estimates.

"In our view the quarter indicates the continued challenges of fixing the model amid a difficult economy," said UBS analyst Neil Currie, who has a "neutral" rating on Walgreen shares.

Shares of Walgreen, which had jumped 27 percent since the beginning of the year, were down 5.4 percent in noon trading on Monday, outpacing a 2.6 decline in the Standard & Poor's 500 Index .SPX.

The company, which does not issue specific forecasts, said it was on track to save $1 billion annually starting in 2011.

Last month, rival CVS Caremark Corp (CVS.N) posted a better-than-expected quarterly profit and issued a slightly brighter profit forecast. [ID:nBNG491584]