Peoples Drug Stores Inc. reported yesterday a 21 percent increase in profits during the fiscal year ended Sept. 30, continuing a rehabilitation program started by the area's largest retail drug chain more than two years ago.

Earnings for the recent 53 weeks totaled $5.5 million ($1.52 a share) compared with $4.5 million ($1.25) a year earlier. Sales of the Alexandria-based company, which operates 377 stores, rose a more modest 10.5 percent to $404 million.

During the most recent quarter, Peoples earned $1.3 million (37 cents a share), up 25 percent from $1.1 million (30 cents) last year as sales growth picked up momentum -- rising 20 percent to $97 million.

Officials of Peoples noted yesterday that on a pre-tax basis, earnings jumped 37 percent in the past year to $9.1 million from $6.6 million.

"Peoples' improved performance in 1978 provides evidence that our revitalization program... is on track. However, we are still a long way from achieving all of the objectives of our program and attaining the levels of profitability to which we aspire," said Chairman Adrian Israel and President Sheldon Fantle.

During the current fiscal year, they said, Peoples management will focus on cutting costs and adding sales volume in such merchandise lines as cosmetics and health care services, "Provided that there are no substantive changes in the country's economy."