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drugstore.com inc. Reports Record Free Cash Flow on Highest Quarterly Revenues in Company History

Friday, August 1, 2008 General News J E 4
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BELLEVUE, Wash., July 31 drugstore.com, inc.(Nasdaq: DSCM), a leading online provider of health, beauty, vision, andpharmacy products, today announced its financial results for the secondquarter ended June 29, 2008. The company reported record quarterly net salesof $122.8 million, up 11% year-over-year driven by over-the-counter (OTC)order growth, and a net loss of $2.3 million, or $0.02 per share. The companyachieved strong gross margins of 24.0%, up 130 basis points over the prioryear period, and adjusted EBITDA of over $3.0 million. Adjusted EBITDA is anon-GAAP financial measure defined as earnings before interest, taxes,depreciation, and amortization of intangible assets and non-cash marketingexpense, adjusted to exclude the impact of stock-based compensation expense.Free cash flow, a non-GAAP financial measure, is defined as net cash providedby operating activities less purchases of fixed assets, including capitalizedinternally developed software and website development costs.

(Logo: http://www.newscom.com/cgi-bin/prnh/20070813/AQM043LOGO)

"We delivered a strong second quarter, posting record quarterly revenuesand adjusted EBITDA, generating significant free cash flow," said Dawn Lepore,chief executive officer and chairman of the board of drugstore.com, inc. "OurOTC revenue growth was in-line with ecommerce trends and we are encouraged bythe strong performance of our Beauty.com sales, which grew 45% year-over-year.This quarter we continued to drive margin expansion and realized the benefitsfrom our profitability investments as gross margins improved 130 basis pointsover the prior year period to 24% and adjusted EBITDA improved by 51%sequentially to surpass $3.0 million. Both our strong quarterly revenues andcontinued progress in improving our current business model enabled us togenerate significant free cash flow of $1.3 million and we expect to continueto be cash flow positive on an ongoing basis."

"The second quarter reinforces our strategy as we are focused on what wedo best -- growing our leading health, beauty and vision platform whileimproving the bottom line. We will continue to drive OTC growth by leveragingour strong capabilities in internet marketing, merchandising, fulfillment andcustomer care in the health, beauty and wellness arena. Consistent with ourstrategy, we are targeting key partnerships that will drive additionaltraffic, orders and customers. We recently announced a new partnership withE4X to allow us to expand our OTC store internationally and gain access to anentirely new market of 500 million customers in 34 countries. Additionally,we are progressing in our discussions with Rite Aid and we have identified andare actively pursuing other partnership opportunities," concluded Ms. Lepore.

GAAP net loss for the second quarter of 2008 was $2.3 million, or $0.02per share, compared to a net loss of $3.0 million, or $0.03 per share, for thesecond quarter of 2007. The second quarter 2008 losses include $1.1 millionrelated to consulting services and $1.8 million, in non-cash stock-basedcompensation expense, compared to $2.5 million for 2007.

Outlook for Third Quarter 2008

For the third quarter of 2008, the company is targeting net sales in therange of $118.0 million to $122.0 million, net loss in the range of $1.0million to $2.0 million, and adjusted EBITDA in the range of $3.5 million to$4.5 million. Third quarter adjusted EBITDA guidance includes $800,000 inconsulting services associated with profitability initiatives, which willcontinue to improve margins throughout the remainder of 2008.

Conference Call

Investors, analysts, and other interested parties are invited to join thedrugstore.com, inc. quarterly conference call on July 31, 2008 at 5:00 p.m. ET(2:00 p.m. PT). To participate, callers should dial 800-257-3401(international callers should dial 303-262-2075) five minut
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