drugstore.com Reports Over 27% Revenue Growth in the Second Quarter of 2010

Wednesday, August 4, 2010 Drug News
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BELLEVUE, Wash., Aug. 3 drugstore.com, inc. (Nasdaq: DSCM), a leading online retailer of health, beauty, vision, and pharmacy products, today announced its financial results for the second quarter ended July 4, 2010.

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In the second quarter of 2010, drugstore.com's quarterly net sales increased over 27% to $113.1 million(1), driven by solid over-the-counter (OTC) sales. During the quarter, the Company incurred combined transaction and integration expenses totaling approximately $450,000 associated with its completed acquisition of Salu, Inc. and third quarter 2010 sale of mail-order pharmacy assets to Bioscrip Pharmacy Services, Inc. Including these expenses, the Company reported a net loss of $2.7 million and adjusted EBITDA of $4.6 million, as the gain on sale of approximately $5.0 million related to the sale of its mail order pharmacy business, which closed on July 30, 2010, will now be recognized in the third quarter of 2010. This compares to net income of $1.0 million and adjusted EBITDA of $5.5 million reported in the same period of the prior year which included approximately $3.0 million contribution from the Company's discontinued local pick-up pharmacy business. Adjusted EBITDA is a non-GAAP financial measure defined as earnings before interest, taxes, depreciation, and amortization of intangible assets, adjusted to exclude the impact of stock-based compensation expense.

"In a softer consumer spending environment, we were pleased to deliver 27% year-over-year revenue growth and strong gross margins of 30.4%," said Dawn Lepore, chief executive officer and chairman of the board of drugstore.com, inc. "Revenue growth was driven by OTC sales up 35%, including solid contributions from our recent acquisition, Salu, which added over $11.5 million. During the quarter, we generated new customer growth of 34%, offering further evidence that we are a clear leader in one of the least penetrated markets in ecommerce."

"Today, we announced an amended agreement with Medco Health Solutions that extends our partnership through 2018. Our relationship with Medco has proven to be highly strategic and incremental to the strength of our core business, and we believe this agreement positions both companies for long term success. Our belief in the power of the Medco relationship has not changed, however given the slower than anticipated ramp in partnership revenue in the first half of the year, we now expect overall partnership revenue in the range of $16 to $20 million for 2010," concluded Ms. Lepore.

Outlook for Third Quarter of 2010

For the third quarter of 2010, the Company is targeting net sales in the range of $107.0 million to $111.0 million, net income in the range of $2.0 million to $3.25 million, and adjusted EBITDA in the range of $8.0 million to $9.0 million. The outlook for the third quarter of 2010 includes an estimated $5.0 million gain related to the sale of our mail-order pharmacy segment, which closed on July 30, 2010.

For fiscal year 2010, which compares a 52-week year to a 53-week year, the Company expects OTC revenue growth between 24% and 28%, inclusive of $16 to $20 million from partnerships, and vision revenue growth in the low single digits.

Financial and Operational Highlights for the Second Quarter of 2010

(All comparisons are made to the second quarter of 2009 and reflect the reporting of the local pick-up and mail-order pharmacy businesses as discontinued operations.)

Key Financial Highlights:

Net Sales Summary:

Key Customer Milestones:

Conference Call

Investors, analysts, and other interested parties are invited to join the drugstore.com, inc. quarterly conference call on August 3, 2010 at 4:30 p.m. ET (1:30 p.m. PT). To participate, callers should dial 1-888-549-7735 (international callers should dial 1-480-629-9858) five minutes beforehand. Investors may also listen to the conference call live and view the financial slides at http://investor.drugstore.com/, by clicking on the "audio" hyperlink. A replay of the call will be available through Tuesday, August 10, 2010 by dialing 800-406-7325 and enter passcode 4331421# and international parties should call 303-590-3030 and enter passcode 4331421# beginning two hours after completion of the call.

Non-GAAP Measures

To supplement the consolidated financial statements presented in accordance with GAAP, drugstore.com, inc. uses the non-GAAP measure of adjusted EBITDA, defined as earnings before interest, taxes, depreciation, and amortization of intangible assets, adjusted to exclude the impact of stock-based compensation expense. This non-GAAP measure is provided to enhance the user's overall understanding of the Company's current financial performance. Management believes that adjusted EBITDA, as defined, provides useful information to the Company and to investors by excluding certain items that may not be indicative of the Company's core operating results. In addition, because drugstore.com, inc. has historically provided adjusted EBITDA measures to investors, management believes that including adjusted EBITDA measures provides consistency in the Company's financial reporting. However, adjusted EBITDA should not be considered in isolation, or as a substitute for, or as superior to, net income/loss, cash flows, or other consolidated income/loss or cash flow data prepared in accordance with GAAP, or as a measure of the Company's profitability or liquidity. Although adjusted EBITDA is frequently used as a measure of operating performance, it is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Net income/loss is the closest financial measure prepared by the Company in accordance with GAAP in terms of comparability to adjusted EBITDA. A reconciliation of adjusted EBITDA to net income/loss is included with the financial statements attached to this release.

The Company also uses the non-GAAP measure of ongoing adjusted EBITDA, defined as adjusted EBITDA excluding the impact of expenses or income from certain legal actions, settlements and related costs outside our normal course of business, restructuring and severance costs, impairment charges, and certain other one-time charges and credits specifically identified in the non-GAAP reconciliation financial schedules included in this financial release.

In addition, the Company uses the non-GAAP measure of free cash flow, defined as net cash provided by (used in) operating activities plus proceeds from the sale of discontinued operations less purchases of fixed assets as disclosed on our consolidated statements of cash flows. Management believes that free cash flow is an important liquidity metric because it measures, during a given period, the amount of cash generated that is available to service debt obligations, make investments, fund acquisitions and for certain other activities. Free cash flow is not a measure determined in accordance with GAAP and may not be defined or calculated by other companies in the same manner. Additionally, this financial measure is subject to variability quarter over quarter as a result of the timing of payments related to accounts payable, including inventory purchases, and accounts receivable. Since free cash flow includes investments in operating assets, management believes this non-GAAP liquidity metric is useful in addition to the most directly comparable GAAP measure of net cash provided by (used in) operating activities, and should not be used as a substitute for it or any other measure determined in accordance with GAAP. A reconciliation of free cash flow to net cash provided by operating activities is included with the supplemental financial schedules attached to this release.

The Company also uses the non-GAAP measure of core OTC, defined as sales generated through our OTC segment less sales generated through our partnerships with Medco Health Solutions, Inc. and Rite Aid Corporation. This non-GAAP measure is provided to enhance the user's overall understanding of the Company's financial performance in the OTC segment, excluding the partnerships. Management believes that this reporting metric provides useful information to the Company and to investors by providing the Company's core operating results in the OTC segment without the impact of the partnerships. By excluding partnership sales from OTC sales data, the Company can more effectively assess the buying behavior of, and the Company's financial performance with respect to, its own core OTC customers. However, this non-GAAP measure should not be considered in isolation, or as a substitute for, or as superior to, OTC segment sales data prepared in accordance with GAAP, or as a measure of the Company's overall performance in the OTC segment. OTC segment sales measures are the closest financial measures prepared by the Company in accordance with GAAP in terms of comparability to OTC segment sales measures that exclude partnership sales.

About drugstore.com, inc.

drugstore.com, inc. (Nasdaq:DSCM) is a leading online retailer of health, beauty, clinical skincare, vision, and pharmacy products. Our portfolio of brands includes: drugstore.com(TM), Beauty.com(TM), SkinStore.com(TM), and VisionDirect.com(TM). All provide a convenient, private, and informative shopping experience while offering a wide assortment of more than 55,000 non-prescription products at competitive prices.

The drugstore.com pharmacy service is certified by the National Association of Boards of Pharmacy (NABP) as a Verified Internet Pharmacy Practice Site (VIPPS) and complies with federal and state laws and regulations in the United States.

The financial results contained in this press release are preliminary and unaudited. In addition, this press release contains forward-looking statements regarding future events or the future financial and operational performance of drugstore.com, inc. Words such as "will," "expect," "target," "believe," "may," "continue," and similar expressions, are intended to identify forward-looking statements. Forward-looking statements are based on current expectations, are not guarantees of future performance and involve assumptions, risks, and uncertainties. Actual performance may differ materially from those contained or implied in such forward-looking statements. Risks and uncertainties that could lead to such differences could include, among other things: the risk that the Salu transaction disrupts current plans and operations; the risk that anticipated synergies and opportunities as a result of the Salu transaction will not be realized; difficulty or unanticipated expenses in connection with integrating Salu into drugstore.com; the risk that the acquired business does not perform as planned; effects of changes in the economy; changes in consumer spending and consumer trends; fluctuations in the stock market; changes affecting the Internet, online retailing, and advertising; difficulties establishing our brand and building a critical mass of customers; the unpredictability of future revenues, expenses, and potential fluctuations in revenues and operating results; risks related to business combinations and strategic alliances; possible tax liabilities relating to the collection of sales tax; the level of competition; seasonality; the timing and success of expansion efforts; changes in senior management; risks related to systems interruptions; possible changes in governmental regulation; possible increases in the price of fuel used in the transportation of packages, or other energy products; and the Company's ability to manage multiple growing businesses. Additional information regarding factors that potentially could affect the business, financial condition, and operating results of drugstore.com, inc. is included in the Company's periodic filings with the SEC on Forms 10-K, 10-Q, and 8-K. drugstore.com, inc. expressly disclaims any intent or obligation to update any forward-looking statement, except as otherwise specifically stated by it.

(1) In connection with the Company's previous announcement regarding its agreement to sell the assets of its mail order pharmacy business, the results of operations, including net sales of $7.1 million and $11.5 million for the second quarter of 2010 and 2009, respectively, of this segment are now presented as discontinued operations in the consolidated financial statements.

-- Gross margins increased 20 basis points to 30.4%. -- Total contribution margin dollars increased by approximately 29% to $25.5 million. -- Total orders grew by 26% to 1.8 million and contribution margin dollars per order was $14. -- Cash provided by operations during the quarter was $4.1 million, a $1.5 million improvement from the prior year period. -- Cash, cash equivalents, and marketable securities were $30.6 million at quarter end.

SOURCE drugstore.com, inc.

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