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drugstore.com Reports Highest Net Revenues in Company History
Date:4/29/2009

- OTC, Vision and Beauty Sales Outpace Industry

- Net Income of $1.3 Million and Adjusted EBITDA More Than Doubles Year-Over-Year to $5.6 Million

BELLEVUE, Wash. April 29 /PRNewswire-FirstCall/ -- drugstore.com, inc. (Nasdaq: DSCM), a leading online retailer of health, beauty, vision, and pharmacy products, today announced its financial results for the first quarter ended March 29, 2009. The company reported record quarterly net sales of $98.3 million and net income of $1.3 million, which included a one-time benefit of $1.2 million. The company more than doubled adjusted EBITDA to $5.6 million from $2.0 million reported in the same period of the prior year. Adjusted EBITDA is a non-GAAP financial measure defined as earnings before interest, taxes, depreciation, and amortization of intangible assets and non-cash marketing expense, adjusted to exclude the impact of stock-based compensation expense.

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"I am very pleased with our strong first quarter results - posting record quarterly revenues, net income and adjusted EBITDA, and delivering another profitable quarter," said Dawn Lepore, chief executive officer and chairman of the board of drugstore.com, inc. "Against the backdrop of a challenging consumer environment, we achieved OTC sales growth of over 11% year-over-year, drove beauty sales growth of 14% and increased vision sales by 13%. All of these results are significantly ahead of eCommerce and industry trends and we believe we are gaining market share over both traditional brick-and-mortar stores and eCommerce companies. Our success in the current market conditions makes us an even more attractive partner and distribution channel for leading health and beauty companies."

"During the quarter, we experienced strong repeat orders, predominantly of beauty and everyday replenishment items, and drove new customer growth of 15% year-over-year. Margins have remained solid at 28.2% as our profitability initiatives have offset most of the impact of the increased customer utilization on promotional offers. We believe that we have the customer base, product assortment and partnerships to position the company to emerge post-recession even stronger," concluded Ms. Lepore.

Net income for the first quarter of 2009 was $1.3 million, or $0.01 per share, compared to a net loss of $2.7 million, or $0.03 per share, for the first quarter of 2008. The first quarter of 2009 net income includes $1.0 million in non-cash stock-based compensation expense and a $1.2 million benefit from the resolution reached on April 27, 2009, between the company and the State of New Jersey, regarding sales and use taxes owed by the company for the period January 1, 2000 through February 22, 2008.

Outlook for Second Quarter of 2009

For the second quarter of 2009, the company is targeting net sales in the range of $93.0 million to $97.0 million, net income in the range of $250,000 to a net loss of $1.75 million, and adjusted EBITDA in the range of $3.0 million to $5.0 million.

Financial and Operational Highlights for the First Quarter of 2009 (All comparisons are made to the first quarter of 2008 and reflect the reporting of the local pick-up business as discontinued operations)

Key Financial Highlights:

  • Gross margins increased 80 basis points to 28.2%.
  • Total contribution margin dollars increased by approximately 12% to $19.9 million.
  • Total orders grew by 10.6% to 1.5 million, while contribution margin dollars per order increased to approximately $13.50.
  • Fulfillment expenses as a percentage of sales decreased 70 basis points to 11.2%.
  • Capital expenditures decreased 67% to $1.7 million.
  • Cash, cash equivalents, and marketable securities were $36.7 million at quarter end.

Net Sales Summary:

  • OTC net sales grew by over 11% to $72.1 million for the quarter, including Beauty.com growth of 14%.
  • Vision net sales grew 13% to $17.4 million for the quarter.
  • Mail-order pharmacy net sales decreased 28% to $8.8 million.
  • Average net sales per order were $67. Average net sales per order were $57 for OTC, grew 6.5% to $115 for vision, and decreased to $151 for mail-order pharmacy.
  • Net sales from repeat customers [1] represented 77% of net sales.

Key Customer Milestones:

  • We served approximately 400,000 new customers, inclusive of our strategic partnerships, during the quarter, up 15% over the same period in the prior year.
  • Marketing and sales expense per new customer decreased 1% to approximately $23.50.
  • We have now served over 10.2 million customers since inception.
  • The number of active customers [2] was 2.7 million, up 10.5% year over year.

[1] Net sales from repeat customers exclude Weil Lifestyle, LLC (Weil) related Custom Nutrition Services (CNS) net sales and reflect only the activity of customers making purchases through the Web sites of drugstore.com, inc. and its subsidiaries.

[2] Active customer base reflects those customers who have purchased at least once within the last 12 months. Both the active customer base (a trailing 12-month number) and average annual spend per active customer exclude net sales and orders generated by the company's CNS fulfillment relationship with Weil, and reflect only the activity of customers making purchases through the Web sites of drugstore.com, inc. and its subsidiaries.

Conference Call

Investors, analysts, and other interested parties are invited to join the drugstore.com, inc. quarterly conference call on April 29, 2009 at 5:00 p.m. ET (2:00 p.m. PT). To participate, callers should dial 866-250-2351 (international callers should dial 303-262-2130) five minutes beforehand. Investors may also listen to the conference call live at http://investor.drugstore.com/, by clicking on the "audio" hyperlink. A replay of the call will be available through Friday, May 1, 2009 by dialing 800-405-2236 (enter pass code 11130228#) or internationally at 303-590-3000 (enter pass code 11130228#) 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 and non-cash marketing expenses, 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.

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.

About drugstore.com, inc.

drugstore.com, inc. (NASDAQ: DSCM) is a leading online retailer of health, beauty, vision, and pharmacy products. Our portfolio of brands includes: drugstore.com(TM), Beauty.com(TM), and VisionDirect.com(TM). All are accessible from http://www.drugstore.com and provide a convenient, private, and informative shopping experience while offering a wide assortment of more than 45,000 products at competitive prices.

The drugstore.com pharmacy is certified by the National Association of Boards of Pharmacy (NABP) as a Verified Internet Pharmacy Practice Site (VIPPS) and operates in compliance 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 "target," "believe," "may," "will," "continue," "should," 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: effects of changes in the economy, changes in consumer spending, 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 and 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, consumer trends, the level of competition, seasonality, the timing and success of expansion efforts, changes in senior management, risks related to systems interruptions, possible governmental regulation, and the ability to manage a growing business. 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.

    Contact:
    Investor Relations:
    Brinlea Johnson
    212-551-1453
    brinlea@blueshirtgroup.com

                                    drugstore.com, inc.
                           Consolidated Statements of Operations
                      (in thousands, except share and per share data)
                                        (unaudited)

                                                    Three Months Ended
                                                March 29,         March 30,
                                                  2009               2008

    Net sales                                   $98,315            $92,568

    Costs and expenses: (1) (2)
      Cost of sales                              70,552             67,183
      Fulfillment and order
       processing                                11,024             11,000
      Marketing and sales                         9,410              8,314
      Technology and content                      5,925              5,203
      General and administrative                  2,896              5,394
      Amortization of intangible assets             207                245
         Total costs and expenses                100,014             97,339

    Operating loss                               (1,699)            (4,771)

    Interest income, net                             43                279

    Loss from continuing operations              (1,656)            (4,492)
    Gain from discontinued
     operations, net of tax                       2,985              1,807

    Net income (loss)                            $1,329            $(2,685)

    Basic and diluted net income
     (loss) per share                             $0.01             $(0.03)

    Weighted average shares used
     in computation of
       basic and diluted net income
        (loss) per share                     97,355,613         96,392,737

    _________
        (1) Set forth below are the amounts of stock-based compensation by
            operating function recorded in the Statements of Operations:

           Fulfillment and order processing        $119               $185
           Marketing and sales                      350                315
           Technology and content                   245                358
           General and administrative               307              1,226
                                                 $1,021             $2,084

        (2) Set forth below are the amounts of depreciation by operating
            function recorded in the Statements of Operations:

           Fulfillment and order processing        $746               $458
           Marketing and sales                        1                  1
           Technology and content                 2,223              1,505
           General and administrative               112                112
                                                 $3,082             $2,076



        SUPPLEMENTAL INFORMATION: Gross Profit and Gross Margin
         Information:
                                         Three Months Ended
    (In thousands, unless               March 29,     March 30,
     otherwise indicated)                 2009          2008

    Net sales                           $98,315       $92,568
    Cost of sales                        70,552        67,183
    Gross profit                        $27,763       $25,385

    Gross margin                           28.2%         27.4%



        SUPPLEMENTAL INFORMATION: Segment Information:

                                         Three Months Ended
    (In thousands, unless               March 29,    March 30,
     otherwise indicated)                 2009         2008
    Net sales:
    OTC                                 $72,087      $64,851
    Vision                               17,441       15,436
    Mail-order pharmacy                   8,787       12,281
                                        $98,315      $92,568
    Cost of sales:
    OTC                                 $49,927      $45,013
    Vision                               13,599       12,028
    Mail-order pharmacy                   7,026       10,142
                                        $70,552      $67,183
    Gross profit:
    OTC                                  22,160       19,838
    Vision                                3,842        3,408
    Mail-order pharmacy                   1,761        2,139
                                        $27,763      $25,385
    Gross margin:
    OTC                                    30.7%        30.6%
    Vision                                 22.0%        22.1%
    Mail-order pharmacy                    20.0%        17.4%
                                           28.2%        27.4%
    Variable order costs:
    OTC                                  $6,448       $5,965
    Vision                                  776          743
    Mail-order pharmacy                     679          929
                                          7,903        7,637
    Contribution margin:
    OTC                                 $15,712      $13,873
    Vision                                3,066        2,665
    Mail-order pharmacy                   1,082        1,210
                                        $19,860      $17,748



        SUPPLEMENTAL INFORMATION: Reconciliation of Net Income (Loss) to
         Adjusted EBITDA (See Note 3 below):

                                     Three Months Ended
    (In thousands, unless          March 29,      March 30,
     otherwise indicated)            2009           2008

    Net income (loss)               $1,329        $(2,685)
    Amortization of
     intangible assets                 207            245
    Amortization of
     non-cash marketing                  -            573
    Stock-based
     compensation                    1,021          2,084
    Depreciation                     3,082          2,076
    Interest income, net               (43)          (279)
    Adjusted EBITDA                 $5,596         $2,014

         NOTE 3: Supplemental information related to the company's adjusted
                 EBITDA for the three months ended March 29, 2009 and March
                 30, 2008 is presented for informational purposes only and is
                 not prepared in accordance with generally accepted accounting
                 principles. Adjusted EBITDA is defined as earnings before
                 taxes, depreciation, and amortization of intangible assets
                 and non-cash marketing expense, adjusted to exclude the
                 impact of stock-based compensation expense.


         SUPPLEMENTAL INFORMATION: Reconciliation of Forecasted Q2 2009 Net
          Income (Loss) Range to Forecasted Q2 2009 Adjusted EBITDA Range

    Range Calculated As:             Three Months Ended
     (In thousands, unless             June 28, 2009
     otherwise indicated)         Range High      Range Low

    Net income (loss)                 $250        $(1,750)
    Amortization of
     intangible assets                 215            215
    Stock-based
     compensation                    1,100          1,100
    Depreciation                     3,500          3,500
    Interest income, net               (65)           (65)
    Adjusted EBITDA                 $5,000         $3,000



        SUPPLEMENTAL INFORMATION: Reconciliation of Net Cash Provided by
         Operating Activities to Free Cash Flow:

                                       Three Months Ended
     (In thousands, unless            March 29,     March 30,
     otherwise indicated)               2009          2008

    Net cash (used in) provided
     by operating activities          $(1,820)         $167
     Add: Proceeds from sale of
      discontinued   operations         2,973             -
    Less: Purchases of fixed
     assets                            (1,732)       (5,182)
    Free Cash Flow                      $(579)      $(5,015)



                                    drugstore.com, inc.
                              Consolidated Balance Sheets
                           (in thousands, except share data)

                                                     March 29,    December 28,
                                                        2009        2008
                                                    (unaudited)   (audited)
     ASSETS
     Current assets:
       Cash and cash equivalents                       $25,976     $25,197
       Marketable securities                            10,746      12,997
       Accounts receivable, net of allowances            9,346       9,108
       Inventories                                      31,913      32,704
       Other current assets                              2,919       2,128
       Assets of discontinued operations                 2,983       5,954
         Total current assets                           83,883      88,088

     Fixed assets, net                                  27,070      28,306
     Other intangible assets, net                        3,658       3,731
     Goodwill                                           32,202      32,202
     Other long-term assets                                222         222
         Total assets                                 $147,035    $152,549

     LIABILITIES AND STOCKHOLDERS' EQUITY
     Current liabilities:
       Accounts payable                                $29,434     $31,208
       Accrued compensation                              3,564       4,416
       Accrued marketing expenses                        4,382       4,630
       Other current liabilities                         3,345       4,560
       Current portion of long-term debt                 2,835       2,998
       Liabilities of discontinued operations            2,973       5,946
         Total current liabilities                      46,533      53,758

     Long-term debt, less current portion                2,089       2,567
     Deferred income taxes                                 955         953
     Other long-term liabilities                         1,105       1,071

     Stockholders' equity:
       Common stock, $.0001 par value, stated
        at amounts paid in:
         Authorized shares - 250,000,000
          Issued and outstanding shares -
           99,531,469 and 96,547,079
           as of March 29, 2009 and December 28,
            2008, respectively                         864,923     864,282
       Accumulated other comprehensive income
        (loss)                                             (45)         57
       Accumulated deficit                            (768,525)   (770,139)
         Total stockholders' equity                     96,353      94,200
         Total liabilities and stockholders'
          equity                                      $147,035    $152,549



                                    drugstore.com, inc.
                          Consolidated Statements of Cash Flows
                                      (in thousands)

                                                     Three Months Ended
                                                    March 29,      March 28,
                                                      2009           2008
                                                          (unaudited)
     Operating activities:
       Net income (loss)                             $1,329        $(2,685)
       Adjustments to reconcile net income
        (loss) to net cash (used in) provided
        by operating activities:
           Depreciation                               3,082          2,076
           Amortization of intangible assets            207            245
           Stock-based compensation                   1,021          2,084
           Other, net                                   (48)            (6)
           Changes in:
             Accounts receivable                       (238)           359
             Inventories                                791          1,643
             Other assets                              (791)           201
             Accounts payable, accrued
              expenses and other liabilities         (4,198)        (4,383)
             Net cash provided by (used in)
              activities of  discontinued
               operations                            (2,975)           633
           Net cash (used in) provided by
            operating activities                     (1,820)           167

     Investing activities:
       Purchases of marketable securities            (1,700)       (14,784)
       Sales and maturities of marketable
        securities                                    3,899         18,438
       Proceeds from sale of discontinued
        operations                                    2,973              -
       Purchases of fixed assets                     (1,732)        (5,182)
       Purchases of intangible assets                  (134)             -
           Net cash provided by (used in)
            investing activities                      3,306         (1,528)

     Financing activities:
          Proceeds from exercise of stock options
           and employee                                  48            423
             stock purchase plan
       Proceeds from line of credit                       -          3,500
         Principal payments  capital lease and
           term loan  obligations                       (755)          (486)
           Net cash (used in) provided by
            financing activities                        (707)         3,437

             Net increase in cash and cash
              equivalents                                779          2,076
             Cash and cash equivalents,
              beginning of period                     25,197         18,572
             Cash and cash equivalents, end of
              period                                 $25,976        $20,648




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SOURCE drugstore.com, inc.
Copyright©2009 PR Newswire.
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