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drugstore.com inc. Reports Record Gross Margins and Bottom Line Results for the Third Quarter of 2007
Date:10/22/2007

- Third Quarter Revenues Increase Year-over-Year to $107.3 Million and Net

Loss Decreases to $0.02 per Share - Company Expects to More Than Double Adjusted EBITDA in Fourth Quarter of

2007

BELLEVUE, Wash., Oct. 22 /PRNewswire-FirstCall/ -- drugstore.com, inc. (Nasdaq: DSCM), a leading online provider of health, beauty, vision, and pharmacy products, today announced its financial results for the third quarter ended September 30, 2007. The company reported quarterly net sales of $107.3 million and a net loss of $2.4 million, or $0.02 per share. The company achieved record performance across a number of key financial metrics: gross margins reached 23.2%, adjusted EBITDA was approximately $2.1 million and operating cash flow was $4.4 million. 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.

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

"In the seasonally challenging third quarter, we continued to grow our OTC business, reported strong gross margin improvement and record adjusted EBITDA," said Dawn Lepore, chief executive officer and chairman of the board of drugstore.com, inc. "OTC revenues increased by 20% year-over-year with a number of our key growth initiatives rolling out later in the quarter. Gross margins increased 170 basis points year-over-year leading to record adjusted EBITDA of $2.1 million, an improvement of over 57% from the same period in ,876 $14,242 $50,566 $43,712

SUPPLEMENTAL INFORMATION: Reconciliation of Net Loss to Adjusted EBITDA

(See Note 3 below):

Three Months Ended Nine Months Ended

September 30, October 1, September 30, October 1,

(In thousands, 2007 2006 2007 2006

unless otherwise

indicated)

Net loss $(2,374) $(2,593) $(9,167) $(10,079)

Amortization of

intangible assets 240 531 990 1,592

Amortization of non-

cash marketing 572 572 1,717 1,717

Stock-based compensation 2,147 1,760 7,114 5,016

Depreciation 1,941 1,494 5,743 4,500

Interest income, net (459) (449) (1,265) (1,292)

Adjusted EBITDA $2,067 $1,315 $5,132 $1,454

NOTE 3: Supplemental information related to the company's adjusted EBITDA

for the three and nine months ended September 30, 2007 and October

1, 2006 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 Q4 2007 Net Loss

Range to Forecasted Q4 2007 Adjusted EBITDA Range

Range Calculated As: Three Months Ended

December 30, 2007

(In thousands, unless

otherwise indicated) Range High Range Low

Net income (loss) $500 $(500)

Amortization of intangible assets 250 250

Amortization of non- cash marketing 575 575

Stock-based compensation 2,100 2,100

Depreciation 2,250 2,250

Interest income, net (475) (475)

Adjusted EBITDA $5,200 $4,200

drugstore.com, inc.

Consolidated Balance Sheets

(in thousands, except share data)

September 30, December 31,

2007 2006

(unaudited) (audited)

ASSETS

Current assets:

Cash and cash equivalents $9,962 $13,393

Marketable securities 27,966 27,246

Accounts receivable, net of allowances 35,304 36,688

Inventories 22,500 26,469

Prepaid marketing expenses 2,290 2,290

Other current assets 3,606 2,615

Total current assets 101,628 108,701

Fixed assets, net 23,735 18,293

Other intangible assets, net 4,842 5,376

Goodwill 32,202 32,202

Prepaid marketing expenses and other 2,033 3,750

Total assets $164,440 $168,322

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable $55,349 $57,507

Accrued compensation 3,993 4,841

Accrued marketing expenses 3,292 3,661

Other current liabilities 1,144 1,292

Current portion of long-term debt 2,695 3,949

Total current liabilities 66,473 71,250

Long-term debt, less current portion 1,610 1,839

Deferred income taxes 945 945

Other long-term liabilities 1,394 1,610

Stockholders' equity:

Common stock, $.0001 par value, stated

at amounts paid in:

Authorized shares - 250,000,000

Issued and outstanding shares - 95,915,369

and 94,335,027 as of September 30, 2007 and

December 31, 2006, respectively 853,521 843,026

Accumulated other comprehensive income (loss) 5 (7)

Accumulated deficit (759,508) (750,341)

Total stockholders' equity 94,018 92,678

Total liabilities and stockholders' equity $164,440 $168,322

drugstore.com, inc.

Consolidated Statements of Cash Flows

(in thousands)

Three Months Ended Nine Months Ended

September October September October

30, 2007 1, 2006 30, 2007 1, 2006

(unaudited)

Operating activities:

Net loss $(2,374) $(2,593) $(9,167) $(10,079)

Adjustments to reconcile net

loss to net cash provided by

(used in) operating activities:

Depreciation 1,941 1,494 5,743 4,500

Amortization of marketing and

sales agreements 572 572 1,717 1,717

Amortization of intangible

assets 240 531 990 1,592

Stock-based compensation 2,147 1,760 7,114 5,016

Other, net 18 12 12 24

Changes in:

Accounts receivable 958 1,476 1,384 (1,296)

Inventories 2,929 (1,800) 3,969 1,512

Prepaid marketing expenses

and other (766) 124 (991) 488

Accounts payable, accrued

expenses and other

liabilities (1,225) 336 (3,739) (4,453)

Net cash provided by (used

in) operating activities 4,440 1,912 7,032 (979)

Investing activities:

Purchases of marketable

securities (5,379) (5,125) (16,540) (18,031)

Sales and maturities of

marketable securities 5,300 1,775 15,825 17,075

Purchases of fixed assets (5,653) (1,981) (10,783) (5,544)

Purchases of intangible assets (456) - (456) -

Net cash used in investing

activities (6,188) (5,331) (11,954) (6,500)

Financing activities:

Proceeds from exercise of

stock 1,448 options and

employee stock purchase plan 1,448 780 3,381 1,397

Borrowings on line of credit - 1,000 300 1,000

Principal payments on capital

lease and term loan obligations (795) (781) (2,190) (1,717)

Net cash provided by

financing activities 653 999 1,491 680

Net decrease in cash and

cash equivalents (1,095) (2,420) (3,431) (6,799)

Cash and cash equivalents,

beginning of period 11,057 15,912 13,393 20,291

Cash and cash equivalents,

end of period 9,962 13,492 9,962 13,492

the prior year."

"Over the last six months we have focused on growing OTC revenues and improving operational efficiencies to set the stage for a break-out fourth quarter -- our strongest seasonal period. In the fourth quarter, we expect adjusted EBITDA to more than double sequentially and believe that this positive momentum will continue throughout 2008. Driving this improvement will be the continued growth of our OTC revenues and the success of our growth and profitability initiatives, many of which are already showing positive traction in the current quarter. For example, we have seen an uptick in drop ship sales with the roll-out of Halloween costumes, demonstrating that we can drive seasonal drop ship products. Additionally, almost 10% of OTC transactions in recent weeks have migrated to alternative payment options since the completion of our roll-out of Bill Me Later, Google Checkout and PayPal. Most importantly, the re-launch of our Beauty.com(TM) website with a more personalized, up-close shopping experience has led to a significant increase in traffic and orders. Based on this, we expect Beauty.com year-over-year growth of more than 50% in the fourth quarter," concluded Ms. Lepore.

GAAP net loss for the third quarter of 2007 was $2.4 million, or $0.02 per share, compared to a net loss of $2.6 million, or $0.03 per share, for the third quarter of 2006. The third quarter losses include $2.1 million and $1.8 million, in non-cash stock-based compensation expense for 2007 and 2006, respectively.

Outlook for Fourth Quarter 2007

For the fourth quarter of 2007, the company is targeting net sales in the range of $120.0 million to $125.0 million, net loss of $0.5 million to net income of $0.5 million, and adjusted EBITDA in the range of $4.2 million to $5.2 million.

Financial and Operational Highlights for the Third Quarter of 2007

(All comparisons are made to the third quarter of 2006)

Key Financial Highlights:

-- Gross margin increased 170 basis points to a record high of 23.2%.

-- Total contribution margin dollars increased by over 18%.

-- OTC revenues grew by approximately 20%.

-- Total orders grew by 10% to 1.4 million, while contribution margin

dollars per order grew to approximately $12.

-- Cash, cash equivalents and marketable securities were $37.9 million at

quarter end.

-- Operating cash flow for the quarter was $4.4 million.

Net Sales Summary:

-- OTC net sales grew by 20% to $54.6 million.

-- Vision net sales grew approximately 17% to $14.9 million.

-- Local pick-up pharmacy net sales were up approximately 5% to $26.4

million.

-- Mail-order pharmacy net sales were down to $11.5 million, while

contribution margins increased 320 basis points to 9.6%.

-- Average net sales per order were $75. Average net sales per order

increased to $57 for OTC, grew over 10% to $101 for vision, and were

$106 for local pick-up pharmacy and $151 for mail-order pharmacy.

-- Net sales from repeat customers[1] represented 82% of net sales.

Key Customer Milestones:

-- New customers grew 15% to 326,000 and we have now served approximately

9.5 million customers since inception.

-- The number of active customers [2] was 2.4 million.

-- The average annual spend per active customer [2] was $180.

1. Net sales from repeat customers exclude Weil-related CNS net sales and

reflect only the activity of customers making purchases through the Web

sites of drugstore.com 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 and its

subsidiaries.

Conference Call

Investors, analysts, and other interested parties are invited to join the drugstore.com, inc. quarterly conference call on Monday, October 22, 2007 at 5:00 p.m. ET (2:00 p.m. PT). To participate, callers should dial 800-218-8862 (international callers should dial 303-262-2141) 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 Wednesday, October 24, 2007 at 800-405-2236 (enter pass code 11098778#) or internationally at 303-590-3000 (enter pass code 11098778#) 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 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 loss is included with the financial statements attached to this release.

About drugstore.com, inc.

drugstore.com, inc. (NASDAQ: DSCM) is a leading online provider 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 25,000 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) 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," "expect," "believe," "may," "will," "focus," "continue," "would," "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.

drugstore.com, inc.

Consolidated Statements of Operations

(in thousands, except share and per share data)

(unaudited)

Three Months Ended Nine Months Ended

September 30, October 1, September 30, October 1,

2007 2006 2007 2006

Net sales $107,323 $100,634 $327,500 $307,179

Costs and

expenses: (1) (2)

Cost of sales 82,431 79,012 252,810 240,846

Fulfillment and

order processing 10,571 9,979 32,201 30,395

Marketing and sales 7,467 6,517 23,428 21,816

Technology and

content 4,680 4,046 13,870 11,991

General and

administrative 4,767 3,591 14,633 11,910

Amortization of

intangible assets 240 531 990 1,592

Total costs and

expenses 110,156 103,676 337,932 318,550

Operating loss (2,833) (3,042) (10,432) (11,371)

Interest income,

net 459 449 1,265 1,292

Net loss $(2,374) $(2,593) $(9,167) $(10,079)

Basic and diluted net

loss per share $(0.02) $(0.03) $(0.10) $(0.11)

Weighted average

shares

outstanding used

to compute basic

and diluted net

loss per share 95,664,011 93,488,258 95,056,884 93,198,037

(1) Set forth below are the amounts of stock-based compensation by

operating function recorded in the Statements of Operations:

Fulfillment and order

processing $185 $264 $646 $639

Marketing and sales 292 244 1,078 825

Technology and content 292 312 935 846

General and

administrative 1,378 940 4,455 2,706

$2,147 $1,760 $7,114 $5,016

(2) Set forth below are the amounts of depreciation by operating function

recorded in the Statements of Operations:

Fulfillment and order

processing $440 $328 $1,360 $1,108

Marketing and sales 1 - 3 1

Technology and

content 1,397 1,053 4,067 3,055

General and

administrative 103 113 313 36

$1,941 $1,494 $5,743 $4,500

SUPPLEMENTAL INFORMATION: Gross Profit and Gross Margin Information:

Three Months Ended Nine Months Ended

September 30, October 1, September 30, October 1,

(In thousands, 2007 2006 2007 2006

unless otherwise

indicated)

Net sales $107,323 $100,634 $327,500 $307,179

Cost of sales 82,431 79,012 252,810 240,846

Gross profit $24,892 $21,622 $74,690 $66,333

Gross margin 23.2% 21.5% 22.8% 21.6%

SUPPLEMENTAL INFORMATION: Segment Information:

Three Months Ended Nine Months Ended

September 30, October 1, September 30, October 1,

2007 2006 2007 2006

Net sales:

Over-the-Counter (OTC) $54,623 $45,605 $168,412 $141,865

Mail-order pharmacy 11,485 17,178 37,414 52,883

Local pick-up pharmacy 26,364 25,150 79,476 74,692

Vision 14,851 12,701 42,198 37,739

$107,323 $100,634 $327,500 $307,179

Cost of sales:

Over-the-Counter (OTC) $38,630 $31,848 $119,091 $99,144

Mail-order pharmacy 9,419 14,830 31,198 45,643

Local pick-up pharmacy 23,098 22,402 70,266 66,711

Vision 11,284 9,932 32,255 29,348

$82,431 $79,012 $252,810 $240,846

Gross profit:

Over-the-Counter

(OTC) 15,993 13,757 49,321 42,721

Mail-order pharmacy 2,066 2,348 6,216 7,240

Local pick-up pharmacy 3,266 2,748 9,210 7,981

Vision 3,567 2,769 9,943 8,391

$24,892 $21,622 $74,690 $66,333

Gross margin:

Over-the-Counter (OTC) 29.3 % 30.2 % 29.3 % 30.1 %

Mail-order

pharmacy 18.0 % 13.7 % 16.6 % 13.7 %

Local pick-up

pharmacy 12.4 % 10.9 % 11.6 % 10.7 %

Vision 24.0 % 21.8 % 23.6 % 22.2 %

23.2 % 21.5 % 22.8 % 21.6 %

Variable order costs:

Over-the-Counter (OTC) $5,232 $4,482 $15,780 $13,194

Mail-order pharmacy 963 1,256 3,036 4,446

Local pick-up pharmacy 1,084 1,034 3,273 3,064

Vision 737 608 2,035 1,917

8,016 7,380 24,124 22,621

Contribution margin:

Over-the-Counter (OTC) $10,761 $9,275 $33,541 $29,527

Mail-order pharmacy 1,103 1,092 3,180 2,794

Local pick-up pharmacy 2,182 1,714 5,937 4,917

Vision 2,830 2,161 7,908 6,474

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SOURCE drugstore.com, inc.
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