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drugstore.com inc. Reports Results for the First Quarter of 2008
Date:5/5/2008

- Company Delivers Record Quarterly Net Revenues and Strong Gross Margins

of 24%, Up 150 Basis Points Year-Over-Year

- Key Internal Promotions, New Senior Director of Operations and

Resignation of There du Pont Announced

BELLEVUE, Wash., May 5 /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 first quarter ended March 30, 2008. The company reported record quarterly net sales of $120.6 million, up 10% year-over-year and driven by over-the-counter (OTC) order growth, and a net loss of $2.7 million, or $0.03 per share. The company achieved strong gross margins of 24.0% and positive adjusted EBITDA of $2.0 million, an improvement of approximately $900,000 from the first quarter of 2007. 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)

"The first quarter of 2008 demonstrates that we are executing on our strategy -- delivering core OTC (1) sales growth of 15.5%, growing Beauty.com 38% year-over-year while expanding overall gross margins by 150 basis points year-over-year," said Dawn Lepore, chief executive officer and chairman of the board of drugstore.com, inc. "We believe our revenue growth was ahead of current ecommerce trends in OTC and prestige beauty, offering evidence that we can drive growth even in a to $2,076 $1,891

SUPPLEMENTAL INFORMATION: Gross Profit and Gross Margin Information:

Three Months Ended

March 30, April 1,

(In thousands, unless otherwise indicated) 2008 2007

Net sales $120,637 $109,765

Cost of sales 91,723 85,062

Gross profit $28,914 $24,703

Gross margin 24.0% 22.5%

SUPPLEMENTAL INFORMATION: Reconciliation of OTC net sales, cost of sales,

gross profit, gross margin, variable order costs, and contribution margin

to Core OTC net sales, cost of sales, gross profit, gross margin, variable

order costs and contribution margin (See Note 3 below):

Three Months Ended

March 30, April 1,

2008 2007

(In thousands)

Over-the-Counter (OTC):

Net sales $64,851 $56,262

CNS 476 503

Core OTC net sales $64,375 $55,759

Cost of sales $45,013 $39,651

CNS 37 27

Core OTC cost of sales $44,976 $39,624

Gross profit 19,838 16,611

CNS 439 476

Core OTC gross profit $19,399 $16,135

Gross margin 30.6% 29.5%

CNS 92.2% 94.6%

Core OTC gross margin 30.1% 28.9%

Variable order costs $5,965 $5,368

CNS 139 170

Core OTC variable order costs $5,826 $5,198

Contribution margin 13,873 11,243

CNS 300 306

Core OTC contribution margin $13,573 $10,937

NOTE 3: Supplemental information related to the company's Core OTC net

sales, cost of sales, gross profit, gross margin, variable order costs and

contribution margin for the three months ended March 30, 2008 and April 1,

2007 is presented for informational purposes only and is not prepared in

accordance with generally accepted accounting principles. On December 31,

2005, we entered into a fulfillment agreement with Weil Lifestyles, LLC,

resulting in Weil-related CNS net sales (which make up the substantial

majority of CNS net sales) being recorded on a net basis after that date.

All CNS sales were previously recorded on a gross basis.

SUPPLEMENTAL INFORMATION: Segment Information:

Three Months Ended

March 30, April 1,

2008 2007

Net sales:

Over-the-Counter (OTC) $64,851 $56,262

Vision 15,436 13,552

Mail-order pharmacy 12,281 13,478

Local pick-up pharmacy 28,069 26,473

$120,637 $109,765

Cost of sales:

Over-the-Counter (OTC) $45,013 $39,651

Vision 12,028 10,496

Mail-order pharmacy 10,142 11,313

Local pick-up pharmacy 24,540 23,602

$91,723 $85,062

Gross profit:

Over-the-Counter (OTC) 19,838 16,611

Vision 3,408 3,056

Mail-order pharmacy 2,139 2,165

Local pick-up pharmacy 3,529 2,871

$28,914 $24,703

Gross margin:

Over-the-Counter (OTC) 30.6% 29.5%

Vision 22.1% 22.6%

Mail-order pharmacy 17.4% 16.1%

Local pick-up pharmacy 12.6% 10.8%

24.0% 22.5%

Variable order costs:

Over-the-Counter (OTC) $5,965 $5,368

Vision 743 648

Mail-order pharmacy 929 1,120

Local pick-up pharmacy 1,150 1,088

8,787 8,224

Contribution margin:

Over-the-Counter (OTC) $13,873 $11,243

Vision 2,665 2,408

Mail-order pharmacy 1,210 1,045

Local pick-up pharmacy 2,379 1,783

$20,127 $16,479

SUPPLEMENTAL INFORMATION: Reconciliation of Net Income (Loss) to Adjusted

EBITDA (See Note 4 below):

Three Months Ended

March 30, April 1,

(In thousands, unless otherwise indicated) 2008 2007

Net income (loss) $(2,685) $(3,778)

Amortization of intangible assets 245 444

Amortization of non-cash marketing 573 572

Stock-based compensation 2,084 2,431

Depreciation 2,076 1,891

Interest income, net (279) (450)

Adjusted EBITDA $2,014 $1,110

NOTE 4: Supplemental information related to the company's adjusted EBITDA

for the three months ended March 30, 2008 and April 1, 2007 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 2008 and FY 2008

Net Income (Loss) Range to Forecasted Q2 2008 and FY 2008 Adjusted EBITDA

Range

Range Calculated As: Three Months Ended Twelve Months Ended

June 29, 2008 December 28, 2008

(In thousands, unless

otherwise indicated)

Range High Range Low Range High Range Low

Net income (loss) $(2,000) $(3,000) $1,000 $(3,000)

Amortization of

intangible assets 250 250 900 900

Amortization of non-cash

marketing 575 575 2,300 2,300

Stock-based compensation 2,000 2,000 7,500 7,500

Depreciation 2,500 2,500 9,750 9,750

Interest income, net (325) (325) (1,450) (1,450)

Adjusted EBITDA $3,000 $2,000 $20,000 $16,000

drugstore.com, inc.

Consolidated Balance Sheets

(in thousands, except share data)

March 30, December 30,

2008 2007

(unaudited) (audited)

ASSETS

Current assets:

Cash and cash equivalents $20,648 $18,572

Marketable securities 14,064 17,677

Accounts receivable, net of allowances 38,855 38,063

Inventories 30,027 31,501

Prepaid marketing expenses 2,321 2,327

Other current assets 3,410 3,605

Total current assets 109,325 111,745

Fixed assets, net 28,699 25,501

Other intangible assets, net 4,353 4,598

Goodwill 32,202 32,202

Prepaid marketing expenses and other 794 1,362

Total assets $175,373 $175,408

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable $59,796 $61,414

Accrued compensation 3,434 4,657

Accrued marketing expenses 4,034 3,988

Other current liabilities 3,977 4,312

Current portion of long-term debt 2,935 3,179

Total current liabilities 74,176 77,550

Long-term debt, less current portion 4,571 1,221

Deferred income taxes 949 947

Other long-term liabilities 1,454 1,322

Stockholders' equity:

Common stock, $.0001 par value, stated at

amounts paid in:

Authorized shares - 250,000,000

Issued and outstanding shares -

96,478,573 and 96,296,687 as of

March 30, 2008 and

December 30, 2007, respectively 858,700 856,193

Accumulated other comprehensive income 60 27

Accumulated deficit (764,537) (761,852)

Total stockholders' equity 94,223 94,368

Total liabilities and stockholders' equity $175,373 $175,408

drugstore.com, inc.

Consolidated Statements of Cash Flows

(in thousands)

Three Months Ended

March 30, April 1,

2008 2007

(unaudited)

Operating activities:

Net loss $(2,685) $(3,778)

Adjustments to reconcile net loss to

net cash provided by (used in)

operating activities:

Depreciation 2,076 1,891

Amortization of marketing and

sales agreements 573 572

Amortization of intangible assets 245 444

Stock-based compensation 2,084 2,431

Other, net (6) -

Changes in:

Accounts receivable (792) (322)

Inventories 1,474 649

Prepaid marketing expenses and other 201 (568)

Accounts payable, accrued expenses

and other liabilities (3,003) (1,824)

Net cash provided by (used in)

operating activities 167 (505)

Investing activities:

Purchases of marketable securities (14,784) (7,146)

Sales and maturities of marketable securities 18,438 7,775

Purchases of fixed assets (5,182) (2,176)

Net cash used in investing activities (1,528) (1,547)

Financing activities:

Proceeds from exercise of stock options

and employee stock purchase plan 423 663

Proceeds from line of credit 3,500 300

Principal payments on capital leases

and term loan obligations (486) (677)

Net cash provided by financing activities 3,437 286

Net increase (decrease) in cash

and cash equivalents 2,076 (1,766)

Cash and cash equivalents,

beginning of period 18,572 13,393

Cash and cash equivalents,

end of period $20,648 $11,627

FOR IMMEDIATE RELEASE

Contact:

Investor Relations:

Brinlea Johnson or Chris Danne

212-551-1453

brinlea@blueshirtgroup.com or chris@blueshirtgroup.com

ugher economic environment without sacrificing margin. Additionally, we are pleased with the benefits we are seeing from our improved operational efficiencies and grew contribution margin dollars 22% year-over-year, exceeding $20.0 million for the first time in company history. Based on growing sales and expanding margins, we reported positive adjusted EBITDA that almost doubled from the first quarter of 2007, despite investing over $1.3 million on our profitability initiatives."

"Beauty.com remains key to our strategy and since the beginning of the year, we have added a record 31 new prestige brands compared to 50 brands in all of fiscal 2007. Profitability remains our top priority and we will continue to drive margin expansion and improve operational efficiencies throughout 2008- targeting to exit the year with gross margins above 26%, adjusted EBITDA margins between 5-6% and GAAP profitability for the full year," concluded Ms. Lepore.

The Company also announced today that chief financial officer, There du Pont will be resigning to run a private foundation effective May 29. Mr. du Pont will continue as a consultant for the company until the end of August. To replace Mr. du Pont, drugstore.com is promoting two senior financial executives effective May 29, 2008 -- Rob Potter, current Vice President, Chief Accountant, will be Vice President, Chief Accounting Officer and Tracy Wright, current Vice President of Financial Planning and Analysis, will be Vice President, Chief Finance Officer.

"Rob and Tracy have each been with drugstore.com over four years and have stepped up to spearhead the finance team," explained Ms. Lepore. "They share over 34 years of combined corporate finance experience and I feel very confident that they are the right team to lead our finance organization. We have also recently hired Jon Axelsson from Wawa, Inc. who brings over 20 years of experience in warehousing and transportation operations, to take over There's operational responsibilities and to continue to drive margin improvement. Jon has an impressive background from Wawa, Federal Express, UPS, and QVC, and will serve as Senior Director of Operations. We thank There for his contributions and wish him success in his new role."

GAAP net loss for the first quarter of 2008 was $2.7 million, or $0.03 per share, compared to a net loss of $3.8 million, or $0.04 per share, for the first quarter of 2007. The first quarter losses include $2.1 million and $2.4 million, in non-cash stock-based compensation expense for 2008 and 2007, respectively.

Outlook for Second Quarter 2008 and Revised 2008 Outlook

For the second quarter of 2008, the company is targeting net sales in the range of $118.0 million to $122.0 million, net loss in the range of $2.0 million to $3.0 million, and adjusted EBITDA in the range of $2.0 million to $3.0 million. Second quarter adjusted EBITDA guidance includes a $1.0 million in consulting services associated with profitability initiatives, which will result in improved margins throughout the remainder of 2008.

Due to a challenging economic environment, drugstore.com is revising initial fiscal year 2008 guidance. The company is now targeting net sales in the range of $490.0 million to $500.0 million, net income (loss) in the range of $(3.0) million to $1.0 million, and adjusted EBITDA in the range of $16.0 million to $20.0 million.

Financial and Operational Highlights for the First Quarter of 2008

(All comparisons are made to the first quarter of 2007)

Key Financial Highlights:

-- Gross margins for the quarter increased 150 basis points to 24.0%.

-- Total contribution margin dollars increased by over 22% for the quarter

and exceeded $20.0 million for the first time in company history.

-- Total orders grew by nearly 8% to 1.6 million, while contribution

margin dollars per order grew almost 14% to approximately $13.

-- Cash, cash equivalents and marketable securities were $34.7 million at

quarter end.

Net Sales Summary:

-- Core OTC (1) revenues grew by approximately 16% to $64.4 million in the

quarter. OTC net sales grew by over 15% to $64.9 million.

-- Vision net sales grew approximately 14% to $15.4 million.

-- Local pick-up pharmacy net sales were up approximately 6% to

$28.1 million.

-- Mail-order pharmacy net sales were down to $12.3 million, while

contribution margins dollars increased approximately 16%.

-- Average net sales per order were $76 for the quarter. Average net

sales per order increased to $58 for OTC, grew 12% to $108 for vision,

and were $106 for local pick-up pharmacy and $164 for mail-order

pharmacy.

-- Net sales from repeat customers(2) represented 81% of net sales.

Key Customer Milestones:

-- We served approximately 374,000 new customers during the quarter, an

11% increase over the prior year.

-- We have now served nearly 10.2 million customers since inception.

-- The number of active customers (3) was 2.6 million.

1. Core OTC net sales is a non-GAAP financial measure that excludes from

OTC net sales the company's Custom Nutrition Services ("CNS") net

sales. CNS sales are generated by sales of customized vitamins through

the company's CNS subsidiary. Prior to December 31, 2005, all CNS

sales were recognized on a gross basis, net of promotional discounts,

cancellations, rebates and returns allowances. Under the terms of the

company's December 31, 2005 fulfillment agreement with Weil Lifestyle,

LLC (Weil), the company recognizes on a net basis the revenue

associated with the fulfillment of customized vitamins sold through

its fulfillment agreement with Weil. A reconciliation of OTC net sales

to core OTC net sales is included in the financial data accompanying

this press release.

2. 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.

3. 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 May 5, 2008 at 5:00 p.m. ET (2:00 p.m. PT). To participate, callers should dial 800-240-6709 (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, May 7, 2008 by dialing 800-405-2236 (enter pass code 11112232#) or internationally at 303-590-3000 (enter pass code 11112232#) 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.

drugstore.com, inc. also uses non-GAAP measures in which CNS sales are excluded from OTC segment sales data. This non-GAAP measure is provided to enhance the user's overall understanding of the company's financial performance in the OTC segment. Management believes that these reporting metrics provide 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 the OTC segment. By excluding CNS 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 (those customers making nonprescription purchases through Web sites owned by drugstore.com, inc. and its subsidiaries). However, these non-GAAP measures 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 CNS sales.

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 30,000 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," "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

March 30, April 1,

2008 2007

Net sales $120,637 $109,765

Costs and expenses: (1) (2)

Cost of sales 91,723 85,062

Fulfillment and order processing 12,150 10,974

Marketing and sales 8,886 8,089

Technology and content 5,203 4,715

General and administrative 5,394 4,709

Amortization of intangible assets 245 444

Total costs and expenses 123,601 113,993

Operating loss (2,964) (4,228)

Interest income, net 279 450

Net loss $(2,685) $(3,778)

Basic and diluted net loss per share $(0.03) $(0.04)

Weighted average shares outstanding

used to compute basic and diluted

net loss per share 96,392,737 94,500,129

_________

(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 $275

Marketing and sales 315 414

Technology and content 358 358

General and administrative 1,226 1,384

$2,084 $2,431

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

recorded in the Statements of Operations:

Fulfillment and order processing $458 $463

Marketing and sales 1 1

Technology and content 1,505 1,323

General and administrative 112 104


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SOURCE drugstore.com, inc.
Copyright©2008 PR Newswire.
All rights reserved

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