drugstore.com Announces First Quarter Financial Results -- Bottom Line Results Beat Expectations; Key Initiatives Improve Margins and Help Drive Company Towards EBITDA Profitability

"In a seasonally softer quarter, our adjusted EBITDA loss of $1.4million reflected a significant sequential improvement and includedexpenses of $1.8 million related to the winding down of our brandawareness campaign," said Dawn Lepore, chief executive officer andchairman of the board of drugstore.com, inc. "This encouragingperformance was driven by strong gross margins, especially in our coreOTC business, as we began to see the impact of a number of keyprofitability initiatives that are rapidly and positively changing ourbusiness model. These include careful examination of the pricing ofeach SKU, initiatives to reduce shipping loss, elimination ofunfavorable partnerships and improvements to web store conversion.This important progress demonstrates that we are executing on plan andwe now expect to approach adjusted EBITDA break-even in the secondquarter."

"Our core OTC net sales (1) increased a strong 21% year-over-yeardespite some short-term product availability issues in our Beauty.comstore," added Ms. Lepore. "Margins from core OTC sales were up 180basis points year-over-year and gross profit dollars were up 29%year-over-year. We are also very pleased to report that quarterlyrepeat orders surpassed one million for the first time in companyhistory. We believe these results reflect not only the benefits of ourmultiple operational initiatives but also our continued focus onstrengthening customer retention and frequency through the launch ofauto delivery, enhanced email applications and improvedpersonalization to build a loyal customer base."

GAAP net loss for the first quarter of 2006 was $5.3 million, or$0.06 per share, compared to a net loss of $5.0 million, or $0.06 pershare, for the first quarter of 2005. The company's GAAP resultsreflect the adoption of FAS 123R for the expensing of non-cashshare-based compensation. In accordance with FAS 123R, such expensefor current and comparative periods is reflected within the applicablefunctional operating expense lines within the statement of operations.Adjusted EBITDA loss (a non-GAAP financial measure defined as earningsbefore interest, taxes, depreciation, and amortization of intangibleassets and non-cash marketing expense, adjusted to exclude the impactof stock-based compensation expense) was $1.4 million for the firstquarter of 2006, compared to $1.3 million for the first quarter of2005.

Outlook for Second Quarter

For the second quarter of 2006, drugstore.com is targeting a netsales range of $101.0 million to $105.0 million, a net loss range of$4.3 million to $5.5 million, and an adjusted EBITDA range ofbreak-even to a loss of $1.0 million.

Financial and Operational Highlights for the First Quarter of 2006

(All comparisons are made with the first quarter of 2005.)

Net Sales Highlights:

-- Core OTC net sales (1) grew by 21%, to $48.3 million. Core OTC net sales from repeat customers grew by 29%.

-- Product sales through Beauty.com grew by 43%, product sales in the natural store grew by 31% and product sales through the personal care store grew by 26%.

-- Mail-order pharmacy net sales were up slightly to $18.3 million and were negatively impacted by the launch of the Medicare Part D prescription drug benefit.

-- Local pick-up pharmacy net sales were down slightly to $24.2 million.

-- Vision net sales grew to $12.6 million, a 4% increase.

-- Total order volume grew to over 1.3 million.

-- Average net sales per order were $77. Average net sales per order were flat at $56 for OTC, grew by 9% to an all-time high of $155 for mail-order pharmacy, grew by 5% to $112 for local pick-up pharmacy, and grew by 5% to $87 for vision.

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

Key Customer Milestones:

-- 7.5 million customers have been served since inception, including 326,000 new customers in the first quarter.

-- The number of active customers (3) grew by 10% to 2.1 million.

-- The average annual spend per active customer (3) grew $2 to $189.

Other Financial Highlights:

-- Fulfillment and order processing expenses improved to 9.8% of net sales, down from 10.3%.

-- Inventory turned at an annualized rate of 14 during the quarter.

1. The company's core OTC sales exclude wholesale OTC and CustomNutrition Services (CNS) net sales. Wholesale OTC sales were generatedby the company's December 2003 agreement to provide fulfillmentservices to Amazon.com, Inc., which agreement was terminated effectiveas of November 9, 2005. Prior to December 31, 2005, all sales ofcustomized vitamins through CNS were recognized on a gross basis, netof promotional discounts, cancellations, rebates and returnsallowances. On December 31, 2005, the company entered into afulfillment agreement with Weil Lifestyle, LLC (Weil). Under the termsof the new agreement, the company recognizes on a net basis therevenue associated with the fulfillment of customized vitamins soldthrough its fulfillment agreement with Weil (which made up thesubstantial majority of CNS net sales during the quarter). Areconciliation of OTC net sales to OTC net sales excluding wholesaleOTC and CNS net sales is included in the financial data accompanyingthis press release.

2. Net sales from repeat customers excludes wholesale OTC netsales and Weil-related CNS net sales and reflects only the activity ofcustomers making purchases through the Web sites of drugstore.com andits subsidiaries.

3. Active customer base reflects those customers who havepurchased at least once within the last 12 months. Both the activecustomer base (a trailing 12-month number) and average annual spendper active customer exclude net sales and orders generated by thecompany's wholesale OTC business and CNS fulfillment relationship withWeil, and reflect only the activity of customers making purchasesthrough the Web sites of drugstore.com and its subsidiaries.

Conference Call

Investors, analysts, and other interested parties are invited tojoin the drugstore.com(TM) quarterly conference call on Thursday,April 27, 2006 at 5:00 p.m. ET (2:00 p.m. PT). To participate, callersshould dial 800-257-1836 (international callers should dial303-262-2141) five minutes beforehand. Investors may also listen tothe conference call live at www.drugstore.com (under CorporateInformation), by clicking on the "audio" hyperlink. A replay of thecall will be available through Saturday, April 29, 2006 at800-405-2236 (enter pass code 11058599) or internationally at303-590-3000 (enter pass code 11058599) beginning two hours aftercompletion of the call.

Non-GAAP Measures

To supplement the consolidated financial statements presented inaccordance with GAAP, drugstore.com, inc. uses the non-GAAP measure ofadjusted EBITDA, defined as earnings before interest, taxes,depreciation, and amortization of intangible assets and non-cashmarketing expenses, adjusted to exclude the impact of stock-basedcompensation expense. This non-GAAP measure is provided to enhance theuser's overall understanding of the company's current financialperformance and prospects for the future. Management believes thatadjusted EBITDA, as defined, provides useful information to thecompany and to investors by excluding certain items that may not beindicative of the company's core operating results. In addition,because drugstore.com, inc. has historically provided EBITDA measuresto investors, management believes that including EBITDA measuresprovides consistency in the company's financial reporting. However,adjusted EBITDA should not be considered in isolation, or as asubstitute for, or as superior to, net profit/loss, cash flows, orother consolidated loss or cash flow data prepared in accordance withGAAP, or as a measure of the company's profitability or liquidity.Although EBITDA is frequently used as a measure of operatingperformance, it is not necessarily comparable to other similarlytitled captions of other companies due to differences in methods ofcalculation. Net profit/loss is the closest financial measure preparedby the company in accordance with GAAP in terms of comparability toadjusted EBITDA.

drugstore.com, inc. also uses non-GAAP measures in which wholesaleOTC sales and CNS sales are excluded from OTC segment sales data.These non-GAAP measures are provided to enhance the user's overallunderstanding of the company's financial performance in the OTCsegment. Management believes that these reporting metrics provideuseful information to the company and to investors by excludingcertain items that may not be indicative of the company's coreoperating results in the OTC segment. By excluding wholesale OTC andCNS sales from OTC sales data, the company can more effectively assessthe buying behavior of, and the company's financial performance withrespect to, its own core OTC customers (those customers makingnonprescription purchases through Web sites owned by drugstore.com,inc. and its subsidiaries). However, these non-GAAP measures shouldnot be considered in isolation, or as a substitute for, or as superiorto, OTC segment sales data prepared in accordance with GAAP, or as ameasure of the company's overall performance in the OTC segment. OTCsegment sales measures are the closest financial measures prepared bythe company in accordance with GAAP in terms of comparability to OTCsegment sales measures that exclude wholesale OTC and CNS sales.

About drugstore.com, inc.

drugstore.com, inc. (NASDAQ:DSCM) is a leading online provider ofhealth, beauty, vision, and pharmacy products. The drugstore.com(TM)online store provides a convenient, private, and informative shoppingexperience that encourages consumers to purchase products essential tohealthy, everyday living. The online store offers thousands ofbrand-name personal health care products at competitive prices; afull-service, licensed retail pharmacy; and a wealth of health-relatedinformation, buying guides, and other tools designed to help consumersmake informed purchasing decisions. Consumers can personalize theirshopping experiences with shopping lists, e-mail reminders forreplenishing regularly used products, and private e-mail access topharmacists and beauty experts for questions.

drugstore.com, inc. has been awarded the Verified InternetPharmacy Practice Sites (VIPPS) certification by the NationalAssociation of Boards of Pharmacy (NABP) as a fully licensed facilityexercising competent, safe pharmacy practices in compliance withfederal and state laws and regulations.

The financial results contained in this press release arepreliminary and unaudited. In addition, this press release containsforward-looking statements regarding future events or the futurefinancial and operational performance of drugstore.com, inc. Wordssuch as "targets," "expects," "believes," "anticipates," "intends,""may," "will," "plan," "continue," "forecast," "remains," "would,""should," and similar expressions, are intended to identifyforward-looking statements. Forward-looking statements are based oncurrent expectations, are not guarantees of future performance andinvolve assumptions, risks, and uncertainties. Actual performance maydiffer materially from those contained or implied in suchforward-looking statements. Risks and uncertainties that could lead tosuch differences could include, among other things: effects of changesin the economy, changes in consumer spending, fluctuations in thestock market, changes affecting the Internet, online retailing andadvertising, difficulties establishing our brand, including the riskthat our new brand campaign may not be successful as we anticipate,and building a critical mass of customers, the unpredictability offuture revenues and expenses and potential fluctuations in revenuesand operating results, risks related to business combinations andstrategic alliances, possible tax liabilities relating to thecollection of sales tax, consumer trends, the level of competition,seasonality, the timing and success of expansion efforts, recentchanges in senior management, risks related to systems interruptions,possible governmental regulation and the ability to manage a rapidlygrowing business. Additional information regarding factors thatpotentially could affect the business, financial condition andoperating results of drugstore.com, inc. is included in the company'speriodic filings with the SEC on Forms 10-K, 10-Q and 8-K.drugstore.com, inc. expressly disclaims any intent or obligation toupdate any forward-looking statement, except as otherwise specificallystated by it.
drugstore.com, inc.
Consolidated Statements of Operations
(in thousands, except share and per share data)
(unaudited)
Three Months Ended
-------------------------
April 2, April 3,
2006 2005
----------- -----------
Net sales $ 104,109 $ 99,573

Costs and expenses: (1) (2)
Cost of sales 81,889 79,336
Fulfillment and order processing 10,177 10,285
Marketing and sales 8,977 6,963
Technology and content 3,942 2,932
General and administrative 4,294 4,429
Amortization of intangible assets 530 801
----------- -----------
Total costs and expenses 109,809 104,746
----------- -----------

Operating loss (5,700) (5,173)
Interest income, net 407 179
----------- -----------
Net loss $ (5,293) $ (4,994)
----------- -----------

Basic and diluted net loss per share $ (0.06) $ (0.06)
=========== ===========

Weighted average shares outstanding used to
compute basic and diluted net loss per
share 92,969,650 85,487,764
=========== ===========

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

Fulfillment and order processing $ 221 $ -
Marketing and sales 324 143
Technology and content 272 4
General and administrative 886 701
----------- -----------
$ 1,703 $ 848
=========== ===========

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

Fulfillment and order processing $ 394 $ 941
Marketing and sales - -
Technology and content 953 507
General and administrative 111 155
----------- -----------
$ 1,458 $ 1,603
=========== ===========





SUPPLEMENTAL INFORMATION: Gross Profit and Gross Margin Information:

Three Months Ended
-------------------
April 2, April 3,
(In thousands, unless otherwise indicated) 2006 2005
-------- --------

Net sales $104,109 $ 99,573

Cost of sales 81,889 79,336
-------- --------

Gross profit $ 22,220 $ 20,237
======== ========

Gross margin 21.3% 20.3%
======== ========



SUPPLEMENTAL INFORMATION: Reconciliation of OTC net sales, cost of
sales, gross profit, and gross margin to Core OTC net sales, cost of
sales, gross profit and gross margin (See Note 3 below):

Three Months Ended
---------------------------------
April 2, January 1, April 3,
2006 2006 2005
-------- ----------- ---------
(In thousands)
Over-the-Counter (OTC):
Net sales $ 49,006 $ 51,226 $ 44,509
CNS 683 2,328 2,001
Wholesale OTC - 468 2,547
-------- ----------- ---------
Core OTC net sales $ 48,323 $ 48,430 $ 39,961
======== =========== =========

Cost of sales $ 34,663 $ 36,382 $ 32,515
CNS (16) 936 851
Wholesale OTC - 350 2,249
-------- ----------- ---------
Core OTC cost of sales $ 34,679 $ 35,096 $ 29,415

Gross profit $ 14,343 $ 14,844 $ 11,994
CNS 699 1,392 1,150
Wholesale OTC - 118 298
-------- ----------- ---------
Core OTC gross profit $ 13,644 $ 13,334 $ 10,546
======== =========== =========

Gross margin 29.3% 29.0% 26.9%
CNS 102.3% 59.8% 57.5%
Wholesale OTC - 25.2% 11.7%
-------- ----------- ---------
Core OTC gross margin 28.2% 27.5% 26.4%
======== =========== =========

NOTE 3: Supplemental information related to the company's Core OTC
net sales, cost of sales, gross profit, and gross margin for the three
months ended April 2, 2006, January 1, 2006 and April 3, 2005 is
presented for informational purposes only and is not prepared in
accordance with generally accepted accounting principles. Effective
November 9, 2005, the company terminated its wholesale OTC fulfillment
agreement with Amazon.com, Inc. without any material obligations for
either party following the termination. On December 31, 2005, the
company 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
--------------------------------
April 2, January 1, April 3,
2006 2006 2005
-------- ---------- ---------
Net sales:
Over-the-Counter (OTC) $ 49,006 $ 51,226 $ 44,509
Mail-order pharmacy 18,300 19,994 17,953
Local pick-up pharmacy 24,213 23,834 24,976
Vision 12,590 11,315 12,135
-------- ---------- ---------
$104,109 $ 106,369 $ 99,573
Cost of sales:
Over-the-Counter (OTC) $ 34,663 $ 36,382 $ 32,515
Mail-order pharmacy 15,845 17,264 15,521
Local pick-up pharmacy 21,588 20,958 21,918
Vision 9,793 8,971 9,382
-------- ---------- ---------
$ 81,889 $ 83,575 $ 79,336
Gross profit:
Over-the-Counter (OTC) 14,343 14,844 11,994
Mail-order pharmacy 2,455 2,730 2,432
Local pick-up pharmacy 2,625 2,876 3,058
Vision 2,797 2,344 2,753
-------- ---------- ---------
$ 22,220 $ 22,794 $ 20,237
======== ========== =========
Gross margin:
Over-the-Counter (OTC) 29.3% 29.0% 26.9%
Mail-order pharmacy 13.4% 13.7% 13.5%
Local pick-up pharmacy 10.8% 12.1% 12.2%
Vision 22.2% 20.7% 22.7%
-------- ---------- ---------
21.3% 21.4% 20.3%
======== ========== =========
Variable order costs:
Over-the-Counter (OTC) $ 4,328 $ 5,358 $ 4,717
Mail-order pharmacy 1,602 1,832 1,750
Local pick-up pharmacy 992 986 1,054
Vision 661 666 726
-------- ---------- ---------
7,583 8,842 8,247
Contribution margin:
Over-the-Counter (OTC) $ 10,015 $ 9,486 $ 7,277
Mail-order pharmacy 853 898 682
Local pick-up pharmacy 1,633 1,890 2,004
Vision 2,136 1,678 2,027
-------- ---------- ---------
$ 14,637 $ 13,952 $ 11,990
======== ========== =========





SUPPLEMENTAL INFORMATION: Reconciliation of Net Loss to Adjusted
EBITDA Loss (See Note 4 below):

Three Months Ended
--------------------
April 2, April 3,
(In thousands, unless otherwise indicated) 2006 2005
--------- --------
Net loss $ (5,293) $ (4,994)
Amortization of intangible assets 530 801
Amortization of non-cash marketing 572 572
Stock-based compensation 1,703 848
Depreciation 1,458 1,603
Interest income, net (407) (179)
--------- --------
Adjusted EBITDA loss $ (1,437) $ (1,349)
========= ========

NOTE 4: Supplemental information related to the company's adjusted
EBITDA loss for the three months ended April 2, 2006 and April 3, 2005
is presented for informational purposes only and is not prepared in
accordance with generally accepted accounting principles. Adjusted
EBITDA loss is defined as loss before interest, 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 2006 Net
Loss Range to Forecasted Q2 2006 Adjusted EBITDA Profit (Loss) Range

Range Calculated As: Three Months Ended
July 2, 2006
---------------------
(In thousands, unless otherwise indicated) Range High Range Low
---------- ----------

Net loss $ (4,300) $ (5,500)
Amortization of intangible assets 530 530
Amortization of non-cash marketing expense 570 570
Stock-based compensation expense 1,600 1,800
Depreciation 1,750 1,750
Interest income, net (150) (150)
--------- ---------
Adjusted EBITDA profit (loss) $ 0 $ (1,000)
========= =========




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

April 2, January 1,
2006 2006 (5)
----------- ---------
(unaudited) (audited)
------------ ----------
ASSETS
Current assets:
Cash and cash equivalents $ 18,352 $ 20,291
Marketable securities 23,565 26,172
Accounts receivable, net of allowances 35,128 34,214
Inventories 19,687 23,468
Prepaid marketing expenses 2,290 2,387
Other current assets 2,491 2,583
----------- ---------
Total current assets 101,513 109,115

Fixed assets, net 15,966 15,839
Other intangible assets, net 6,897 7,427
Goodwill 32,202 32,202
Prepaid marketing expenses and other 5,408 5,980
----------- ---------
Total assets $ 161,986 $ 170,563
=========== =========

LIABILITIES AND STOCKHOLDER'S' EQUITY
Current liabilities:
Accounts payable $ 54,123 $ 58,177
Accrued compensation 3,130 3,426
Accrued marketing expenses 3,181 3,382
Other current liabilities 1,487 1,751
Current portion of long-term debt 2,088 2,029
----------- ---------
Total current liabilities 64,009 68,765

Long-term debt, less current portion 2,279 2,685
Deferred income taxes 945 945
Other long-term liabilities 1,826 1,897

Stockholders' equity:
Common stock, $.0001 par value, stated at
amounts paid in:
Authorized shares - 250,000,000
Issued and outstanding shares - 93,010,886
and 92,904,652 as of April 2, 2006 and
January 1, 2006, respectively 835,543 833,589
Accumulated other comprehensive loss (8) (3)
Accumulated deficit (742,608) (737,315)
----------- ---------
Total stockholders' equity 92,927 96,271
----------- ---------
Total liabilities and stockholders' equity $ 161,986 $ 170,563
=========== =========

NOTE 5: Certain prior year amounts have been reclassified to conform
to the current year presentation.




drugstore.com, inc.
Consolidated Statements of Cash Flows
(in thousands)
Three Months Ended
-------------------
April 2, April 3,
2006 2005
-------- --------
(unaudited)
Operating activities:
Net loss $ (5,293) $ (4,994)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 1,458 1,603
Amortization of marketing and sales
agreements 572 572
Amortization of intangible assets 530 801
Stock-based compensation 1,703 848
Other, net 4 (34)
Changes in:
Accounts receivable (914) 1,909
Inventories 3,781 (1,831)
Prepaid marketing expenses and other 189 -
Other current assets - (279)
Accounts payable, accrued expenses and
other liabilities (4,886) (440)
-------- --------
Net cash used in operating activities (2,856) (1,845)
-------- --------

Investing activities:
Purchases of marketable securities (10,873) (30,209)
Sales and maturities of marketable
securities 13,475 6,825
Purchases of fixed assets (1,351) (1,693)
-------- --------
Net cash provided by (used in) investing
activities 1,251 (25,077)
-------- --------

Financing activities:
Proceeds from exercise of stock options and
employee stock purchase plan 251 229
Proceeds from private placement, net - 25,950
Proceeds from term loan, line of credit and
asset financings - 1,000
Principal payments on capital lease and
term loan obligations (585) (381)
-------- --------
Net cash provided by (used in) financing
activities (334) 26,798
-------- --------

Net decrease in cash and cash equivalents (1,939) (124)
Cash and cash equivalents, beginning of
period 20,291 15,491
-------- --------
Cash and cash equivalents, end of period $ 18,352 $ 15,367
======== ========