drugstore.com, inc. Announces Fourth Quarter 2004 and Full Year 2004 F

drugstore.com, inc. Announces Fourth Quarter 2004 and Full Year 2004 Financial Results; Company Reports Record Revenues and Quarterly and Annual Net Sales Growth of 47%

    Business Editors

    BELLEVUE, Wash.--(BUSINESS WIRE)--Feb. 2, 2005--drugstore.com, inc. (Nasdaq:DSCM), a leading online provider of health, beauty, vision, and pharmacy products, today announced its financial results for the fourth quarter and full year ended January 2, 2005.
    The company reported a 47% year-over-year increase in net sales for the full year, to $360.1 million, and fourth quarter 2004 net sales of $103.6 million, the largest quarterly revenue in the history of the company.
    "Many of our key metrics -- revenues, customer growth, order volumes, and basket sizes -- are showing robust growth," said Dawn Lepore, chief executive officer and chairman of the board of drugstore.com, inc. "These results underscore both strong and sustained consumer demand, and our ability to execute in our business."
    "We're also seeing excellent growth in our flagship segments," said Bob Barton, vice president and chief financial officer of drugstore.com, inc. "For the fourth quarter, mail-order pharmacy net sales increased 41% year-over-year, and our OTC business (excluding our wholesale operations)(1) saw a year-over-year increase of 28% in net sales."
    Gross margin was 20.2% for the fourth quarter, growing 50 basis points over the third quarter of 2004, largely due to an increased proportion of higher-margin OTC sales. Gross margin was 20.3% for the full year. Gross margin for the fourth quarter declined by 200 basis points from the fourth quarter of 2003, in part due to an increase in shipping costs resulting from the company's Free 3-day Shipping offer that was implemented during fiscal year 2004, and a higher proportion of lower-margin sales. However, the company saw strong sales from repeat customers and 34% growth in gross profit dollars.
    Net loss for the fourth quarter was $5.4 million, or $0.07 per share, and $47.7 million, or $0.62 per share, for the year. Adjusted EBITDA loss was $1.2 million for the fourth quarter and $5.8 million for the entire year.(2) The fourth quarter net loss reflects $400,000 of CEO transition costs and a $250,000 write-down of decommissioned software associated with the company's Custom Nutrition Services platform that had been previously capitalized.
    As previously disclosed, drugstore.com, inc. operates on a 52/53-week retail calendar year, with each quarter in a 52-week fiscal year representing a 13-week period. Fiscal year 2004 was a 53-week fiscal year, with the fourth quarter representing a 14-week period.

    Outlook for the First Quarter 2005 and Full Year 2005

    Stated Lepore, "We have proven our ability to grow net sales, but I was brought on board to take a hard look at this business, and to leverage its sales growth and produce long-term, sustained profitability. I very strongly believe that drugstore.com has an exciting opportunity, but we need to invest in our brand, marketing and technology. Our fiscal 2005 guidance reflects that plan."
    For the 2005 fiscal year, drugstore.com, inc. is targeting net sales in the range of $400 million to $420 million, with OTC net sales targeted to grow by 20% to 30%, mail-order pharmacy net sales by 15% to 23%, vision net sales by 5% to 16% and local pick-up pharmacy net sales remaining relatively flat. The company is targeting a GAAP net loss in the range of $19 million to $24 million, and an EBITDA loss in the range of $3 million to $8 million, for the full fiscal year. For the first quarter of 2005, the company is targeting a net sales range of $86.5 million to $93.5 million, a net loss range of $7.5 million to $9.5 million, and an EBITDA loss range of $3 million to $5 million. Note: the net loss ranges provided do not reflect the implementation of Statement of Financial Accounting Standards No. 123R ("Share Based Payments"), which will be effective July 1, 2005. During the year the company will update its guidance as necessary to reflect any impact of implementing this standard.
    Fiscal 2005 is a 52-week year, with the first quarter representing a 13-week period.

    Financial and Operational Highlights for the Fourth Quarter of 2004
    (all comparisons are made with the fourth quarter of 2003, unless otherwise noted)

    Net Sales Highlights:

--	Net sales in the OTC segment grew by 41% to $47.9 million(3) (28% growth when excluding wholesale OTC sales), with net sales from repeat OTC customers(4) growing by 34%. For the year, net sales from repeat OTC customers grew by 37%.
--	Mail-order pharmacy net sales grew by 41% to $18.1 million.
--	Total order volume in the fourth quarter (including wholesale OTC orders) grew by 42%, to 1.3 million orders processed.
--	Average net sales per order were $78, an all-time high. Average net sales per order for the mail-order pharmacy segment grew 16% to $140, OTC net sales per order grew 2% to $59 ($62 excluding wholesale OTC sales), vision net sales per order grew 13% to $80, and LPU net sales per order grew 8% to $107.
--	Revenue from repeat customers represented 74% of net sales.

    Key Customer Milestones:

    -- Approximately 6 million customers have been served since
    inception.

    -- The number of active customers(5) grew by 472,000 during the
    year, to approximately 1.87 million.

    -- The average annual spend per active customer(6) grew 3% to
    approximately $182.

    Other Financial Highlights:

    -- Fulfillment and order processing expenses improved to 10.6% of
    net sales, an all-time low as a percentage of net sales.

    -- Marketing and sales expenses improved to 6.1% of net sales,
    also an all-time low. Marketing and sales expense per new
    customer declined by more than $3 from the third quarter of
    2004, to $19.

    -- During the quarter, the company capitalized $557,000 in labor
    costs associated with internally developed software.

    -- Inventory turned at an annualized rate of 18 during the
    quarter.

    Conference Call

    Investors, analysts, and other interested parties are invited to join the drugstore.com(TM) quarterly conference call on Wednesday, February 2, 2005 at 8:00 a.m. ET (5:00 a.m. PT). To participate, callers should dial 800-240-2134 (international callers should dial 303-262-2140) five minutes beforehand. Investors may also listen to the conference call live at www.drugstore.com (under Corporate Information), by clicking on the "audio" hyperlink. A replay of the call will be available through Friday, February 4, 2005 at 800-405-2236 (enter pass code 11021339) or internationally at 303-590-3000 (enter pass 11021339) 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, non-cash marketing expenses and stock-based compensation, and adjusted to exclude non-cash charges for impairment of goodwill, other intangible assets and a non-cash litigation settlement. This non-GAAP measure is provided to enhance the user's overall understanding of the company's current financial performance and prospects for the future. 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 EBITDA measures to investors, management believes that including 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 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 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 loss is the closest financial measure prepared by the company in accordance with GAAP in terms of comparability to adjusted EBITDA profit or loss.
    drugstore.com, inc. also uses non-GAAP measures in which wholesale OTC sales are excluded from OTC segment sales data. These non-GAAP measures are 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 wholesale OTC 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 OTC customers (those customers making 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 wholesale OTC sales.

    About drugstore.com, inc.

    drugstore.com, inc. (Nasdaq:DSCM) is a leading online provider of health, beauty, vision, and pharmacy products. The drugstore.com(TM) online store provides a convenient, private, and informative shopping experience that encourages consumers to purchase products essential to healthy, everyday living. The online store offers thousands of brand-name personal health care products at competitive prices; a full-service, licensed retail pharmacy; and a wealth of health-related information, buying guides, and other tools designed to help consumers make informed purchasing decisions. Consumers can personalize their shopping experiences with shopping lists, e-mail reminders for replenishing regularly used products, and private e-mail access to pharmacists and beauty experts for questions.
    drugstore.com, inc. has been awarded the Verified Internet Pharmacy Practice Sites (VIPPS) certification by the National Association of Boards of Pharmacy (NABP) as a fully licensed facility exercising competent, safe pharmacy practices in compliance with federal and state laws and regulations.

    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 "expects," "believes," "anticipates," "intends," "may," "will," "plan," "continue," "forecast," "remains," "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, consumer spending, fluctuations in the stock market, changes affecting the Internet, online retailing and advertising, the company's limited operating history, 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, recent changes in senior management, risks related to systems interruptions, possible governmental regulation and the ability to manage a rapidly 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 and 10-Q and the Form 8-K filed with the SEC on October 14, 2004. drugstore.com, inc. expressly disclaims any intent or obligation to update any forward-looking statement, except as otherwise specifically stated by it.

    (1) Wholesale OTC net sales are generated by the company's December 2003 agreement to provide fulfillment services to Amazon.com, Inc. A reconciliation of OTC net sales to OTC net sales excluding wholesale OTC is included in the financial data accompanying this press release.
    (2) Adjusted EBITDA loss is a non-GAAP financial measure defined as earnings before interest, taxes, depreciation, and amortization of intangible assets, non-cash marketing expense and stock-based compensation, and adjusted to exclude non-cash charges for impairment of goodwill, other intangible assets and a non-cash litigation settlement. A reconciliation of net loss to adjusted EBITDA loss is included in the financial data accompanying this press release.
    (3) Includes $4.5 million in wholesale OTC net sales
    (4) Revenue from repeat customers excludes wholesale OTC net sales
    (5) Active customer base reflects those customers who have purchased at least once within the last 12 months. Note that both the active customer base (a trailing 12-month number) and average annual spend per active customer exclude net sales and orders associated with the company's wholesale OTC fulfillment business, and reflect only the activity of customers making purchases through Web sites owned by drugstore.com, inc. and its subsidiaries
    (6) See footnote 5

DRUGSTORE.COM, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share data)

Three Months Ended Twelve Months Ended ------------------------- ------------------------- January 2, December 28, January 2, December 28, 2005 2003 2005 2003 ----------- ------------ ----------- ----------- (unaudited) (unaudited) (audited)

Net sales $ 103,606 $ 70,583 $ 360,099 $ 245,733

Costs and expenses: Cost of sales 82,627 54,923 286,858 195,501 Fulfillment and order processing 11,010 7,569 39,416 28,888 Marketing and sales 6,355 5,012 24,567 17,482 Technology and content 2,839 1,966 9,483 8,283 General and administrative 4,858 2,779 16,200 11,111 Amortization of intangible assets 796 609 3,952 1,725 Amortization of stock-based compensation 623 277 1,238 2,014 Impairment of goodwill and other intangible assets -- -- 26,480 -- ----------- ----------- ----------- ----------- Total costs and expenses 109,108 73,135 408,194 265,004 ----------- ----------- ----------- -----------

Operating loss (5,502) (2,552) (48,095) (19,271)

Interest income, net 139 112 360 622 ----------- ----------- ----------- -----------

Net loss $ (5,363) $ (2,440) $ (47,735) $ (18,649) ----------- ----------- ----------- ----------- Basic and diluted net loss per share $ (0.07) $ (0.03) $ (0.62) $ (0.27) =========== =========== =========== =========== Weighted average shares outstanding used to compute basic and diluted net loss per share 79,895,117 70,651,803 76,650,915 69,148,872 =========== =========== =========== ===========

SUPPLEMENTAL INFORMATION: Gross Profit, Gross Margin, and Adjusted EBITDA Profit (Loss) (See Note 1 below):

USD (in thousands), unless otherwise indicated Three Months Ended Twelve Months Ended ----------------------- ------------------------ January December January December 2, 28, 2, 28, 2005 2003 2005 2003 1. Gross Profit and Gross Margin -------------------- Net sales $ 103,606 $ 70,583 $360,099 $ 245,733

Cost of sales 82,627 54,923 286,858 195,501 ------------ ---------- -------- -----------

Gross profit $ 20,979 $ 15,660 $ 73,241 $ 50,232 ============ ========== ======== ===========

Gross margin 20.2% 22.2% 20.3% 20.4% ============ ========== ======== ===========

2. Reconciliation of Net Loss to Adjusted EBITDA Profit (Loss) (see Note 2 below) -------------- (a) Reconciliation of Net Loss to Adjusted EBITDA Profit (Loss) Calculated As: --------------

USD (in thousands), unless otherwise indicated Three Months Ended Twelve Months Ended ------------------------- ------------------------ January December January December 2, 28, 2, 28, 2005 2003 2005 2003 Net loss $ (5,363) $ (2,440) $(47,735) $ (18,649) Amortization of intangible assets 796 609 3,952 1,725 Amortization of non- cash marketing 573 574 2,291 2,290 Non-cash litigation settlement 17 -- 492 -- Amortization of stock-based compensation 623 277 1,238 2,014 Impairment of goodwill and other intangible assets -- -- 26,480 -- Depreciation (see Note 2 below) 2,301 1,647 7,872 6,430 Interest income, net (139) (112) (360) (622) ------------ ---------- -------- ----------- Adjusted EBITDA profit (loss) $ (1,192) $ 555 $ (5,770) $ (6,812) ============ ========== ======== ===========

(b) Reconciliation of Forecasted Q1 2005 and FY 2005 Net Loss Range to Forecasted Q1 2005 and FY 2005 EBITDA Loss Range Calculated As: ---------------------------------------------------------------

Three Months Ended Twelve Months Ended April 3, 2005 January 1, 2006 ----------------------- ------------------------ Range High Range Low Range High Range Low Estimated net loss $ (7,500)$ (9,500) $ (19,000) $ (24,000) Estimated amortization of intangible assets 800 800 2,925 2,925 Estimated amortization of non-cash marketing 575 575 2,300 2,300 Estimated amortization of stock-based compensation 560 560 1,525 1,525 Estimated depreciation 2,575 2,575 9,325 9,325 Estimated interest income, net (10) (10) (75) (75) -------- ------------ --------- ---------- Estimated EBITDA loss $ (3,000)$ (5,000) $ (3,000) $ (8,000) ======== ============ ========= ==========

NOTE 1: Supplemental information related to the company's gross profit, gross margin and adjusted EBITDA loss for the three and twelve months ended January 2, 2005 and December 28, 2003, is presented for informational purposes only and is not prepared in accordance with generally accepted accounting principles.

NOTE 2: Adjusted EBITDA profit (loss) is defined as loss before interest, taxes, depreciation, and amortization of intangible assets, non-cash marketing expense and stock-based compensation, and adjusted to exclude non-cash charges for impairment of goodwill, other intangible assets and a non-cash litigation settlement.

Depreciation expense excluded from adjusted EBITDA profit (loss) is classified in the following financial statement line items:

Three Months Ended Twelve Months Ended ----------------------- ----------------------- January 2, December 28, January 2, December 28, 2005 2003 2005 2003 ---------- ------------ ---------- ------------ Fulfillment and order processing $ 1,306 $ 1,221 $ 5,088 $ 4,741 Marketing and sales -- -- -- -- Technology and content 636 204 1,675 881 General and administrative 359 222 1,109 808 -------- ---------- -------- ---------- Depreciation $ 2,301 $ 1,647 $ 7,872 $ 6,430 -------- ---------- -------- ----------

SUPPLEMENTAL INFORMATION: Net sales by reporting segment:

Three Months Ended Twelve Months Ended ----------------------- ----------------------- January 2, December 28, January 2, December 28, 2005 2003 2005 2003 ---------- ------------ ---------- ----------- Mail-order pharmacy $ 18,104 $ 12,830 $ 63,936 $ 49,155 Local pick-up pharmacy 25,739 21,482 92,440 85,131 Over-the-Counter (OTC) 47,875 33,978 155,316 109,154 Vision 11,888 2,293 48,407 2,293 -------- ---------- -------- --------- Consolidated $103,606 $ 70,583 $360,099 $ 245,733 -------- ---------- -------- ---------

SUPPLEMENTAL INFORMATION: Reconciliation of OTC Net Sales to OTC Net Sales Excluding Wholesale OTC (see Note 3 below):

Three Months Ended --------------------------------------- January 2, September 26, December 28, 2005 2004 2003 ----------- -------------- ------------ (in thousands, except orders shipped and per order data) Over-the-Counter (OTC): Net sales $ 47,875 $ 35,249 33,978 Wholesale OTC net sales 4,523 3,612 57 --------- ------------ ---------- OTC net sales, excluding wholesale OTC 43,352 31,637 33,921

OTC orders shipped 814,251 635,122 586,095 Wholesale OTC orders shipped 110,001 89,154 2,000 OTC orders shipped, excluding wholesale OTC 704,250 545,968 584,095 OTC sales per order shipped, excluding wholesale OTC $ 62 $ 58 $ 58 ========= ============ ==========

NOTE 3: Supplemental information related to the company's OTC net sales excluding wholesale OTC for the three months ended January 2, 2005, September 26, 2004 and December 28, 2003 is presented for informational purposes only and is not prepared in accordance with generally accepted accounting principles.

DRUGSTORE.COM, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data)

January 2, December 28, 2005 2003 -------------- ------------- (unaudited) (audited)(1) ASSETS Current assets: Cash, cash equivalents and marketable securities $ 34,219 $ 43,572 Accounts receivable, net of allowances 35,344 26,227 Inventories 19,287 13,647 Prepaid marketing expenses 2,290 2,291 Other current assets 3,027 1,900 ----------- ----------- Total current assets 94,167 87,637

Fixed assets, net 13,626 14,280 Intangible assets, net 10,101 18,713 Goodwill, net 31,555 53,375 Prepaid marketing expenses 8,015 10,305 Deposits and other assets 102 102 ----------- ----------- Total assets $ 157,566 $ 184,412 =========== ===========

LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 57,510 $ 46,964 Accrued compensation 3,559 2,932 Accrued marketing expenses 2,567 1,870 Other current liabilities 3,837 3,043 Current portion of long term debt 1,158 785 ----------- ----------- Total current liabilities 68,631 55,594

Long term debt, less current portion 1,807 600

Stockholders' equity: Common stock, $.0001 par value, stated at amounts paid in: Authorized shares -- 250,000,000 Issued and outstanding shares -- 81,440,927 and 77,361,026 as of January 2, 2005 and December 28, 2003, respectively 807,142 797,534 Deferred stock-based compensation (3,598) (635) Accumulated deficit (716,416) (668,681) ----------- ----------- Total stockholders' equity 87,128 128,218 ----------- ----------- Total liabilities and stockholders' equity $ 157,566 $ 184,412 ------------------------------------------ ===========- ===========

(1) Certain prior year amounts have been reclassified to conform to the current year presentation.

--30--APG/se*

CONTACT: drugstore.com, inc. Judith McGarry, 415-971-2900 jmcgarry@drugstore.com or Investor Relations: Chris Danne or Brinlea Johnson 415-217-5865 or 415-269-2645 chris@blueshirtgroup.com brinlea@blueshirtgroup.com

KEYWORD: WASHINGTON INDUSTRY KEYWORD: PHARMACEUTICAL INTERNET E-COMMERCE EARNINGS CONFERENCE CALLS SOURCE: drugstore.com, inc.

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