drugstore.com, inc. Announces Third Quarter 2005 Financial Results; Company Reports 27% Year-Over-Year Growth in OTC Net Sales

"With the exception of our small wholesale OTC business, all ofour business units showed solid year-over-year growth," said DawnLepore, chief executive officer and chairman of the board ofdrugstore.com, inc. "Most importantly, we continue to postdouble-digit growth in our core OTC and mail-order pharmacybusinesses. During the third quarter, we saw evidence of strongprogress in a number of key metrics for our business. For example, ouractive customer base is now approaching 2 million, OTC net sales fromrepeat customers increased by 36% year-over-year, and our averageannual customer spend continues to show strong growth over last year,up $17 to $193."

The company also announced today the termination of its wholesaleOTC fulfillment agreement with Amazon.com, Inc., effective November 9,2005. In the third quarter, wholesale OTC sales generated under theagreement with Amazon.com were $1.5 million, with very low margins.Stated Ms. Lepore, "Given the decline in wholesale OTC revenues, lowmargins associated with this business and considerable managementdistraction, I made the strategic decision to contact Amazon.com andend our partnership."

Net loss for the third quarter of 2005 was $7.1 million, or $0.08per share, compared to a net loss of $32.8 million, or $0.43 pershare, for the third quarter of 2004. Adjusted EBITDA loss (a non-GAAPfinancial measure defined as earnings before interest, taxes,depreciation, and amortization of intangible assets, non-cashmarketing expense and stock-based compensation, and adjusted toexclude non-cash charges for impairment of goodwill and otherintangible assets and a non-cash litigation settlement) was $4.6million for the third quarter of 2005, compared to an adjusted EBITDAloss of $2.2 million for the third quarter of 2004. The company's netloss and adjusted EBITDA loss for the third quarter of 2005 reflects$1.9 million in marketing expenses attributable to the company's brandand personalization campaigns that launched in September.

"Building on our solid foundation and growth in our corebusinesses, we implemented some exciting new initiatives that webelieve will further strengthen our company," added Ms. Lepore."First, we introduced our new brand on August 15th, giving the companya fresh look. Second, we redesigned the website, including simplifyingour check-out procedure to improve order conversion. Next, we expandedour personalization strategy, employing enhanced segmentation to aidorder conversion and drive more effective e-mail marketing programs.Finally, we launched an ongoing brand advertising campaign targeted atincreasing the awareness of our brand and the breadth of our productofferings. Preliminary feedback from all of these programs has beenencouraging."

Outlook for the Fourth Quarter 2005

For the fourth quarter of 2005, drugstore.com, inc. is targeting anet sales range of $105.0 million to $110.0 million, a net loss rangeof $6.4 million to $7.4 million, and an EBITDA loss range of $3.7million to $4.7 million. As previously disclosed, drugstore.comoperates on a 52/53 week retail calendar year, with each quarter in a52-week fiscal year representing a 13-week period. Fiscal year 2004was a 53-week fiscal year, with the fourth quarter representing a14-week period. Accordingly, the company's guidance ranges for thefourth quarter of 2005 reflect one less week than the fourth quarterof 2004. The guidance ranges also reflect the termination of thecompany's wholesale OTC fulfillment agreement with Amazon.com, whichtermination is effective November 9, 2005.

Financial and Operational Highlights for the Third Quarter of 2005

(all comparisons are made with the third quarter of 2004, unlessotherwise noted)

Net Sales Highlights:

-- Excluding the company's lower-margin wholesale OTC business,(1) OTC net sales grew by 27%. Overall, OTC net sales grew by 18% to $41.7 million,(2) with net sales from repeat OTC customers(3) growing by 36%. Wholesale OTC net sales were down 60% to $1.5 million.

-- Mail-order pharmacy net sales reached an all-time high, growing by 19% to $19.2 million.

-- Local pick-up pharmacy net sales grew by 6% to $23.4 million.

-- Vision net sales were up 14% to $12.3 million.

-- Total order volume grew by 14% to 1.3 million orders.(4)

-- Average net sales per order were $77. Average net sales per order were stable at $55 for OTC ($58 excluding wholesale OTC) and grew by 7% to $149 for mail-order pharmacy, by 7% to $111 for local pick-up pharmacy, and by 4% to $83 for vision.

-- Net sales from repeat customers represented 80% of net sales.

Key Customer Milestones:

-- Approximately 6.8 million customers have been served since inception, including 286,000 new customers in the third quarter.

-- The number of active customers(5) grew by 9% to approximately 2.0 million.

-- The average annual spend per active customer(6) grew $17, or 10%, to approximately $193.

Other Financial Highlights:

-- Fulfillment and order processing expenses improved to 10.1% of net sales, down from 11.4% of net sales.

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

Conference Call

Investors, analysts, and other interested parties are invited tojoin the drugstore.com(TM) quarterly conference call on Thursday,October 27, 2005 at 5:00 p.m. ET (2:00 p.m. PT). To participate,callers should dial 800-366-7449 (international callers should dial303-262-2142) 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, October 29, 2005 at800-405-2236 (enter pass code 11041346) or internationally at303-590-3000 (enter pass code 11041346) 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, non-cashmarketing expenses and stock-based compensation, and adjusted toexclude non-cash charges for impairment of goodwill and otherintangible assets and a non-cash litigation settlement. This non-GAAPmeasure is provided to enhance the user's overall understanding of thecompany's current financial performance and prospects for the future.Management believes that adjusted EBITDA, as defined, provides usefulinformation to the company and to investors by excluding certain itemsthat may not be indicative of the company's core operating results. Inaddition, because drugstore.com, inc. has historically provided EBITDAmeasures to investors, management believes that including EBITDAmeasures provides consistency in the company's financial reporting.However, adjusted EBITDA should not be considered in isolation, or asa substitute for, or as superior to, net loss, cash flows, or otherconsolidated loss or cash flow data prepared in accordance with GAAP,or as a measure of the company's profitability or liquidity. AlthoughEBITDA is frequently used as a measure of operating performance, it isnot necessarily comparable to other similarly titled captions of othercompanies due to differences in methods of calculation. Net loss isthe closest financial measure prepared by the company in accordancewith GAAP in terms of comparability to adjusted EBITDA loss.

drugstore.com, inc. also uses non-GAAP measures in which wholesaleOTC sales are excluded from OTC segment sales data. These non-GAAPmeasures are provided to enhance the user's overall understanding ofthe company's financial performance in the OTC segment. Managementbelieves that these reporting metrics provide useful information tothe company and to investors by excluding certain items that may notbe indicative of the company's core operating results in the OTCsegment. By excluding wholesale OTC sales from OTC sales data, thecompany can more effectively assess the buying behavior of, and thecompany's financial performance with respect to, its own OTC customers(those customers making purchases through Web sites owned bydrugstore.com, inc. and its subsidiaries). However, these non-GAAPmeasures should not be considered in isolation, or as a substitutefor, or as superior to, OTC segment sales data prepared in accordancewith GAAP, or as a measure of the company's overall performance in theOTC segment. OTC segment sales measures are the closest financialmeasures prepared by the company in accordance with GAAP in terms ofcomparability to OTC segment sales measures that exclude wholesale OTCsales.

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 "expects," "believes," "anticipates," "intends," "may,""will," "plan," "continue," "forecast," "targeting," "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 and 10-Q. drugstore.com,inc. expressly disclaims any intent or obligation to update anyforward-looking statement, except as otherwise specifically stated byit.

(1) Wholesale OTC net sales are generated by the company'sDecember 2003 agreement to provide fulfillment services to Amazon.com,Inc. which was terminated effective as of November 9, 2005. Areconciliation of OTC net sales to OTC net sales excluding wholesaleOTC is included in the financial data accompanying this press release.

(2) Includes $1.5 million in wholesale OTC net sales.

(3) Revenue from repeat customers excludes wholesale OTC net salesand reflects only the activity of customers making purchases throughWeb sites owned by drugstore.com, inc. and its subsidiaries.

(4) Includes wholesale OTC orders.

(5) 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 associated with thecompany's wholesale OTC fulfillment business, and reflect only theactivity of customers making purchases through Web sites owned by thecompany and its subsidiaries.

(6) See footnote 5.
DRUGSTORE.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)


Three Months Ended Nine Months Ended
------------------------- -------------------------
October 2, September 26, October 2, September 26,
2005 2004 2005 2004
------------ ------------ ------------ ------------

Net sales $ 96,596 $ 84,287 $ 293,061 $ 256,493

Costs and expenses:
Cost of sales 77,419 67,702 233,791 204,231
Fulfillment and
order processing 9,772 9,590 29,423 28,406
Marketing and
sales 8,803 5,749 22,645 18,212
Technology and
content 3,262 2,256 9,223 6,644
General and
administrative 3,709 4,287 11,360 11,342
Amortization of
intangible
assets 745 1,072 2,298 3,156
Stock-based
compensation 378 56 1,631 615
Impairment of
goodwill and
other intangible
assets -- 26,480 -- 26,480
----------- ----------- ----------- -----------
Total
costs and
expenses 104,088 117,192 310,371 299,086
----------- ----------- ----------- -----------

Operating loss (7,492) (32,905) (17,310) (42,593)

Interest income, net 384 62 903 221
----------- ----------- ----------- -----------
Net loss $ (7,108) $ (32,843) $ (16,407) $ (42,372)
----------- ----------- ----------- -----------

Basic and
diluted net
loss per
share $ (0.08) $ (0.43) $ (0.18) $ (0.56)
=========== =========== =========== ===========
Weighted average
shares outstanding
used to compute
basic and diluted
net loss per share 92,641,952 76,493,041 90,119,313 75,474,903
=========== =========== =========== ===========



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

$ in thousands Three Months Ended Nine Months Ended
------------------- ------------------
October September October September
2, 26, 2, 26,
2005 2004 2005 2004
1. Gross Profit and Gross
Margin
--------------------------
Net sales $96,596 $ 84,287 $293,061 $256,493

Cost of sales 77,419 67,702 233,791 204,231
------- -------- -------- --------

Gross profit $19,177 $ 16,585 $ 59,270 $ 52,262
======= ======== ======== ========

Gross margin 19.9% 19.7% 20.2% 20.4%
======= ======== ======== ========

2. Reconciliation of Net Loss to Adjusted EBITDA Loss (see Note 2
below)
-------------------------------------------------------------------

(a) Reconciliation of Net Loss to Adjusted EBITDA Loss Calculated As:
----------------------------------------------------------------------


Three Months Ended Nine Months Ended
------------------- ------------------
$ in thousands October September October September
2, 26, 2, 26,
2005 2004 2005 2004


Net loss $(7,108) $(32,843) $(16,407) $(42,372)
Amortization of intangible
assets 745 1,072 2,298 3,156
Amortization of non-cash
marketing 573 573 1,718 1,718
Non-cash litigation settlement --- 475 --- 475
Stock-based compensation 378 56 1,631 615
Impairment of goodwill and other
intangible assets --- 26,480 --- 26,480
Depreciation (see Note 2 below) 1,165 2,083 3,871 5,571
Interest income, net (384) (62) (903) (221)
------- -------- -------- --------
Adjusted EBITDA loss $(4,631) $ (2,166) $ (7,792) $ (4,578)
======= ======== ======== ========


NOTE 1: Supplemental information related to the company's gross
profit, gross margin and adjusted EBITDA loss for the three
and nine months ended October 2, 2005 and September 26, 2004,
is presented for informational purposes only and is not
prepared in accordance with generally accepted accounting
principles.

NOTE 2: Adjusted EBITDA 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 and other intangible assets, and a non-cash
litigation settlement. Depreciation expense excluded from
adjusted EBITDA loss is classified in the following financial
statement line items:

Three Months Ended Nine Months Ended
----------------- -------------------
October September October September
2, 26, 2, 26,
2005 2004 2005 2004
------ -------- -------- --------
Fulfillment and order processing $ 438 $ 1,257 $ 1,833 $ 3,782
Marketing and sales -- -- -- --
Technology and content 617 550 1,659 1,039
General and administrative 110 276 379 750
------ -------- -------- --------
Depreciation $1,165 $ 2,083 $ 3,871 $ 5,571
------ -------- -------- --------

(b) Reconciliation of Forecasted Q4 2005 Net Loss Range to Forecasted
Q4 2005 EBITDA Loss Range Calculated As:
----------------------------------------------------------------------

Three Months Ended
January 1, 2006
-------------------------
Range High Range Low
Estimated net loss $ (6,400) $ (7,400)
Estimated amortization of intangible assets 650 650
Estimated amortization of non-cash marketing 573 573
Estimated stock-based compensation 427 427
Estimated depreciation 1,400 1,400
Estimated interest income, net (350) (350)
----------- -----------
Estimated EBITDA loss $ (3,700) $ (4,700)
=========== ===========


SUPPLEMENTAL INFORMATION: Net sales by reporting segment:

Three Months Ended
-----------------------------------------------
October 2, 2005 July 3, 2005 September 26, 2004
--------------- ------------ ------------------
Over-the-Counter (OTC) $ 41,701 $ 43,130 $ 35,249
Mail-order pharmacy 19,249 18,416 16,184
Local pick-up pharmacy 23,363 23,953 22,077
Vision 12,283 11,393 10,777
-------------- ----------- -----------------
Consolidated $ 96,596 $ 96,892 $ 84,287
-------------- ----------- -----------------

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

Three Months Ended
-------------------------------------
October 2, July 3, September 26,
2005 2005 2004
-------------------------------------
(in thousands, except orders shipped
and per order data)
Over-the-Counter (OTC):
Net sales $ 41,701 $ 43,130 $ 35,249
Wholesale OTC sales 1,451 1,826 3,612
----------- ---------- -------------
OTC sales, excluding
wholesale OTC 40,250 41,304 31,637

OTC orders shipped 764,211 754,484 635,122
Wholesale OTC orders shipped 68,365 65,846 89,154
OTC orders shipped,
excluding wholesale OTC 695,846 688,638 545,968
OTC sales per order shipped,
excluding wholesale OTC $ 58 $ 60 $ 58
=========== ========== =============


NOTE 3: Supplemental information related to the company's OTC
sales excluding wholesale OTC sales for the three months
ended October 2, 2005, July 3, 2005 and September 26, 2004
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)


October 2, January 2,
2005 2005
----------- ----------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents $ 15,804 $ 15,491
Marketable securities 30,415 18,728
Accounts receivable, net of allowances 32,807 35,344
Inventories 20,370 19,287
Prepaid marketing expenses 3,644 2,290
Other current assets 2,708 3,027
--------- ---------
Total current assets 105,748 94,167

Fixed assets, net 15,341 13,626
Other intangible assets, net 8,101 10,399
Goodwill, net 32,202 32,202
Prepaid marketing expenses and other 6,399 8,117
--------- ---------
Total assets $ 167,791 $ 158,511
========= =========

LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 53,635 $ 57,510
Accrued compensation 3,139 3,559
Accrued marketing expenses 2,809 2,567
Other current liabilities 3,684 3,837
Current portion of long term debt 2,234 1,158
--------- ---------
Total current liabilities 65,501 68,631

Deferred income taxes 945 945
Long term debt, less current portion 1,044 1,807

Stockholders' equity:
Common stock, $.0001 par value, stated at
amounts paid in:
Authorized shares -- 250,000,000
Issued and outstanding shares --
92,834,729 and 81,440,927 as of
October 2, 2005 and January 2, 2005,
respectively 835,378 807,142
Deferred stock-based compensation (2,245) (3,598)
Accumulated other comprehensive loss (9) --
Accumulated deficit (732,823) (716,416)
--------- ---------
Total stockholders' equity 100,301 87,128
--------- ---------
Total liabilities and stockholders' equity $ 167,791 $ 158,511
========= =========



DRUGSTORE.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)


Nine Months Ended
------------------
Oct. 2, Sept. 26,
2005 2004(4)
------------------
Operating Activities:
Net loss $(16,407)$(42,372)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 3,871 5,571
Amortization of marketing and sales
agreements 1,718 1,718
Amortization of intangible assets 2,298 3,156
Stock-based compensation 1,631 615
Impairment of goodwill and other intangible
assets --- 26,480
Litigation settlement --- 475
Other 100 (19)
Changes in:
Accounts receivable 2,537 (4,794)
Inventories (1,083) (2,359)
Other current assets (1,035) (256)
Accounts payable, accrued expenses, and
other liabilities (4,206) 1,536
-------- --------
Net cash used in operating activities (10,576) (10,249)
-------- --------

Investing Activities:
Purchases of marketable securities (36,571) (11,940)
Sales and maturities of marketable securities 24,875 28,770
Purchase of fixed assets (5,178) (3,258)
-------- --------
Net cash provided by (used in) investing activities (16,874) 13,572
-------- --------

Financing Activities:

Proceeds from exercise of stock options and employee
stock purchase plan 1,997 3,991
Proceeds from private placement, net 25,961 ---
Advances under revolving line of credit 1,000 ---
Principal payments on capital lease and term loan
obligations (1,195) (332)
-------- --------
Net cash provided by financing activities 27,763 3,659
-------- --------
Net increase in cash and cash equivalents 313 6,982
Cash and cash equivalents at beginning of
period $ 15,491 $ 7,035
Cash and cash equivalents at end of period $ 15,804 $ 14,017

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