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BELLEVUE, Wash., Oct 26, 2006 (BUSINESS WIRE) -- drugstore.com, inc. (NASDAQ:DSCM), a leading online provider of health, beauty, vision, and pharmacy products, today announced its financial results for the third quarter ended October 1, 2006. The company reported quarterly net sales of $100.6 million, driven by 17% year-over-year growth in core over-the-counter (OTC) net sales (1), and a net loss of $2.6 million, or $0.03 per share, reflecting a $4.5 million improvement from the same period of 2005. During the quarter, the company generated $1.9 million in operating cash flows, the highest in the company's history, and achieved its second consecutive quarter of solid, adjusted EBITDA. Adjusted EBITDA of $1.3 million was an improvement of nearly $6.0 million from the third quarter of 2005. 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.
"Our third quarter results reflect continued progress in 2006 and steady improvement of our business model, with record positive cash flows from operations," said Dawn Lepore, chief executive officer and chairman of the board of drugstore.com, inc. "As part of our strategic plan, we have focused on our OTC segment where gross margins increased by 320 basis points to 30.2% and contribution margin dollars increased 41% over the third quarter of 2005. Along with margin expansion, we continue to see healthy sales growth of over 17% in our core OTC business which was driven by the strong performance of a number of key categories - most notably our beauty business. Beauty.com reported 38% year-over-year growth, reflecting the addition of a number of high-end prestige brands."
"As we enter our seasonally strong fourth quarter, we are focused on delivering strong results and driving accelerated growth through a number of strategic initiatives and new partnerships," added Ms. Lepore.
GAAP net loss for the third quarter of 2006 was $2.6 million, or $0.03 per share, compared to a net loss of $7.1 million, or $0.08 per share, for the third quarter of 2005. The company's GAAP results reflect $1.8 million in non-cash share-based compensation associated with FAS 123R. In accordance with FAS 123R, the expense for current and comparative periods is reflected within the applicable functional operating expense lines within the statement of operations.
1. Core OTC net sales is a non-GAAP financial measure that excludes from OTC net sales the company's wholesale OTC net sales and Custom Nutrition Services ("CNS") net sales. Wholesale OTC sales were generated by the company's December 2003 agreement to provide fulfillment services to Amazon.com, Inc., which was terminated effective as of November 9, 2005. 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 (which made up the majority of CNS net sales during the quarter). A reconciliation of OTC net sales to core OTC net sales is included in the financial data accompanying this press release.
Outlook for Fourth Quarter of 2006
For the fourth quarter of 2006, the company is targeting net sales in the range of $108 million to $110 million, net loss in the range of $2.9 million to $3.4 million, and adjusted EBITDA in the range of $1.0 million to $1.5 million.
Financial and Operational Highlights for the Third Quarter of 2006
(All comparisons are made to the third quarter of 2005.)
Key Financial Highlights:
-- Total contribution margin dollars increased 29%, while the company reduced fixed costs by 7%.
-- Contribution margin dollars from the OTC segment grew by 41%.
-- Gross margin expansion was a key contributor to contribution margin growth. Overall gross margin increased by 160 basis points, while OTC gross margin increased by 320 basis points.
-- Total orders grew 4% to 1.3 million while contribution margin dollars per order grew by 24% to $11.
-- Core OTC (1) order volumes grew by 20%
-- Cash flow provided by operating activities was $1.9 million.
Net Sales Summary:
-- Core OTC net sales (1) grew by 17% to $45.0 million.
-- Mail-order pharmacy net sales were down 11% to $17.2 million.
-- Local pick-up pharmacy net sales were up 8% to $25.2 million.
-- Vision net sales grew to $12.7 million, a 3% increase.
-- Average net sales per order were $77. Average net sales per order were relatively flat for OTC at $55, up by 18% to an all-time high of $176 for Mail-Order Pharmacy, down 6% to $104 for Local Pick-Up Pharmacy, and grew by 11% to $92 for Vision.
-- Net sales from repeat customers represented 82% of net sales. (2)
Key Customer Milestones:
-- 8.1 million customers have been served since inception, including 283,000 new customers in the third quarter.
-- The number of active customers (3) grew by 11% to just under 2.2 million.
-- The average annual spend per active customer (3) was $188.
-- During the quarter, the company fulfilled its 25 millionth order since inception.
Other Financial Highlights:
-- Fulfillment and order processing expenses decreased to 9.9% of net sales, from 10.1%.
-- Inventory turned at an annualized rate of 14 times during the quarter.
2. Net sales from repeat customers excludes wholesale OTC and Weil-related CNS net sales and reflects 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 wholesale OTC and 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(TM) quarterly conference call on Thursday, October 26, 2006 at 5:00 p.m. ET (2:00 p.m. PT). To participate, callers should dial 800-257-1836 (international callers should dial 303-275-1836) 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 Monday, October 30, 2006 at 800-405-2236 (enter pass code 11073231#) or internationally at 303-590-3000 (enter pass code 11073231#) 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 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 income/loss, cash flows, or other consolidated loss or cash flow data prepared in accordance with GAAP, or as a measure of the company's profitability or liquidity. Although adjusted EBITDA is frequently used as a measure of operating performance, it is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Net income/loss is the closest financial measure prepared by the company in accordance with GAAP in terms of comparability to adjusted EBITDA.
drugstore.com, inc. also uses non-GAAP measures in which wholesale OTC and CNS 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 and 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 wholesale OTC and CNS 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 "targets," "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, changes in consumer spending, fluctuations in the stock market, changes affecting the Internet, online retailing and advertising, difficulties establishing our brand, and building a critical mass of customers, the unpredictability of future revenues and expenses and potential fluctuations in revenues and operating results, risks related to business combinations and strategic alliances, possible tax liabilities relating to the collection of sales tax, consumer trends, the level of competition, seasonality, the timing and success of expansion efforts, changes in senior management, risks related to systems interruptions, possible governmental regulation and the ability to manage a growing business. Additional information regarding factors that potentially could affect the business, financial condition and operating results of drugstore.com, inc. is included in the company's periodic filings with the SEC on Forms 10-K, 10-Q and 8-K. drugstore.com, inc. expressly disclaims any intent or obligation to update any forward-looking statement, except as otherwise specifically stated by it.
drugstore.com, inc.
Consolidated Statements of Operations
(in thousands, except share and per share data)
(unaudited)
Three Months Ended Nine Months Ended
----------------------- -----------------------
October 1, October 2, October 1, October 2,
2006 2005 2006 2005
----------- ----------- ----------- -----------
Net sales $100,634 $96,596 $307,179 $293,061
Costs and expenses:
(1) (2)
Cost of sales 79,012 77,419 240,846 233,791
Fulfillment and
order processing 9,979 9,774 30,395 29,425
Marketing and sales 6,517 8,803 21,816 22,804
Technology and
content 4,046 3,262 11,991 9,228
General and
administrative 3,591 4,085 11,910 12,825
Amortization of
intangible assets 531 745 1,592 2.298
----------- ----------- ----------- -----------
Total costs and
expenses 103,676 104,088 318,550 310,371
----------- ----------- ----------- -----------
Operating loss (3,042) (7,492) (11,371) (17,310)
Interest income, net 449 384 1,292 903
----------- ----------- ----------- -----------
Net loss $(2,593) $(7,108) $(10,079) $(16,407)
----------- ----------- ----------- -----------
Basic and diluted net
loss per share $(0.03) $(0.08) $(0.11) $(0.18)
=========== =========== =========== ===========
Weighted average
shares outstanding
used to compute basic
and diluted net loss
per share 93,488,258 92,641,952 93,198,037 90,119,313
=========== =========== =========== ===========
_________
(1) Set forth below are the amounts of stock-based compensation by
operating function recorded in the Statements of Operations:
Fulfillment and
order
processing $264 $2 $639 $2
Marketing and
sales 244 - 825 159
Technology and
content 312 - 846 5
General and
administrative 940 376 2,706 1,465
----------- ----------- ----------- -----------
$1,760 $378 $5,016 $1,631
=========== =========== =========== ===========
(2) Set forth below are the amounts of depreciation by operating
function recorded in the Statements of Operations:
Fulfillment and
order
processing $328 $438 $1,108 $1,833
Marketing and
sales - - 1 -
Technology and
content 1,053 617 3,055 1,659
General and
administrative 113 110 336 379
----------- ----------- ----------- -----------
$1,494 $1,165 $4,500 $3,871
=========== =========== =========== ===========
SUPPLEMENTAL INFORMATION: Gross Profit and Gross Margin Information:
Three Months Ended Nine Months Ended
------------------ -------------------
(In thousands, unless otherwise October October October October
indicated) 1, 2006 2, 2005 1, 2006 2, 2005
--------- -------- --------- ---------
Net sales $100,634 $96,596 $307,179 $293,061
Cost of sales 79,012 77,419 240,846 233,791
--------- -------- --------- ---------
Gross profit $21,622 $19,177 $66,333 $59,270
========= ======== ========= =========
Gross margin 21.5% 19.9% 21.6% 20.2%
========= ======== ========= =========
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
--------------------------
October October
1, July 2, 2,
2006 2006 2005
-------- -------- --------
(In thousands)
Over-the-Counter (OTC):
Net sales $45,605 $47,254 $41,701
CNS 559 612 1,861
Wholesale OTC - - 1,451
-------- -------- --------
Core OTC net sales $45,046 $46,642 $38,389
======== ======== ========
Cost of sales $31,848 $32,633 $30,462
CNS 30 52 852
Wholesale OTC - - 1,234
-------- -------- --------
Core OTC cost of sales $31,818 $32,581 $28,376
======== ======== ========
Gross profit $13,757 $14,621 $11,239
CNS 529 560 1,009
Wholesale OTC - - 217
-------- -------- --------
Core OTC gross profit $13,228 $14,061 $10,013
======== ======== ========
Gross margin 30.2% 30.9% 27.0%
CNS 94.6% 91.5% 54.2%
Wholesale OTC - - 15.0%
-------- -------- --------
Core OTC gross margin 29.4% 30.1% 26.1%
======== ======== ========
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 October 1, 2006, July 2, 2006 and October 2, 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, 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
----------------------------
October October
1, July 2, 2,
2006 2006 2005
--------- --------- --------
Net sales:
Over-the-Counter (OTC) $45,605 $47,254 $41,701
Mail-order pharmacy 17,178 17,405 19,249
Local pick-up pharmacy 25,150 25,329 23,363
Vision 12,701 12,448 12,283
--------- --------- --------
$100,634 $102,436 $96,596
Cost of sales:
Over-the-Counter (OTC) $31,848 $32,633 $30,462
Mail-order pharmacy 14,830 14,968 16,634
Local pick-up pharmacy 22,402 22,721 20,522
Vision 9,932 9,623 9,801
--------- --------- --------
$79,012 $79,945 $77,419
Gross profit:
Over-the-Counter (OTC) 13,757 14,621 11,239
Mail-order pharmacy 2,348 2,437 2,615
Local pick-up pharmacy 2,748 2,608 2,841
Vision 2,769 2,825 2,482
--------- --------- --------
$21,622 $22,491 $19,177
========= ========= ========
Gross margin:
Over-the-Counter (OTC) 30.2% 30.9% 27.0%
Mail-order pharmacy 13.7% 14.0% 13.6%
Local pick-up pharmacy 10.9% 10.3% 12.2%
Vision 21.8% 22.7% 20.2%
--------- --------- --------
21.5% 22.0% 19.9%
========= ========= ========
Variable order costs:
Over-the-Counter (OTC) $4,482 $4,385 $4,664
Mail-order pharmacy 1,256 1,588 1,707
Local pick-up pharmacy 1,034 1,038 970
Vision 608 648 815
--------- --------- --------
7,380 7,659 8,156
Contribution margin:
Over-the-Counter (OTC) $9,275 $10,236 $6,575
Mail-order pharmacy 1,092 849 908
Local pick-up pharmacy 1,714 1,570 1,871
Vision 2,161 2,177 1,667
--------- --------- --------
$14,242 $14,832 $11,021
========= ========= ========
SUPPLEMENTAL INFORMATION: Reconciliation of Net Loss to Adjusted
EBITDA Income (Loss) (See Note 4 below):
Three Months Ended Nine Months Ended
------------------ -------------------
(In thousands, unless otherwise October October October October
indicated) 1, 2006 2, 2005 1, 2006 2, 2005
--------- -------- --------- ---------
Net loss $(2,593) $(7,108) $(10,079) $(16,407)
Amortization of intangible
assets 531 745 1,592 2,298
Amortization of non-cash
marketing 572 573 1,717 1,718
Stock-based compensation 1,760 378 5,016 1,631
Depreciation 1,494 1,165 4,500 3,871
Interest income, net (449) (384) (1,292) (903)
--------- -------- --------- ---------
Adjusted EBITDA income (loss) $1,315 $(4,631) $1,454 $(7,792)
========= ======== ========= =========
NOTE 4: Supplemental information related to the company's adjusted
EBITDA income (loss) for the three and nine months ended October 1,
2006 and October 2, 2005 is presented for informational purposes only
and is not prepared in accordance with generally accepted accounting
principles. Adjusted EBITDA income (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 Q4 2006 and FY
2006 Net Loss Range to Forecasted Q4 2006 and FY 2006 Adjusted EBITDA
Income Range
Range Calculated As: Three Months Ended Twelve Months Ended
December 31, 2006 December 31, 2006
------------------ -------------------
(In thousands, unless otherwise Range Range Range Range
indicated) High Low High Low
--------- -------- --------- ---------
Net loss $(2,900) $(3,400) $(12,900) $(13,400)
Amortization of intangible
assets 475 475 2,075 2,075
Amortization of non-cash
marketing 570 570 2,290 2,290
Stock-based compensation 1,675 1,675 6,695 6,695
Depreciation 2,100 2,100 6,540 6,540
Interest income, net (420) (420) (1,700) (1,700)
Adjusted EBITDA Income $1,500 $1,000 $3,000 $2,500
drugstore.com, inc.
Consolidated Balance Sheets
(in thousands, except share data)
October 1, January 1,
2006 2006 (5)
------------ ----------
(unaudited) (audited)
------------ ----------
ASSETS
Current assets:
Cash and cash equivalents $13,492 $20,291
Marketable securities 27,145 26,172
Accounts receivable, net of allowances 35,510 34,214
Inventories 21,956 23,468
Prepaid marketing expenses 2,290 2,387
Other current assets 2,069 2,583
------------ ----------
Total current assets 102,462 109,115
Fixed assets, net 17,088 15,839
Other intangible assets, net 5,844 7,427
Goodwill 32,202 32,202
Prepaid marketing expenses and other 4,386 5,980
------------ ----------
Total assets $161,982 $170,563
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $53,920 $58,177
Accrued compensation 4,333 3,426
Accrued marketing expenses 2,921 3,382
Other current liabilities 1,324 1,751
Current portion of long-term debt 2,908 2,029
------------ ----------
Total current liabilities 65,406 68,765
Long-term debt, less current portion 1,327 2,685
Deferred income taxes 945 945
Other long-term liabilities 1,682 1,897
Stockholders' equity:
Common stock, $.0001 par value, stated at
amounts paid in:
Authorized shares - 250,000,000
Issued and outstanding shares - 93,688,407
and 92,904,652 as of October 1, 2006 and
January 1, 2006, respectively 840,002 833,589
Accumulated other comprehensive loss 14 (3)
Accumulated deficit (747,394) (737,315)
------------ ----------
Total stockholders' equity 92,622 96,271
------------ ----------
Total liabilities and stockholders' equity $161,982 $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 Nine Months Ended
------------------ -------------------
October October October October
1, 2006 2, 2005 1, 2006 2, 2005
--------- -------- --------- ---------
(unaudited) (unaudited)
Operating activities:
Net loss $(2,593) $(7,108) $(10,079) $(16,407)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation 1,494 1,165 4,500 3,871
Amortization of marketing
and sales agreements 572 573 1,717 1,718
Amortization of intangible
assets 531 745 1,592 2,298
Stock-based compensation 1,760 378 5,016 1,631
Other, net 12 - 24 100
Changes in:
Accounts receivable 1,476 516 (1,296) 2,537
Inventories (1,800) (492) 1,512 (1,083)
Prepaid marketing expenses
and other 124 (729) 488 (1,035)
Accounts payable, accrued
expenses and other
liabilities 336 (3,043) (4,453) (4,206)
--------- -------- --------- ---------
Net cash provided by (used
in) operating activities 1,912 (7,995) (979) (10,576)
Investing activities:
Purchases of marketable
securities (5,125) (3,094) (18,031) (36,571)
Sales and maturities of
marketable securities 1,775 9,550 17,075 24,875
Purchases of fixed assets (1,981) (2,256) (5,544) (5,178)
--------- -------- --------- ---------
Net cash provided by (used
in) investing activities (5,331) 4,200 (6,500) (16,874)
--------- -------- --------- ---------
Financing activities:
Proceeds from exercise of
stock options and employee
stock purchase plan 780 896 1,397 1,997
Proceeds from private
placement, net - - - 25,961
Proceeds from term loan, line
of credit and asset
financings 1,000 - 1,000 1,000
Principal payments on capital
lease and term loan
obligations (781) (483) (1,717) (1,195)
--------- -------- --------- ---------
Net cash provided by
financing activities 999 413 680 27,763
--------- -------- --------- ---------
Net increase (decrease) in
cash and cash equivalents (2,420) (3,382) (6,799) 313
Cash and cash equivalents,
beginning of period 15,912 19,186 20,291 15,491
--------- -------- --------- ---------
Cash and cash equivalents,
end of period $13,492 $15,804 $13,492 $15,804
========= ======== ========= =========
SOURCE: drugstore.com, inc.
drugstore.com, inc. Investor Relations: Brinlea Johnson or Chris Danne, 212-867-2593 brinlea@blueshirtgroup.com or chris@blueshirtgroup.com
Copyright Business Wire 2006
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