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BELLEVUE, Wash., Nov 05, 2008 /PRNewswire-FirstCall via COMTEX News Network/ -- 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 September 28, 2008. The company reported strong quarterly net sales of $87.8 million, up 8.5% year-over-year, driven by over-the-counter (OTC) order growth, and a net loss of $3.6 million, or $0.04 per share. The company achieved record gross margins of 28.6%, up 90 basis points sequentially and 190 basis points over the prior year period, and adjusted EBITDA of over $3.6 million, up 20% sequentially and up 76% over the prior year period. Adjusted EBITDA is a non-GAAP financial measure defined as earnings before interest, taxes, depreciation, and amortization of intangible assets and non-cash marketing expense, adjusted to exclude the impact of stock-based compensation expense.
(Logo: http://www.newscom.com/cgi-bin/prnh/20070813/AQM043LOGO)
"We posted a solid third quarter, with strong beauty growth, record gross margins, and adjusted EBITDA improvement of 76% over the prior year period to surpass $3.6 million," said Dawn Lepore, chief executive officer and chairman of the board of drugstore.com, inc. "Overall beauty revenues increased over 20% from the prior year period, aided by 32% growth in our Beauty.com business. Importantly, we are also continuing to see the benefits from our focus on our profitability initiatives as OTC margins improved 230 basis points to 31.6% year-over-year."
"Our sales growth was in-line with our previous guidance, but we did see an overall impact from the slowdown in the economy -- notably in the second half of September. While we are not recession proof, trends have improved in October, and we believe that we have a number of key differentiators, which should help fuel growth going forward. We serve a very attractive customer demographic and offer a wide selection of lower ticket items, a compelling value proposition, and a high percentage of replenishment products. Over the next three months, we should also start to see the initial benefits from the launch of two new growth initiatives: our international OTC platform and our online OTC store with Rite Aid. We believe our strengthened business model and strategic growth initiatives will position us to achieve OTC growth of over 9% and GAAP profitability in the fourth quarter of 2008," concluded Ms. Lepore.
GAAP net loss for the third quarter of 2008 was $3.6 million, or $0.04 per share, compared to a net loss of $2.4 million, or $0.02 per share, for the third quarter of 2007. The third quarter 2008 losses include $1.7 million in accelerated non-cash marketing expense, $800,000 related to consulting services, and $1.8 million in non-cash stock-based compensation expense, compared to $2.1 million in non-cash stock-based compensation expense for 2007.
For the third quarter of 2008, we reported $1.1 million of net income from our discontinued local pick-up pharmacy operations, as a result of our restructured agreement with Rite Aid announced on September 4, 2008.
Outlook for Fourth Quarter 2008
For the fourth quarter of 2008, the company is targeting net sales in the range of $94.0 million to $99.0 million, net income in the range of $400,000 to $1.9 million, and adjusted EBITDA in the range of $5.3 million to $6.8 million.
Financial and Operational Highlights for the Third Quarter of 2008
(All comparisons are made to the third quarter of 2007 and reflect the reporting of the local pick-up business as discontinued operations)
Key Financial Highlights:
-- Gross margins for the quarter increased 190 basis points to 28.6%.
-- Total contribution margin dollars increased by over 21% for the quarter
to $17.8 million.
-- Total orders grew by 7% to approximately 1.3 million, while
contribution margin dollars per order grew over 13% to approximately
$14.
-- Cash, cash equivalents, and marketable securities were $33.4 million at
quarter end.
Net Sales Summary:
-- Core OTC [1] revenues grew by 12.2% to $60.8 million in the quarter.
OTC net sales grew by approximately 12.1% to $61.2 million.
-- Vision net sales grew approximately 5% to $15.6 million.
-- Mail-order pharmacy net sales decreased 4% to $11.0 million, while
contribution margins dollars increased approximately 5%.
-- Average net sales per order were $69 for the quarter. Average net
sales per order were $58 for OTC, grew approximately 13% to $114 for
vision and increased 7% to $161 for mail-order pharmacy.
-- Net sales from repeat customers [2] represented 79% of net sales.
Key Customer Milestones:
-- We served approximately 325,000 new customers during the quarter, up
approximately 6% over the same period in the prior year.
-- We have now served over 9.4 million customers since inception.
-- The number of active customers [3] was 2.5 million, up 10.5% year over
year.
1. Core OTC net sales is a non-GAAP financial measure that excludes from
OTC net sales the company's Custom Nutrition Services ("CNS") net
sales. CNS sales are generated by sales of customized vitamins through
the company's CNS subsidiary. Prior to December 31, 2005, all CNS
sales were recognized on a gross basis, net of promotional discounts,
cancellations, rebates and returns allowances. Under the terms of the
company's December 31, 2005 fulfillment agreement with Weil Lifestyle,
LLC (Weil), the company recognizes on a net basis the revenue
associated with the fulfillment of customized vitamins sold through its
fulfillment agreement with Weil. A reconciliation of OTC net sales to
core OTC net sales is included in the financial data accompanying this
press release.
2. Net sales from repeat customers exclude Weil-related CNS net sales and
reflect only the activity of customers making purchases through the Web
sites of drugstore.com, inc. and its subsidiaries.
3. Active customer base reflects those customers who have purchased at
least once within the last 12 months. Both the active customer base (a
trailing 12-month number) and average annual spend per active customer
exclude net sales and orders generated by the company's CNS fulfillment
relationship with Weil, and reflect only the activity of customers
making purchases through the Web sites of drugstore.com, inc. and its
subsidiaries.
Conference Call
Investors, analysts, and other interested parties are invited to join the drugstore.com, inc. quarterly conference call on November 5, 2008 at 5:00 p.m. ET (2:00 p.m. PT). To participate, callers should dial 866-250-2351 (international callers should dial 303-262-2130) five minutes beforehand. Investors may also listen to the conference call live at http://investor.drugstore.com/, by clicking on the "audio" hyperlink. A replay of the call will be available through Friday, November 7, 2008 by dialing 800-405-2236 (enter pass code 11121487#) or internationally at 303-590-3000 (enter pass code 11121487#) beginning two hours after completion of the call.
Non-GAAP Measures
To supplement the consolidated financial statements presented in accordance with GAAP, drugstore.com, inc. uses the non-GAAP measure of adjusted EBITDA, defined as earnings before interest, taxes, depreciation, and amortization of intangible assets and non-cash marketing expenses, adjusted to exclude the impact of stock-based compensation expense. This non-GAAP measure is provided to enhance the user's overall understanding of the company's current financial performance. Management believes that adjusted EBITDA, as defined, provides useful information to the company and to investors by excluding certain items that may not be indicative of the company's core operating results. In addition, because drugstore.com, inc. has historically provided adjusted EBITDA measures to investors, management believes that including adjusted EBITDA measures provides consistency in the company's financial reporting. However, adjusted EBITDA should not be considered in isolation, or as a substitute for, or as superior to, net income/loss, cash flows, or other consolidated income/loss or cash flow data prepared in accordance with GAAP, or as a measure of the company's profitability or liquidity. Although adjusted EBITDA is frequently used as a measure of operating performance, it is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Net income/loss is the closest financial measure prepared by the company in accordance with GAAP in terms of comparability to adjusted EBITDA. A reconciliation of adjusted EBITDA to net income/loss is included with the financial statements attached to this release.
In addition, the company uses the non-GAAP measure of free cash flow, defined as net cash provided by (used in) operating activities less purchases of fixed assets as disclosed on our consolidated statements of cash flows. Management believes that free cash flow is an important liquidity metric because it measures, during a given period, the amount of cash generated that is available to service debt obligations, make investments, fund acquisitions and for certain other activities. Free cash flow is not a measure determined in accordance with GAAP and may not be defined or calculated by other companies in the same manner. Additionally, this financial measure is subject to variability quarter over quarter as a result of the timing of payments related to accounts payable, including inventory purchases, and accounts receivable. Since free cash flow includes investments in operating assets, management believes this non-GAAP liquidity metric is useful in addition to the most directly comparable GAAP measure of net cash provided by (used in) operating activities, and should not be used as a substitute for it or any other measure determined in accordance with GAAP. A reconciliation of free cash flow to net cash provided by operating activities is included with the supplemental financial schedules attached to this release.
drugstore.com, inc. also uses non-GAAP measures in which CNS sales are excluded from OTC segment sales data. This non-GAAP measure is provided to enhance the user's overall understanding of the company's financial performance in the OTC segment. Management believes that these reporting metrics provide useful information to the company and to investors by excluding certain items that may not be indicative of the company's core operating results in the OTC segment. By excluding CNS sales from OTC sales data, the company can more effectively assess the buying behavior of, and the company's financial performance with respect to, its own core OTC customers (those customers making nonprescription purchases through Web sites owned by drugstore.com, inc. and its subsidiaries). However, these non-GAAP measures should not be considered in isolation, or as a substitute for, or as superior to, OTC segment sales data prepared in accordance with GAAP, or as a measure of the company's overall performance in the OTC segment. OTC segment sales measures are the closest financial measures prepared by the company in accordance with GAAP in terms of comparability to OTC segment sales measures that exclude CNS sales.
About drugstore.com, inc.
drugstore.com, inc. (NASDAQ: DSCM) is a leading online provider of health, beauty, vision, and pharmacy products. Our portfolio of brands includes: drugstore.com(TM), Beauty.com(TM), and VisionDirect.com(TM). All are accessible from http://www.drugstore.com and provide a convenient, private, and informative shopping experience while offering a wide assortment of more than 40,000 products at competitive prices.
The drugstore.com pharmacy is certified by the National Association of Boards of Pharmacy (NABP) as a Verified Internet Pharmacy Practice Site (VIPPS) and operates in compliance with federal and state laws and regulations in the United States.
The financial results contained in this press release are preliminary and unaudited. In addition, this press release contains forward-looking statements regarding future events or the future financial and operational performance of drugstore.com, inc. Words such as "target," "believe," "may," "will," "focus," "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.
Contact:
Investor Relations:
Brinlea Johnson
212-551-1453
brinlea@blueshirtgroup.com
drugstore.com, inc.
Consolidated Statements of Operations
(in thousands, except share and per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 28, September 30, September 28, September 30,
2008 2007 2008 2007
Net sales $87,823 $80,959 $272,639 $248,024
Costs and expenses:
(1) (2)
Cost of sales 62,708 59,333 196,570 182,544
Fulfillment and
order processing 10,968 9,487 32,914 28,928
Marketing and sales 7,929 6,895 24,491 21,711
Technology and
content 6,009 4,680 16,948 13,870
General and
administrative 4,862 4,767 15,156 14,633
Amortization of
intangible assets 206 240 661 990
Total costs and
expenses 92,682 85,402 286,740 262,676
Operating loss (4,859) (4,443) (14,101) (14,652)
Interest income, net 137 459 516 1,265
Net loss from
continuing
operations (4,722) (3,984) (13,585) (13,387)
Net income from
discontinued
operations 1,103 1,610 5,009 4,220
Net loss $(3,619) $(2,374) $(8,576) $(9,167)
Basic and diluted net
loss per share $(0.04) $(0.02) $(0.09) $(0.10)
Weighted average
shares used in
computation of:
Basic and diluted
net loss per
share 96,515,737 95,664,011 96,462,259 95,056,884
(1) Set forth below are the amounts of stock-based compensation by operating function recorded in the Statements of Operations:
Fulfillment and
order processing $152 $185 $440 $646
Marketing and
sales 416 292 1,148 1,078
Technology and
content 326 292 930 935
General and
administrative 952 1,378 3,260 4,455
$1,846 $2,147 $5,778 $7,114
(2) Set forth below are the amounts of depreciation by operating function recorded in the Statements of Operations:
Fulfillment and
order processing $769 $440 $1,913 $1,360
Marketing and
sales 1 1 3 3
Technology and
content 2,137 1,397 5,618 4,067
General and
administrative 136 103 361 313
$3,043 $1,941 $7,895 $5,743
SUPPLEMENTAL INFORMATION: Gross Profit and Gross Margin Information:
Three Months Ended Nine Months Ended
September 28, September 30, September 28, September 30,
(In thousands, 2008 2007 2008 2007
unless otherwise
indicated)
Net sales $87,823 $80,959 $272,639 $248,024
Cost of sales 62,708 59,333 196,570 182,544
Gross profit $25,115 $21,626 $76,069 $65,480
Gross margin 28.6% 26.7% 27.9% 26.4%
SUPPLEMENTAL INFORMATION: Reconciliation of OTC net sales, cost of sales, gross profit, gross margin, variable order costs, and contribution margin to Core OTC net sales, cost of sales, gross profit, gross margin, variable order costs and contribution margin (See Note 3 below):
Three Months Ended Nine Months Ended
September 28, September 30, September 28, September 30,
2008 2007 2008 2007
(In thousands)
Over-the-Counter (OTC):
Net sales $61,223 $54,623 $190,985 $168,412
CNS 429 446 1,365 1,431
Core OTC net
sales $60,794 $54,177 $189,620 $166,981
Cost of sales $41,858 $38,630 $131,970 $119,091
CNS 20 157 112 198
Core OTC cost
of sales $41,838 $38,473 $131,858 $118,893
Gross profit 19,365 15,993 59,015 49,321
CNS 409 289 1,253 1,233
Core OTC gross
profit $18,956 $15,704 $57,762 $48,088
Gross margin 31.6% 29.3% 30.9% 29.3%
CNS 95.3% 64.8% 91.8% 86.2%
Core OTC gross
margin 31.2% 29.0% 30.5% 28.8%
Variable order costs $5,677 $5,232 $17,511 $15,780
CNS 142 138 424 437
Core OTC variable
order costs $5,535 $5,094 $17,087 $15,343
Contribution margin 13,688 10,761 41,504 33,541
CNS 267 151 829 796
Core OTC
contribution
margin $13,421 $10,610 $40,675 $32,745
NOTE 3: Supplemental information related to the company's Core OTC netsales, cost of sales, gross profit, gross margin, variable order costs and contribution margin for the three and nine months ended September 28, 2008 and September 30, 2007 is presented for informational purposes only and is not prepared in accordance with generally accepted accounting principles. On December 31, 2005, we entered into a fulfillment agreement with Weil Lifestyles, LLC, resulting in Weil-related CNS net sales (which make up the substantial majority of CNS net sales) being recorded on a net basis after that date. All CNS sales were previously recorded on a gross basis.
SUPPLEMENTAL INFORMATION: Segment Information:
Three Months Ended Nine Months Ended
September 28, September 30, September 28, September 30,
(In thousands, 2008 2007 2008 2007
unless otherwise
indicated)
Net sales:
OTC $61,223 $54,623 $190,985 $168,412
Vision 15,579 14,851 46,865 42,198
Mail-order pharmacy 11,021 11,485 34,789 37,414
$87,823 $80,959 $272,639 $248,024
Cost of sales:
OTC $41,858 $38,630 $131,970 $119,091
Vision 11,888 11,284 36,154 32,255
Mail-order pharmacy 8,962 9,419 28,446 31,198
$62,708 $59,333 $196,570 $182,544
Gross profit:
OTC 19,365 15,993 59,015 49,321
Vision 3,691 3,567 10,711 9,943
Mail-order pharmacy 2,059 2,066 6,343 6,216
$25,115 $21,626 $76,069 $65,480
Gross margin:
OTC 31.6% 29.3% 30.9% 29.3%
Vision 23.7% 24.0% 22.9% 23.6%
Mail-order pharmacy 18.7% 18.0% 18.2% 16.6%
28.6% 26.7% 27.9% 26.4%
Variable order costs:
OTC $5,677 $5,232 $17,511 $15,780
Vision 745 737 2,235 2,035
Mail-order pharmacy 904 963 2,737 3,036
7,326 6,932 22,483 20,851
Contribution margin:
OTC $13,688 $10,761 $41,504 $33,541
Vision 2,946 2,830 8,476 7,908
Mail-order pharmacy 1,155 1,103 3,606 3,180
$17,789 $14,694 $53,586 $44,629
SUPPLEMENTAL INFORMATION: Discontinued Operations Information:
Three Months Ended Nine Months Ended
September 28, September 30, September 28, September 30,
2008 2007 2008 2007
Net sales $23,303 $26,364 $81,911 $79,476
Cost of sales 19,289 23,098 70,458 70,266
Fulfillment and
order processing 897 1,084 3,285 3,273
Marketing and sales 2,290 572 3,435 1,717
827 1,610 4,733 4,220
Other, net 276 - 276 -
Net income from
discontinued
operations $1,103 $1,610 $5,009 $4,220
SUPPLEMENTAL INFORMATION: Reconciliation of Net Loss to Adjusted EBITDA
(See Note 4 below):
Three Months Ended Nine Months Ended
September 28, September 30, September 28, September 30,
(In thousands, 2008 2007 2008 2007
unless otherwise
indicated)
Net loss $(3,619) $(2,374) $(8,576) $(9,167)
Amortization of
intangible assets 206 240 661 990
Amortization of
non-cash marketing 2,290 573 3,435 1,717
Stock-based
compensation 1,846 2,147 5,778 7,114
Depreciation 3,043 1,941 7,895 5,743
Interest income, net (137) (459) (516) (1,265)
Adjusted EBITDA $3,629 $2,068 $8,677 $5,132
NOTE 4: Supplemental information related to the company's adjusted EBITDA for the three and nine months ended September 28, 2008 and September 30, 2007 is presented for informational purposes only and is not prepared in accordance with generally accepted accounting principles. Adjusted EBITDA is defined as earnings before taxes, depreciation, and amortization of intangible assets and non-cash marketing expense, adjusted to exclude the impact of stock-based compensation expense.
SUPPLEMENTAL INFORMATION: Reconciliation of Forecasted Q4 2008 and FY 2008
Net Income (Loss) Range to Forecasted Q4 2008 and FY 2008 Adjusted EBITDA
Range
Range Calculated As: Three Months Ended Twelve Months Ended
December 28, 2008 December 28, 2008
(In thousands, unless
otherwise indicated) Range High Range Low Range High Range Low
Net income (loss) $1,900 $400 $(6,675) $(8,175)
Amortization of
intangible assets 210 210 870 870
Amortization of
non-cash marketing 0 0 3,435 3,435
Stock-based
compensation 1,650 1,650 7,425 7,425
Depreciation 3,150 3,150 11,045 11,045
Interest income, net (110) (110) (625) (625)
Adjusted EBITDA $6,800 $5,300 $15,475 $13,975
SUPPLEMENTAL INFORMATION: Reconciliation of Net Cash Provided by Operating Activities to Free Cash Flow:
Three Months Ended Nine Months Ended
September 28, September 30, September 28, September 30,
(In thousands, 2008 2007 2008 2007
unless otherwise
indicated)
Net cash provided by
operating activities $1,907 $4,440 $6,307 $7,032
Purchases of fixed
assets (2,947) (5,653) (11,063) (10,783)
Free Cash Flow $(1,040) $(1,213) $(4,756) $(3,751)
drugstore.com, inc.
Consolidated Balance Sheets
(in thousands, except share data)
September 28, December 30,
2008 2007
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents $22,372 $18,572
Marketable securities 11,037 17,677
Accounts receivable, net of allowances 11,010 10,999
Inventories 30,739 31,237
Other current assets 3,183 3,642
Assets of discontinued operations 32,512 30,763
Total current assets 110,853 112,890
Fixed assets, net 29,140 25,501
Other intangible assets, net 3,939 4,598
Goodwill 32,202 32,202
Prepaid marketing expenses and other 222 217
Total assets $176,354 $175,408
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $35,544 $36,446
Accrued compensation 3,516 4,657
Accrued marketing expenses 3,206 3,988
Other current liabilities 4,351 4,312
Current portion of long-term debt 3,022 3,179
Liabilities of discontinued operations 29,277 24,968
Total current liabilities 78,916 77,550
Long-term debt, less current portion 3,292 1,221
Deferred income taxes 952 947
Other long-term liabilities 1,199 1,322
Stockholders' equity:
Common stock, $.0001 par value, stated at
amounts paid in:
Authorized shares - 250,000,000
Issued and outstanding shares - 96,535,579
and 96,296,687 as of September 28, 2008 and
December 30, 2007, respectively 862,496 856,193
Accumulated other comprehensive income (loss) (73) 27
Accumulated deficit (770,428) (761,852)
Total stockholders' equity 91,995 94,368
Total liabilities and stockholders' equity $176,354 $175,408
drugstore.com, inc.
Consolidated Statements of Cash Flows
(in thousands)
Three Months Ended Nine Months Ended
September 28, September 30, September 28, September 30,
2008 2007 2008 2007
(unaudited)
Operating activities:
Net loss $(3,619) $(2,374) $(8,576) $(9,167)
Adjustments to
reconcile net loss
to net cash
provided by
operating
activities:
Depreciation 3,043 1,941 7,895 5,743
Amortization of
intangible assets 206 240 661 990
Stock-based
compensation 1,846 2,147 5,778 7,114
Other, net (28) 18 (43) 12
Changes in:
Accounts
receivable 96 695 (11) 1,755
Inventories 107 2,740 498 3,995
Prepaid
marketing
expenses and
other (337) (766) 459 (991)
Accounts
payable,
accrued
expenses and
other
liabilities (970) (549) (2,914) (3,938)
Net cash
provided by
activities of
discontinued
operations 1,563 348 2,560 1,519
Net cash
provided by
operating
activities 1,907 4,440 6,307 7,032
Investing activities:
Purchases of
marketable
securities (7,772) (5,379) (43,116) (16,540)
Sales and
maturities
of marketable
securities 15,606 5,300 49,704 15,825
Purchases of fixed
assets (2,947) (5,653) (11,063) (10,783)
Purchases of
intangible
assets - (456) - (456)
Net cash
provided by
(used in)
investing
activities 4,887 (6,188) (4,475) (11,954)
Financing
activities:
Proceeds from
exercise of
stock options
and employee
stock purchase
plan 102 1,448 525 3,381
Proceeds from line
of credit 1,500 - 5,000 300
Principal payments
on line of credit,
capital lease and
term loan
obligations (2,339) (795) (3,557) (2,190)
Net cash (used in)
provided by
financing
activities (737) 653 1,968 1,491
Net increase
(decrease)
in cash and cash
equivalents 6,057 (1,095) 3,800 (3,431)
Cash and cash
equivalents,
beginning
of period 16,315 11,057 18,572 13,393
Cash and cash
equivalents,
end of
period $22,372 $9,962 $22,372 $9,962
SOURCE drugstore.com, inc.
http://www.drugstore.com
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