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drugstore.com inc. Achieves GAAP Profitability in the Fourth Quarter of 2007- Highest Revenues, Gross Margins and Net Income in Company History
BELLEVUE, Wash., Feb. 6 /PRNewswire-FirstCall/ -- 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 fiscal year ended December 30, 2007. The company reported quarterly net sales of $118.2 million and net income of $156,000, or $0.00 per share. The company achieved record gross margins in the fourth quarter of 24.6%, up 300 basis points year-over-year, and reported adjusted EBITDA of approximately $4.0 million. 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. For the year, the company reported net sales of $445.7 million, a net loss of $9.0 million or $0.09 per share, and adjusted EBITDA of $9.1 million, reflecting an adjusted EBITDA improvement of approximately $6.8 million over fiscal year 2006. Additionally, the company reported operating cash flow of $7.8 million for 2007 compared to operating cash used of $1.1 million in the previous year. "I am very pleased to announce that we reached GAAP profitability in the fourth quarter for the first time in company history," said Dawn Lepore, chief executive officer and chairman of the board of drugstore.com, inc. "During the quarter, we delivered record results across many of our key metrics including prestige beauty sales increasing 57% year-over-year, gross margins up over 300 basis points year-over-year, and core OTC [1] contribution margin dollars up 40% year-over-year. Our core OTC business grew 18% year-over-year, in-line with ecommerce trends, but below our expectations due to increased marketing costs in paid search and portals." "Throughout 2008, we expect to accelerate our full year top line revenue growth by: increasing sales in each one of our business segments, driving OTC sales by 20% year-over-year and increasing prestige beauty sales more than 40% year-over-year. In the first quarter of 2008, we are making targeted investments in a number of our profitability initiatives including pricing and sourcing to further expand margins. We will start to see the benefits of these investments in the second quarter and we expect to double full year adjusted EBITDA and to exit the year with gross margins above 26% and adjusted EBITDA margins between 5-6%," concluded Ms. Lepore. GAAP net income for the fourth quarter of 2007 was $156,000, or $0.00 per share, compared to a net loss of $2.9 million, or $0.03 per share, for the fourth quarter of 2006. The fourth quarter in both 2007 and 2006 included $1.7 million in non-cash stock-based compensation expense. GAAP net loss for the fiscal year of 2007 was $9.0 million or $0.09 per share, compared to a net loss of $13.0 million, or $0.14 per share, for the fiscal year of 2006. The fiscal year losses include $8.8 million and $6.7 million, in non-cash stock- based compensation expense for 2007 and 2006, respectively. Outlook for First Quarter and Fiscal Year 2008 For fiscal year 2008, the company is targeting net sales in the range of $498.0 million to $512.0 million, net income in the range of $(1.0) million to $3.0 million, and adjusted EBITDA in the range of $18.0 million to $22.0 million. For the first quarter of 2008, the company is targeting net sales in the range of $118.0 million to $122.0 million, net loss in the range of $2.9 million to $2.4 million, and adjusted EBITDA in the range of $1.9 million to $2.4 million. First quarter adjusted EBITDA guidance includes a $1.3 million investment in consulting services associated with profitability initiatives, which will result in improved margins throughout the remainder of 2008.
Financial and Operational Highlights for the Fourth Quarter of 2007
(All comparisons are made to the fourth quarter of 2006)
Key Financial Highlights:
-- Gross margins for the quarter increased 300 basis points to a record
high of 24.6%. For the year, gross margins improved 170 basis points
to 23.3%.
-- Total contribution margin dollars increased by over 30% for the quarter
and for the year improved by 20%.
-- Total orders grew by 9% to 1.6 million, while contribution margin
dollars per order grew almost 20% to approximately $13. For the year,
total orders increased by 10%, while contribution margin dollars per
order grew to approximately $12.
-- Cash, cash equivalents and marketable securities were $36.2 million at
year end.
Net Sales Summary:
-- Core OTC [1] revenues grew by approximately 18% to $65.4 million in the
quarter and increased by 19% to $232.4 million for the year.OTC net
sales grew by over 17% to $65.9 million. For the year, OTC net sales
grew by over 18% to $234.3 million.
-- Vision net sales grew approximately 6% to $12.7 million and for the
year increased over 10% to $54.9 million.
-- Local pick-up pharmacy net sales were up approximately 4% to
$26.9 million and for the year increased by approximately 6% to
$106.4 million.
-- Mail-order pharmacy net sales were down to $12.7 million. For the
year, mail order pharmacy net sales decreased 26% while contribution
margins dollars increased 10%.
-- Average net sales per order were $75 for the quarter and year. Average
net sales per order increased to $59 for OTC, grew 10% to $102 for
vision, and were $107 for local pick-up pharmacy and $165 for
mail-order pharmacy. For the year, average net sales per order
increased to $57 for OTC, grew 10% to $99 for vision, and were $106 for
local pick-up pharmacy and $159 for mail-order pharmacy.
-- Net sales from repeat customers [2] represented 80% of net sales for
the quarter and 82% of net sales for the year.
Key Customer Milestones:
-- New customers grew to 398,000.
-- We have now served nearly 10 million customers since inception.
-- The number of active customers [3] was 2.5 million.
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 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 and its
subsidiaries.
Conference Call Investors, analysts, and other interested parties are invited to join the drugstore.com, inc. quarterly conference call on February 6, 2008 at 5:00 p.m. ET (2:00 p.m. PT). To participate, callers should dial 800-257-2182 (international callers should dial 303-262-2140) 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, February 8, 2008 by dialing 800-405-2236 (enter pass code 11106968#) or internationally at 303-590-3000 (enter pass code 11106968#) 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. 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 30,000 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," "expect," "believe," "may," "will," "focus," "continue," "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.
Contact:
Investor Relations:
Brinlea Johnson or Chris Danne
415-489-2189
brinlea@blueshirtgroup.com or chris@blueshirtgroup.com
drugstore.com, inc.
Consolidated Statements of Operations
(in thousands, except share and per share data)
(unaudited)
Three Months Ended Twelve Months Ended
December 30, December 31, December 30, December 31,
2007 2006 2007 2006
Net sales $118,223 $108,598 $445,723 $415,777
Costs and expenses:(1)(2)
Cost of sales 89,109 85,190 341,919 326,036
Fulfillment and
order processing 11,999 10,704 44,200 41,099
Marketing and sales 8,942 7,919 32,370 29,735
Technology and content 4,388 4,199 18,258 16,190
General and administrative 3,795 3,503 18,428 15,413
Amortization of
intangible assets 244 468 1,234 2,060
Total costs and
expenses 118,477 111,983 456,409 430,533
Operating loss (254) (3,385) (10,686) (14,756)
Interest income, net 410 438 1,675 1,730
Net income (loss) $156 $(2,947) $(9,011) $(13,026)
Basic net income
(loss) per share $0.00 $(0.03) $(0.09) $(0.14)
Diluted net income
(loss) per share $0.00 $(0.03) $(0.09) $(0.14)
Weighted average shares
used in computation of:
Basic net income
(loss) per share 96,229,531 94,027,508 95,350,046 93,405,405
Diluted net income
(loss) per share 97,894,513 94,027,508 95,350,046 93,405,405
(1) Set forth below are the amounts of stock-based compensation by
operating function recorded in the Statements of Operations:
Fulfillment and order
processing $138 $196 $784 $835
Marketing and sales 303 233 1,381 1,058
Technology and content 289 225 1,224 1,071
General and administrative 957 1,051 5,412 3,757
$1,687 $1,705 $8,801 $6,721
(2) Set forth below are the amounts of depreciation by operating function
recorded in the Statements of Operations:
Fulfillment and order
processing $466 $368 $1,826 $1,476
Marketing and sales - 1 3 2
Technology and content 1,185 1,064 5,252 4,119
General and administrative 110 107 423 443
$1,761 $1,540 $7,504 $6,040
SUPPLEMENTAL INFORMATION: Gross Profit and Gross Margin Information:
Three Months Ended Twelve Months Ended
December 30, December 31, December 30, December 31,
2007 2006 2007 2006
(In thousands, unless
otherwise indicated)
Net sales $118,223 $108,598 $445,723 $415,777
Cost of sales 89,109 85,190 341,919 326,036
Gross profit $29,114 $23,408 $103,804 $89,741
Gross margin 24.6% 21.6% 23.3% 21.6%
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 Twelve Months Ended
December 30, December 31, December 30, December 31,
2007 2006 2007 2006
(In thousands)
Over-the-Counter (OTC):
Net sales $65,870 $56,099 $234,282 $197,964
CNS 450 522 1,881 2,376
Core OTC net sales $65,420 $55,577 $232,401 $195,588
Cost of sales $45,378 $40,530 $164,469 $139,674
CNS 36 46 234 112
Core OTC cost of sales $45,342 $40,484 $164,235 $139,562
Gross profit 20,492 15,569 69,813 58,290
CNS 414 476 1,647 2,264
Core OTC gross profit $20,078 $15,093 $68,166 $56,026
Gross margin 31.1% 27.8% 29.8% 29.4%
CNS 92.0% 91.2% 87.6% 95.3%
Core OTC gross margin 30.7% 27.2% 29.3% 28.6%
Variable order costs $6,479 $5,456 $22,259 $18,650
CNS 144 161 607 711
Core OTC variable
order costs $6,335 $5,295 $21,652 $17,939
Contribution margin 14,013 10,113 47,554 39,640
CNS 270 315 1,040 1,553
Core OTC contribution
margin $13,743 $9,798 $46,514 $38,087
NOTE 3: Supplemental information related to the company's Core OTC net
sales, cost of sales, gross profit, gross margin, variable order
costs and contribution margin for the three and twelve months
ended December 30, 2007 and December 31, 2006 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 Twelve Months Ended
December 30, December 31, December 30, December 31,
2007 2006 2007 2006
Net sales:
Over-the-Counter (OTC) $65,870 $56,099 $234,282 $197,964
Mail-order pharmacy 12,729 14,496 50,143 67,379
Local pick-up pharmacy 26,916 25,962 106,392 100,654
Vision 12,708 12,041 54,906 49,780
$118,223 $108,598 $445,723 $415,777
Cost of sales:
Over-the-Counter (OTC) $45,378 $40,530 $164,469 $139,674
Mail-order pharmacy 10,737 12,383 41,935 58,026
Local pick-up pharmacy 23,345 22,943 93,611 89,654
Vision 9,649 9,334 41,904 38,682
$89,109 $85,190 $341,919 $326,036
Gross profit:
Over-the-Counter (OTC) 20,492 15,569 69,813 58,290
Mail-order pharmacy 1,992 2,113 8,208 9,353
Local pick-up pharmacy 3,571 3,019 12,781 11,000
Vision 3,059 2,707 13,002 11,098
$29,114 $23,408 $103,804 $89,741
Gross margin:
Over-the-Counter (OTC) 31.1% 27.8% 29.8% 29.4%
Mail-order pharmacy 15.6% 14.6% 16.4% 13.9%
Local pick-up pharmacy 13.3% 11.6% 12.0% 10.9%
Vision 24.1% 22.5% 23.7% 22.3%
24.6% 21.6% 23.3% 21.6%
Variable order costs:
Over-the-Counter (OTC) $6,479 $5,456 $22,259 $18,650
Mail-order pharmacy 931 1,055 3,967 5,501
Local pick-up pharmacy 1,110 1,064 4,383 4,128
Vision 673 561 2,708 2,478
9,193 8,136 33,317 30,757
Contribution margin:
Over-the-Counter (OTC) $14,013 $10,113 $47,554 $39,640
Mail-order pharmacy 1,061 1,058 4,241 3,852
Local pick-up pharmacy 2,461 1,955 8,398 6,872
Vision 2,386 2,146 10,294 8,620
$19,921 $15,272 $70,487 $58,984
SUPPLEMENTAL INFORMATION: Reconciliation of Net Income (Loss) to Adjusted EBITDA (See Note 4 below): Three Months Ended Twelve Months Ended
December 30, December 31, December 30, December 31,
2007 2006 2007 2006
(In thousands, unless
otherwise indicated)
Net income (loss) $156 $(2,947) $(9,011) $(13,026)
Amortization of intangible
assets 244 468 1,234 2,060
Amortization of non-cash
marketing 573 573 2,290 2,290
Stock-based compensation 1,687 1,705 8,801 6,721
Depreciation 1,761 1,540 7,504 6,040
Interest income, net (410) (438) (1,675) (1,730)
Adjusted EBITDA $4,011 $901 $9,143 $2,355
NOTE 4: Supplemental information related to the company's adjusted EBITDA
for the three and twelve months ended December 30, 2007 and
December 31, 2006 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 Q1 2008
and FY 2008 Net Income (Loss) Range to Forecasted
Q1 2008 and FY 2008 Adjusted EBITDA Range
Range Calculated As: Three Months Ended Twelve Months Ended
March 30, 2008 December 28, 2008
(In thousands, unless
otherwise indicated) Range High Range Low Range High Range Low
Net income (loss) $(2,350) $(2,850) $3,000 $(1,000)
Amortization of
intangible assets 250 250 900 900
Amortization of
non-cash marketing 575 575 2,300 2,300
Stock-based compensation 2,100 2,100 7,300 7,300
Depreciation 2,225 2,225 10,500 10,500
Interest income, net (400) (400) (2,000) (2,000)
Adjusted EBITDA $2,400 $1,900 $22,000 $18,000
drugstore.com, inc.
Consolidated Balance Sheets
(in thousands, except share data)
December 30, December 31,
2007 2006
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents $18,572 $13,393
Marketable securities 17,677 27,246
Accounts receivable, net of allowances 38,063 36,688
Inventories 31,501 26,469
Prepaid marketing expenses 2,327 2,290
Other current assets 3,605 2,615
Total current assets 111,745 108,701
Fixed assets, net 25,501 18,293
Other intangible assets, net 4,598 5,376
Goodwill 32,202 32,202
Prepaid marketing expenses and other 1,362 3,750
Total assets $175,408 $168,322
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $61,414 $57,507
Accrued compensation 4,657 4,841
Accrued marketing expenses 3,988 3,661
Other current liabilities 1,812 1,292
Current portion of long-term debt 3,179 3,949
Total current liabilities 75,050 71,250
Long-term debt, less current portion 1,221 1,839
Deferred income taxes 947 945
Other long-term liabilities 1,322 1,610
Stockholders' equity:
Common stock, $.0001 par value, stated at
amounts paid in:
Authorized shares - 250,000,000
Issued and outstanding shares -
96,296,687 and 94,335,027
as of December 30, 2007 and
December 31, 2006, respectively 856,193 843,026
Accumulated other comprehensive income (loss) 27 (7)
Accumulated deficit (759,352) (750,341)
Total stockholders' equity 96,868 92,678
Total liabilities and stockholders' equity $175,408 $168,322
drugstore.com, inc.
Consolidated Statements of Cash Flows
(in thousands)
Three Months Ended Twelve Months Ended
December 30, December 31, December 30, December 31,
2007 2006 2007 2006
(unaudited) (unaudited) (audited)
Operating activities:
Net income (loss) $156 $(2,947) $(9,011) $(13,026)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation 1,761 1,540 7,504 6,040
Amortization of
marketing and sales
agreements 573 573 2,290 2,290
Amortization of
intangible assets 244 468 1,234 2,060
Stock-based
compensation 1,687 1,705 8,801 6,721
Other, net 2 - 14 24
Changes in:
Accounts receivable (2,759) (1,178) (1,375) (2,474)
Inventories (9,001) (4,513) (5,032) (3,001)
Prepaid marketing
expenses and other 62 (483) (929) 5
Accounts payable,
accrued expenses and
other liabilities 8,021 4,731 4,282 278
Net cash provided by
(used in) operating
activities 746 (104) 7,778 (1,083)
Investing activities:
Purchases of marketable
securities (11,004) (4,822) (27,544) (22,853)
Sales and maturities of
marketable securities 21,316 4,700 37,141 21,775
Purchases of fixed
assets (3,466) (2,020) (14,249) (7,564)
Purchases of intangible
assets - - (456) -
Net cash provided by
(used in) investing
activities 6,846 (2,142) (5,108) (8,642)
Financing activities:
Proceeds from exercise of
stock options and
employee stock purchase
plan 985 1,319 4,366 2,716
Proceeds from line of
credit, term loan and
asset financings 3,700 1,325 4,000 2,325
Principal payments on
line of credit, capital
lease and term loan
obligations (3,667) (497) (5,857) (2,214)
Net cash provided by
financing activities 1,018 2,147 2,509 2,827
Net increase
(decrease) in
cash and cash
equivalents 8,610 (99) 5,179 (6,898)
Cash and cash
equivalents,
beginning of period 9,962 13,492 13,393 20,291
Cash and cash
equivalents, end of
period $18,572 $13,393 $18,572 $13,393
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