Results at drugstore.com continue to improve

Chain Drug Review, March 2, 2009

BELLEVUE, Wash. -- Drugstore.com narrowed its loss from continuing operations in 2008, as adjusted EBITDA more than doubled over the 52 weeks and nearly quadrupled in the fourth quarter in the face of single-digit sales growth.

The online drug and over-the-counter items retailer reduced the red ink from ongoing lines for the 12 months ended December 28 to $16.4 million from $19.3 million in fiscal 2007.

Including $8.08 million in income from discontinued operations in 2008 and $6.11 million in the preceding year, the company's full-year net loss fell to $8.29 million from $11.5 million. The discontinued lines represent local-pickup pharmacy operations that were transferred to Rite Aid Corp. as part of a restructured and expanded relationship with the chain that was implemented last September.

According to management, the fiscal 2008 loss was shaped by $3.4 million in noncash marketing expenses, including $1.1 million related to the revised agreement with Rite Aid, $3.2 million for consulting services and $7.6 million in noncash stock-based compensation. The prior-year loss reflected $2.3 million in noncash marketing expense, $1.1 million for consulting services and $8.8 million in noncash stock-based compensation.

For the fourth quarter drugstore.com posted a $2.78 million loss from ongoing operations, down from a $4.23 million deficit in the prior-year period. With income from discontinued lines vaulting to $3.07 million from $1.89 million in the 2007 period, the bottom line edged into the black with a $289,000 profit, in contrast to a $2.34 million loss in the fiscal 2007 quarter.

Results in the final period include $1.8 million in noncash stock-based compensation expense, compared with $1.7 million in the prior-year period.

Adjusted EBITDA (earnings before interest, taxes, depreciation, amortization of intangible assets, and the noncash marketing and stock-based compensation expenses) for the year skyrocketed 108.6% to $13.9 million from $6.64 million in fiscal 2007. Fourth quarter adjusted EBITDA, meanwhile, soared 243% to a record $5.18 million from $1.51 million.

Turning to the top line, fiscal 2008 net sales climbed 8% to $366.6 million from $339.3 million, propelled by an 11.3% jump in O-T-C net sales to $260.8 million. Vision net sales jumped 11.9% to $61.4 million, but mail-order pharmacy sales fell 11.5% to $44.4 million.

The top line for the final quarter moved up 2.9% to $93.9 million from $91.3 million, as O-T-C sales gained 6% to $69.8 million, while vision net sales advanced 14.5% to $14.6 million. Those increases, however, were softened by a 24.8% plunge in the mail-order pharmacy business to $9.58 million in the quarter.

Focusing more closely on sales trends, the average transaction for the fourth quarter was $67, while the average net sales per O-T-C order were $58. The average vision order expanded about 11% to $112, while the average mail-order prescription ticket fell to $156. According to management, drugstore. corn served about 406,000 new customers in the quarter, up 8% over the prior-year period.

"We're pleased to report record quarterly O-T-C revenues, net income, free cash flow and adjusted EBITDA as we delivered a profitable fourth quarter and achieved positive free cash flow for the year for the first time in company history," says chairman and chief executive officer Dawn Lepore. "While holiday sales were clearly impacted by the economy, we saw strong sales of our O-T-C basics, reinforcing our belief that a large portion of our products are not considered discretionary by our customers."

Fourth quarter gross margin expanded by 57 basis points to 28.54%. Total operating expenses--including fulfillment and order processing, marketing and sales, technology and content, general and administrative costs, and amortization of intangible assets--shrank by 143 basis points to 31.63% of sales. With that, the fourth quarter operating loss fell 37.6% to $2.9 billion.

Similarly, the fiscal 2008 operating loss declined 11.9% to $17 million as gross margin grew 125 basis points to 28.07% and the operating expense ratio added 19 basis points to 32.7% of sales.

                              Current   Previous
                               close     close       Net       %
Chain drug Stocks             2/12/09   1/29/09    change    change

Dow Jones Composite Average   2787.05    2585.60    201.45     7.79
CVS Caremark                    28.07      27.37      0.70     2.56
Rite Aid                         0.29       0.27      0.02     7.41
Walgreens                       26.87      27.89     -1.02    -3.66

                              52-week   52-week                  P/E
Chain drug Stocks              high       low     Div.   Yield   ratio

Dow Jones Composite Average   4640.71   2607.77
CVS Caremark                    44.29     23.19   0.30    1.1      13
Rite Aid                         3.25      0.27     --     --      --
Walgreens                       39.00     21.28   0.45    1.7      13

                              Current   Previous
                               close     close       Net       %
Canadian drug stocks *        2/12/09   1/29/09    change    change

Jean Coutu Group                 8.63       8.16      0.47     5.76
Shoppers Drug Mart              43.00      45.20     -2.20    -4.87

                              52-week   52-week                  P/E
Canadian drug stocks *         high       low     Div.   Yield   ratio

Jean Coutu Group                11.49      6.01   0.16    1.9      --
Shoppers Drug Mart              58.23     41.39   0.86    2.0      17

* Figures are in Canadian dollars.

                              Current   Previous
                               close     close       Net       %
Internet drug Stores          2/12/09   1/29/09    change    change

drugstore.com                    1.08       0.93      0.15    16.13

                              52-week   52-week                  P/E
Internet drug Stores           high       low     Div.   Yield   ratio

drugstore.com                    2.95      0.01     --     --      --

                              Current   Previous
Parent companies &             close     close       Net       %
Combo Operators               2/12/09   1/29/09    change    change

Ahold (combos)                  11.25      11.71     -0.46    -3.93
AmerisourceBergen (GNP)         37.84      37.08      0.76     2.05
A&P (combos)                     6.53       7.51     -0.98   -13.05
Cardinal Health (Medicine       38.39      37.83      0.56     1.48
  Snoppe)
Kroger (combos)                 21.40      24.13     -2.73   -11.31
McKesson (Health Mart)          45.80      44.84      0.96     2.14
Supervalu (combos)              18.04      19.18     -1.14    -5.94

Parent companies &            52-week   52-week                  P/E
Combo Operators                high       low     Div.   Yield   ratio

Ahold (combos)                  15.53      8.40     --     --      --
AmerisourceBergen (GNP)         44.45     26.66   0.40    1.1      24
A&P (combos)                    30.21      3.10     --     --      --
Cardinal Health (Medicine       62.00     27.79   0.56    1.5      11
  Snoppe)
Kroger (combos)                 30.99     20.68   0.36    1.7      12
McKesson (Health Mart)          61.37     28.27   0.48    1.1      15
Supervalu (combos)              35.91      8.59   0.69    3.9      --

                              Current   Previous
                               close     close       Net       %
Other retailers               2/12/09   1/29/09    change    change

Sears (Kmart)                   40.00      43.69     -3.69    -8.45
Target                          30.85      32.70     -1.85    -5.66
Wal-Mart                        48.13      47.86      0.27     0.56

                              52-week   52-week                  P/E
Other retailers                high       low     Div.   Yield   ratio

Sears (Kmart)                  112.80     26.80     --     --      17
Target                          59.55     25.60   0.64    2.0       9
Wal-Mart                        63.85     46.25   0.95    2.0      14