Positive earnings report.
BELLEVUE, Wash., Oct 26, 2006 (BUSINESS WIRE) -- drugstore.com, inc. (DSCM, Trade), 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.
