drugstore.com Achieves Key Milestones in 2006
Fiscal 2006 Net Loss Improves 38% Year-over-Year, Company reports First Full Year of Positive Adjusted EBITDA
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 31, 2006. The company reported quarterly net sales of $108.6 million, driven by core over-the-counter (OTC) order growth of 19% year-over-year, and a net loss of $2.9 million, or $0.03 per share, reflecting a $1.5 million improvement from the same period of 2005. During the quarter, the company achieved its third consecutive quarter of positive adjusted EBITDA. Adjusted EBITDA of $901,000 was an improvement of approximately $2.7 million from the fourth 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. For the year, the company reported net sales of $415.8 million, a net loss of $13.0 million or $0.14 per share, and adjusted EBITDA of $2.4 million, reflecting an adjusted EBITDA improvement of $12.0 million over the fiscal year ending 2005.
"This was a turnaround year for the company, and we executed on our goal of achieving positive adjusted EBITDA," said Dawn Lepore, chief executive officer and chairman of the board of drugstore.com, inc. "Our focus on profitability and increasing contribution margins has resulted in a significantly improved business model. Our goal now is to build on that model to drive continued adjusted EBITDA margin expansion and GAAP profitability by the fourth quarter of 2007," continued Lepore. The Company achieved record annual adjusted EBITDA of $2.4 million, which improved by $12.0 million from 2005, and generated positive operating cash flow during the second half of the year.
"Our core OTC segment continues to be the key driver of our business and, in the fourth quarter, orders grew by 19% year-over-year and 21% for the year. Importantly, we had a strong 8-week holiday season, with order growth during this period increasing by 25%. Additionally, fourth quarter contribution margin dollars increased by nearly 10% while fixed costs declined by 1%," explained Ms. Lepore.
"Building on our solid business momentum, we are now well positioned to accelerate growth and maximize our core business in 2007 by implementing key initiatives such as expanding beauty.com, executing on our "hard-to-find" strategy, and developing strategic partnerships like our new affiliation with Revolution Health and the Cystic Fibrosis Foundation. We believe these initiatives will continue to move us towards our goal of surpassing half a billion in sales in 2008," concluded Ms. Lepore.
GAAP net loss for the fourth quarter of 2006 was $2.9 million, or $0.03 per share, compared to a net loss of $4.5 million, or $0.05 per share, for the fourth quarter of 2005. This loss includes $1.7 million in non-cash share-based compensation expense 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.
The Company also announced today that Robert A. Barton, Vice President and Chief Financial Officer, has decided to resign and is expected to depart the Company in mid 2007. Mr. Barton will remain in his current role while the Company conducts a search for his successor and will continue in an advisory capacity during a transition period after his successor is identified and retained. "Bob has been a great partner to me as we have turned the company around and achieved positive adjusted EBITDA. I will miss his passion and commitment," said Ms. Lepore.
Outlook for First Quarter and Fiscal Year 2007
For fiscal year 2007, the company is targeting net sales in the range of $440.0 million to $460.0 million, net loss in the range of $7.0 million to $11.0 million, and positive adjusted EBITDA in the range of $7.0 million to $11.0 million.
For the first quarter of 2007, the company is targeting net sales in the range of $108.0 million to $110.0 million, net loss in the range of $3.0 million to $4.0 million, and positive adjusted EBITDA in the range of $500,000 to $1.5 million.
Financial and Operational Highlights for the Fourth Quarter of 2006
(All comparisons are made to the fourth quarter of 2005)
Key Financial Highlights:
-- Total contribution margin dollars increased by nearly 10%, while fixed operating expenses declined by 1%. For the year, contribution margin dollars improved by 20%, while fixed costs increased by only 3%.
-- Gross margin expansion of 20 basis point and 110 basis point for the quarter and year, respectively, was a key contributor to our contribution margin improvement.
-- Total orders grew 8% to a record 1.4 million while contribution margin dollars per order grew by 1% to $11. For the year, total orders grew by 6%, while contribution margin dollars per order increased by 14%.
-- Core OTC(1) order volumes grew by 19% for the quarter, and 21% for the year.
-- Cash, cash equivalents and marketable securities were $40.6 million at year end.
Net Sales Summary:
-- Core OTC net sales(1) grew by 15% to $55.6 million. For the year, core OTC sales were $195.6 million and grew by 18%.
-- Mail-order pharmacy net sales were down 28% to $14.5 million reflecting a full quarter without sales through our partnership with Envision, which was terminated in the second quarter. Contribution margin dollars increased by 18%. For the year, mail-order pharmacy net sales declined by 11% to $67.4 million, while contribution margin dollars increased by 17%.
-- Local pick-up pharmacy net sales were up approximately 9% to $26.0 million. For the year, local pick-up pharmacy net sales were up 5% to $100.7 million.
-- Vision net sales grew to $12.0 million, a 6% increase. For the year, vision net sales grew by 6% to $49.8 million.
-- Average net sales per order were $75. Average net sales per order were down 4% for core OTC at $57, up by 11% to $167 for mail-order pharmacy, down 6% to $106 for local pick-up pharmacy, and up by 12% to $93 for vision. For the year, average net sales per order were down 2% for core OTC at $57, up by 12% to $164 for mail-order pharmacy, down 3% to $106 for local pick-up pharmacy, and up by 10% to $90 for vision.
-- Net sales from repeat customers represented 79% of net sales. For the year, net sales from repeat customers were 81% of net sales(2)
Key Customer Milestones:
-- Approximately 8.5 million customers have been served since inception, including 347,000 new customers in the fourth quarter.
-- The number of active customers(3) grew by 8% to more than 2.2 million.
-- The average annual spend per active customer(3) was $186.
(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.
(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 Wednesday, January 31, 2007 at 5:00 p.m. ET (2:00 p.m. PT). To participate, callers should dial 800-240-7305 (international callers should dial 303-262-2193) 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 Friday, February 2, 2007 at 800-405-2236 (enter pass code 11080873#) or internationally at 303-590-3000 (enter pass code 11080873#) 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 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.
