drugstore.com, inc. Reports Forty Percent Net Sales Growth

BELLEVUE, Wash.--(BUSINESS WIRE)--July 24, 2002--drugstore.com, inc. (Nasdaq:DSCM), the leading Internet retailer of health, beauty, wellness, personal care and pharmacy products, announced today its second quarter financial results.

drugstore.com, inc. beat earlier estimates for the quarter, reporting year over year net sales growth of forty percent and a forty-two percent reduction in EBITDA loss (excluding impairment and restructuring charges and cumulative effect adjustment).

"By maintaining a simple, but critical company-wide focus on customer service, we are driving the right metrics towards profitability," said drugstore.com, inc. President and Chief Executive Officer, Kal Raman. "I'm extremely pleased with our accomplishments in the second quarter, and am proud of our team as we continue to push toward our goal to become EBITDA positive during 2003."

Second quarter net sales were $47.6 million and grew by $13.6 million or 40 percent from the second quarter of 2001, and gross margin increased to 19.5 percent, growing by 320 basis points from the prior year second quarter. Concurrently, operating expenses before impairment and restructuring charges, amortization of intangible assets, and amortization of stock-based compensation, declined year over year by 14 percent or $3.4 million, to $20.1 million. Pro forma net loss for the quarter (excluding impairment and restructuring charges, amortization of intangible assets, amortization of stock-based compensation and cumulative effect adjustments) decreased to $10.5 million or $0.16 per share, which reflects a year-over-year loss reduction of $6.3 million and a sequential loss reduction of $2.6 million. EBITDA loss (excluding impairment and restructuring charges and cumulative effect adjustment) was $8.5 million, reflecting a year over year loss reduction of $6.2 million or 42%. Cash use declined for the ninth consecutive quarter to $4.9 million, and represented a 63% year over year reduction in quarterly cash use. Cash on hand at quarter end was $66 million, a balance the company believes is sufficient to reach cash flow break-even.

Net loss on a GAAP basis declined to $14.0 million or $.21 per share in the second quarter of 2002, from $32.1 million or $0.49 per share in the second quarter of 2001. Reflected in the GAAP net loss is a non-cash impairment charge of $2.5 million associated with the write-off of prepaid cable television advertising rights. These rights were received in connection with a private placement offering in June of 1999, and were recorded on the balance sheet at fair value. During the second quarter, the company made a determination that they will not be utilizing these rights, and accordingly have written off the balance.

Also during the quarter, the company completed its transitional goodwill impairment test in connection with its January 1, 2002 adoption of SFAS 142 "Goodwill and Other Intangible Assets". As a result of the test, the company recorded an $8.9 million non-cash cumulative effect adjustment that, in accordance with the statement, has been reflected retroactively as of the adoption date, and included in the GAAP net loss for the six month period ended June 30, 2002. The impairment was associated with goodwill recorded in connection with the acquisition of Beauty.com in the first quarter of 2000.

Operational Highlights for Second Quarter of 2002

-- David Dowhan joined drugstore.com as the Vice President of Marketing. David brings over 12 years of general management, product development, and Internet marketing and sales experience to drugstore.com, and most recently served as the Group Vice President of Marketing Acquisitions at NextCard, Inc.
-- Entered into new marketing relationships with Amazon.com.
-- Executed several new marketing programs with partner Rite-Aid, seeing sales through the Rite-Aid channel grow 18 percent from first quarter of this year.
-- Named one of the Top 10 "Five Star" Merchants for Online Customer Service in a Mystery Shopping Survey conducted by the DMA (Direct Marketing Association) and the e-tailing group.

Financial Highlights for Second Quarter of 2002 (all comparisons are made with the second quarter of 2001 unless otherwise noted)

-- Net sales increased by 40 percent to $47.6 million, and increased sequentially from first quarter 2002 net sales of $43.9 million.
-- Net revenue per order increased by 10 percent, or $6, to $68.
-- Acquired 205,000 new customers, bringing the total customer base to approximately 2.8 million.
-- Orders from repeat customers in the quarter represented 71 percent of all orders and reflected an all time high on an absolute basis.
-- Gross margin increased for the twelfth consecutive quarter to 19.5%, a year over year improvement of 320 basis points.
-- Fulfillment expenses declined to 14 percent of net sales, down from 20 percent in second quarter 2001.
-- Pro forma net loss for the quarter (excluding impairment and restructuring charges, amortization of intangible assets, amortization of stock-based compensation and cumulative effect adjustment) decreased to $10.5 million or $0.16 per share, which reflects a year-over-year loss reduction of $6.3 million and a sequential loss reduction of $2.6 million.
-- EBITDA loss for the quarter (excluding impairment and restructuring charges and cumulative effect adjustment) was $8.5M or $0.13 per share and improved year over year by $6.2 million or 42 percent.
-- Cash use was reduced for the ninth consecutive quarter to $4.9 million, which represents an $8.3 million or 63 percent year over year reduction, and a $3 million or 39 percent sequential decline.

Outlook for Third Quarter and the Year Ending 2002

drugstore.com expects third quarter of 2002 net sales to approximate $50 million, and gross margin to approximate 19.5 percent. EBITDA loss is anticipated to approximate $6 million to $7 million. The company also expects to add 210,000 new customers to its base at an acquisition cost of $21 to $22.

For the fiscal year ending 2002, the company remains firm on its prior net sales guidance of $200 million, and anticipates an EBITDA loss excluding non-cash marketing expenses (estimated at $7.8 million) and before impairment and restructuring charges and cumulative effect adjustment, to fall in the range of $22 million to $24 million, rather than the previous guidance range of $25 million to $26 million.

About drugstore.com

drugstore.com, inc. (Nasdaq:DSCM) is a leading online drugstore and information site offering The Simple Way to Look and Feel your Best(TM) for health, beauty, wellness, personal care, and pharmacy products. The drugstore.com(TM) Web site provides a convenient, private, and informative shopping experience that encourages consumers to purchase products essential to healthy, everyday living. The drugstore.com Web store offers thousands of brand-name personal health care products at competitive prices; a full-service, licensed retail pharmacy; and a wealth of health-related information, buying guides, and other tools designed to help consumers make informed purchasing decisions.

drugstore.com,inc. has been awarded the Verified Internet Pharmacy Practice Sites (VIPPS) certification by the National Association of Boards of Pharmacy (NABP) as a fully licensed facility exercising the best safe pharmacy practices in compliance with federal and state laws and regulations.

In addition to Amazon.com (Nasdaq:AMZN), drugstore.com, inc. also has strategic relationships with Rite Aid Corporation (NYSE, PSE:RAD) General Nutrition Companies, and WellPoint Health Networks (NYSE:WPT). drugstore.com and The Simple Way to Look and Feel your Best are trademarks of drugstore.com, inc.

The historical 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. Words such as "expects", "believes", "anticipates", "intends", "may", "will", "plan" "continue" "forecast" ,"remains", "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, consumer spending, the stock market, changes affecting the Internet, online retailing and advertising, drugstore.com's limited operating history, the unpredictability of future revenues and expenses and potential fluctuations in revenues and operating results, risks related to business combinations and strategic alliances, consumer trends, the level of competition, seasonality, the timing and success of expansion efforts, risks related to systems interruptions, possible governmental regulation, and the ability to manage a rapidly growing business. Additional information, regarding factors that potentially could affect drugstore.com's business, financial condition and operating results is included in drugstore.com's filings with the Securities and Exchange Commission, including in the prospectus dated March 15, 2000 relating to drugstore.com's public offering of common stock, in the prospectus on Form S-3, effective October 2, 2000 and in our periodic filings with the SEC on Forms 10K and 10Q. drugstore.com expressly disclaims any intent or obligation to update any forward-looking statement, except as otherwise specifically stated by it.

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