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Sales surge, earnings slip in 1Q at drugstore.com

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BELLEVUE, Wash. — Drugstore.com tallied a double-digit increase in revenue for its fiscal 2010 first quarter, but earnings took a hit in part due to acquisition costs.

The online retailer late Wednesday said sales for the first quarter ended April 4 jumped 20% to $118.3 million from $98.3 million a year earlier, driven by strong over-the-counter products and Beauty.com business. OTC sales surged 29% to $93 million in the quarter, including Beauty.com growth of 28% and total beauty growth of 48%.

Chairman and chief executive officer Dawn Lepore also unveiled an agreement to sell drugstore.com’s pharmacy business to BioScrip Inc., which thereafter would become the online retailer’s pharmacy services partner.

On the earnings side, drugstore.com posted a net loss of $2.6 million, or 3 cents per share, in the 2010 first quarter, down from net income of $854 million, or 1 cent per share, a year ago. The company noted that during the 2010 first quarter it incurred $1.8 million in transaction and integration expenses related to its acquisition of SkinStore.com operator Salu Inc., which was finalized in February.

The average analyst estimate for drugstore.com’s 2010 first-quarter earnings was for a 1-cent-per-share loss, according to Thomson Financial.

Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) for the quarter came in at $2.5 million, down from $5.1 million in the prior-year period. The retailer noted that 2009 first-quarter adjusted EBITDA and net income results reflect a $3 million contribution from the company’s discontinued local pickup business.

Also during the 2010 first quarter, gross margins rose 110 basis points to 29.3%, and free cash flow was $627,000, up $1.2 million from a year earlier.

Other business highlights in the quarter included a 3% rise in vision sales to $17.9 million and a 16% drop in mail-order pharmacy sales to $7.4 million. Total orders grew by 21% to 1.8 million, and sales from repeat customers represented 76% of revenue.

Average net sales per order came in at $67. For OTC, average net sales per order climbed nearly 3% to $59, while vision and mail-order pharmacy each rose 5% to $121 and $158, respectively.

Drugstore.com said that in the 2010 first quarter it served about 543,000 new customers, including those from its strategic partnerships, a gain of 32% versus a year ago.

"Consistent demand for everyday health and beauty products, contributions from our partnerships and a strong performance by our overall beauty business helped drive strong growth in our OTC segment," Lepore said in a statement about 2010 first-quarter results. "With this revenue growth, we were able to leverage our scale, resulting in a 110-basis-point improvement in our gross margins.

"Additionally, SkinStore.com, which we acquired in mid-February, is performing well, contributing $5.5 million in revenues to the quarter," Lepore added. "We are very pleased with the integration and synergies of this acquisition and believe that we are well on our way to improving SkinStore.com’s adjusted EBITDA by over 50%. Overall, we remain on track to hit 2010 goals of OTC revenue growth of 20% to 35%, doubling our prestige beauty business and delivering bottom-line profitability."

For the 2010 second quarter, drugstore.com forecasts earnings of $3.5 million to $4.5 million, adjusted EBITDA of $9.8 million to $10.8 million, and revenue growth of between 27% and 32% to $113 million to $117 million. The company said the second-quarter outlook includes the estimated gain on the sale and the results of operations of its mail-order pharmacy segment in connection with the deal to sell its pharmacy assets to BioScrip.


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