drugstore.com Announces 2005 Revenues of Approximately $400 Million -- Net Loss Narrows by 56%; Company Targets Adjusted EBITDA Profitability for the Second Half of 2006(1)

drugstore.com, inc. (NASDAQ: DSCM), a leading onlineprovider of health, beauty, vision, and pharmacy products, todayannounced its financial results for the fourth quarter and fiscal yearended January 1, 2006. The company reported quarterly net sales of$106.4 million, an all-time high, and fiscal year 2005 net sales of$399.4 million. Fourth quarter net sales were driven by 26%year-over-year adjusted growth(2) in the company's coreover-the-counter (OTC) segment (excluding wholesale OTC(3)) and 19%year-over-year adjusted growth in its mail-order pharmacy segment.

"During the quarter, we made a number of key strategic decisionsthat benefited our bottom line and that we believe will position us toreach adjusted EBITDA profitability during the second half of 2006,"said Dawn Lepore, chief executive officer and chairman of the board ofdrugstore.com, inc. "First, we are focused on making each of ourorders profitable, and to that end, we have adjusted our shippingcharges and refined our shipping promotions. We are also eliminatingor re-pricing unprofitable SKUs. Second, we evaluated theprofitability potential of our existing partnerships, which led us toterminate our lower-margin wholesale OTC business with Amazon.com andrestructure our relationship with Dr. Andrew Weil. Finally, we weighedthe tangible benefits we've seen from our brand campaign against itsestimated payback time and our anticipated proximity to EBITDAprofitability, and decided to wind down the campaign in the firstquarter of 2006."

"In the fourth quarter, we began to realize the positive impact ofthese and many other strategic decisions," added Ms. Lepore. "Duringthe quarter we added a record 351,000 new customers, saw OTC net salesfrom repeat customers increase by 35% on a year-over-year comparablebasis, and increased our overall average basket size to an all-timehigh of $80. Gross margin grew sequentially by 150 basis points andincreased year-over-year by 120 basis points, to a solid 21.4% -- ourbest performance in almost two years. These improvements supported anadjusted EBITDA loss of $1.8 million (which is less than ourfourth-quarter brand and personalization spend of $2.6 million) andpositive cash flow from operations in the fourth quarter."

Net loss for the fourth quarter of 2005 was $4.5 million, or $0.05per share, compared to a net loss of $5.4 million, or $0.07 per share,for the fourth quarter of 2004. Net loss for fiscal year 2005 was$20.9 million, or $0.23 per share, compared to $47.7 million, or $0.62per share, for fiscal year 2004. Adjusted EBITDA loss (a non-GAAPfinancial measure defined as earnings before interest, taxes,depreciation, and amortization of intangible assets, non-cashmarketing expense and stock-based compensation, and adjusted toexclude non-cash charges for impairment of goodwill and otherintangible assets and a non-cash litigation settlement) was $1.8million for the fourth quarter of 2005, compared to $1.2 million forthe fourth quarter of 2004. Adjusted EDITDA loss for fiscal year 2005was $9.6 million, compared to $5.8 million for fiscal year 2004, andreflected, among other things, $5.5 million of expenses associatedwith the company's brand development and personalization initiatives.The company's net loss and adjusted EBITDA loss also reflect a$560,000 write-off of internally developed software in the fourthquarter.

"We continue to post double-digit growth in our core OTC andmail-order pharmacy businesses and believe we have identified a numberof strong initiatives to continue to grow our sales," added Ms.Lepore. "At the same time, we are closely focusing on theprofitability of each and every order and initiative, as we drivetoward achieving our primary goal of long-term, sustainableprofitability. We made significant progress in this area in 2005 andbelieve we have established a clear path to reaching adjusted EBITDAprofitability for the second half of 2006."

1. Adjusted EBITDA is a non-GAAP financial measure defined asearnings before interest, taxes, depreciation, and amortization ofintangible assets, non-cash marketing expense and stock-basedcompensation, and adjusted to exclude non-cash charges for impairmentof goodwill and other intangible assets and non-cash litigationsettlements.

2. drugstore.com, inc. operates on a 52/53-week retail calendaryear, with each quarter in a 52-week fiscal year representing a13-week period. Fiscal year 2004 was a 53-week fiscal year, with thefourth quarter representing a 14-week period, while fiscal year 2005was a 52-week fiscal year, with the fourth quarter representing a 13-week period. The extra week in the fourth quarter of 2004 impactsyear-over-year comparisons for both the fourth quarter and full year.To make results comparable on a 52-week basis for the purpose ofpresenting growth rates, each fourth quarter 2004 result for which thecompany presents a growth rate comparison has been multiplied by thefraction of 13/14.

3. Wholesale OTC net sales are generated by the company's December2003 agreement to provide fulfillment services to Amazon.com, Inc.,which agreement was terminated effective as of November 9, 2005. Areconciliation of OTC net sales to OTC net sales excluding wholesaleOTC is included in the financial data accompanying this press release.

Outlook for First Quarter and Fiscal Year 2006

For fiscal year 2006, drugstore.com, inc. is targeting a net salesrange of $440.0 million to $460.0 million, a net loss range of $15.0million to $20.0 million (reflecting stock option expense associatedwith the adoption of Statement of Financial Accounting Standards123R), and an adjusted EBITDA range of $4.0 million in adjusted EBITDAloss to $1.0 million in adjusted EBITDA profit. The company istargeting adjusted EBITDA profitability for the second half of 2006and expects to end the 2006 fiscal year with more than $35 million incash, cash equivalents and marketable securities.

For the first quarter of 2006, drugstore.com is targeting a netsales range of $102.0 million to $107.0 million, a net loss range of$7.2 million to $8.2 million, and an adjusted EBITDA loss range of$3.5 million to $4.5 million (reflecting $1.7 million in brandcampaign expenses in the first quarter).

Financial and Operational Highlights for the Fourth Quarter of2005

(All comparisons are made with the fourth quarter of 2004. All netsales growth rates are adjusted to take into account the extra week infiscal year 2004, unless otherwise noted.)(4)

Net Sales Highlights:

-- Excluding the company's wholesale OTC business(5), OTC net sales grew by 26%, to $50.8 million. Net sales from repeat OTC customers grew by 35%.(6) Wholesale OTC net sales decreased 89% to $468,000, reflecting the termination of the company's wholesale OTC fulfillment agreement with Amazon.com, effective November 9, 2005. (Without adjustment to reflect the extra week in 2004, OTC net sales grew by 17%, net sales from repeat OTC customers grew by 25%, and wholesale net sales decreased 90%.)

-- Mail-order pharmacy net sales reached an all-time quarterly high of $20.0 million, growing by 19% (10% unadjusted).

-- Local pick-up pharmacy net sales were relatively flat at $23.8 million.

-- Vision net sales grew to $11.3 million, a 3% increase (a 5% decrease unadjusted).

-- Total order volume grew to 1.3 million orders.

-- Average net sales per order were an all-time high of $80. Average net sales per order grew by 2% to $60 for OTC ($61 excluding wholesale OTC), by 7% to $151 for mail-order pharmacy, by 5% to $112 for local pick-up pharmacy, and by 3% to $83 for vision.

-- Net sales from repeat customers represented 80% of net sales.

Key Customer Milestones:

-- 7.2 million customers have been served since inception, including 351,000 new customers in the fourth quarter.

-- The number of active customers(7) grew by 10% to 2.0 million.

-- The average annual spend per active customer(7) grew $10, or 6%, to $192.

Other Financial Highlights:

-- Fulfillment and order processing expenses improved to 9.8% of net sales, down from 10.6%.

-- Inventory turned at an annualized rate of 14 during the quarter.

4. See Note 2.

5. See Note 3.

6. Revenue from repeat customers excludes wholesale OTC net salesand reflects only the activity of customers making purchases throughweb sites owned by drugstore.com, inc. and its subsidiaries.

7. Active customer base reflects those customers who havepurchased at least once within the last 12 months. Both the activecustomer base (a trailing 12-month number) and average annual spendper active customer exclude net sales and orders associated with thecompany's wholesale OTC fulfillment business, and reflect only theactivity of customers making purchases through Web sites owned by thecompany and its subsidiaries.

Conference Call

Investors, analysts, and other interested parties are invited tojoin the drugstore.com(TM) quarterly conference call on Wednesday,February 1, 2006 at 5:00 p.m. ET (2:00 p.m. PT). To participate,callers should dial 800-219-6110 (international callers should dial303-262-2138) five minutes beforehand. Investors may also listen tothe conference call live at www.drugstore.com (under CorporateInformation), by clicking on the "audio" hyperlink. A replay of thecall will be available through Friday, February 3, 2006 at800-405-2236 (enter pass code 11051297) or internationally at303-590-3000 (enter pass code 11051297) beginning two hours aftercompletion of the call.

Non-GAAP Measures

To supplement the consolidated financial statements presented inaccordance with GAAP, drugstore.com, inc. uses the non-GAAP measure ofadjusted EBITDA, defined as earnings before interest, taxes,depreciation, and amortization of intangible assets, non-cashmarketing expenses and stock-based compensation, and adjusted toexclude non-cash charges for impairment of goodwill and otherintangible assets and a non-cash litigation settlement. This non-GAAPmeasure is provided to enhance the user's overall understanding of thecompany's current financial performance and prospects for the future.Management believes that adjusted EBITDA, as defined, provides usefulinformation to the company and to investors by excluding certain itemsthat may not be indicative of the company's core operating results. Inaddition, because drugstore.com, inc. has historically provided EBITDAmeasures to investors, management believes that including EBITDAmeasures provides consistency in the company's financial reporting.However, adjusted EBITDA should not be considered in isolation, or asa substitute for, or as superior to, net loss, cash flows, or otherconsolidated loss or cash flow data prepared in accordance with GAAP,or as a measure of the company's profitability or liquidity. AlthoughEBITDA is frequently used as a measure of operating performance, it isnot necessarily comparable to other similarly titled captions of othercompanies due to differences in methods of calculation. Net loss isthe closest financial measure prepared by the company in accordancewith GAAP in terms of comparability to adjusted EBITDA loss.

drugstore.com, inc. also uses non-GAAP measures in which wholesaleOTC sales are excluded from OTC segment sales data. These non-GAAPmeasures are provided to enhance the user's overall understanding ofthe company's financial performance in the OTC segment. Managementbelieves that these reporting metrics provide useful information tothe company and to investors by excluding certain items that may notbe indicative of the company's core operating results in the OTCsegment. By excluding wholesale OTC sales from OTC sales data, thecompany can more effectively assess the buying behavior of, and thecompany's financial performance with respect to, its own OTC customers(those customers making purchases through Web sites owned bydrugstore.com, inc. and its subsidiaries). However, these non-GAAPmeasures should not be considered in isolation, or as a substitutefor, or as superior to, OTC segment sales data prepared in accordancewith GAAP, or as a measure of the company's overall performance in theOTC segment. OTC segment sales measures are the closest financialmeasures prepared by the company in accordance with GAAP in terms ofcomparability to OTC segment sales measures that exclude wholesale OTCsales.

About drugstore.com, inc.

drugstore.com, inc. (NASDAQ: DSCM) is a leading online provider ofhealth, beauty, vision, and pharmacy products. The drugstore.com(TM)online store provides a convenient, private, and informative shoppingexperience that encourages consumers to purchase products essential tohealthy, everyday living. The online store offers thousands ofbrand-name personal health care products at competitive prices; afull-service, licensed retail pharmacy; and a wealth of health-relatedinformation, buying guides, and other tools designed to help consumersmake informed purchasing decisions. Consumers can personalize theirshopping experiences with shopping lists, e-mail reminders forreplenishing regularly used products, and private e-mail access topharmacists and beauty experts for questions.

drugstore.com, inc. has been awarded the Verified InternetPharmacy Practice Sites (VIPPS) certification by the NationalAssociation of Boards of Pharmacy (NABP) as a fully licensed facilityexercising competent, safe pharmacy practices in compliance withfederal and state laws and regulations.

The financial results contained in this press release arepreliminary and unaudited. In addition, this press release containsforward-looking statements regarding future events or the futurefinancial and operational performance of drugstore.com, inc. Wordssuch as "targets," "expects," "believes," "anticipates," "intends,""may," "will," "plan," "continue," "forecast," "remains," "would,""should," and similar expressions, are intended to identifyforward-looking statements. Forward-looking statements are based oncurrent expectations, are not guarantees of future performance andinvolve assumptions, risks, and uncertainties. Actual performance maydiffer materially from those contained or implied in suchforward-looking statements. Risks and uncertainties that could lead tosuch differences could include, among other things: effects of changesin the economy, changes in consumer spending, fluctuations in thestock market, changes affecting the Internet, online retailing andadvertising, difficulties establishing our brand, including the riskthat our new brand campaign may not be successful as we anticipate,and building a critical mass of customers, the unpredictability offuture revenues and expenses and potential fluctuations in revenuesand operating results, risks related to business combinations andstrategic alliances, possible tax liabilities relating to thecollection of sales tax, consumer trends, the level of competition,seasonality, the timing and success of expansion efforts, recentchanges in senior management, risks related to systems interruptions,possible governmental regulation and the ability to manage a rapidlygrowing business. Additional information regarding factors thatpotentially could affect the business, financial condition andoperating results of drugstore.com, inc. is included in the company'speriodic filings with the SEC on Forms 10-K, 10-Q and 8-K.drugstore.com, inc. expressly disclaims any intent or obligation toupdate any forward-looking statement, except as otherwise specificallystated by it.
DRUGSTORE.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)


Three Months Ended Twelve Months Ended
------------------------- -------------------------
January 1, January 2, January 1, January 2,
2006 2005 2006 2005
----------- ----------- ----------- -----------

Net sales $ 106,369 $ 103,606 $ 399,430 $ 360,099

Costs and expenses:
Cost of sales 83,575 82,628 317,366 286,858
Fulfillment and
order processing 10,430 11,009 39,853 39,416
Marketing and
sales 9,947 6,355 32,592 24,567
Technology and
content 3,545 2,839 12,768 9,483
General and
administrative 2,688 4,858 14,048 16,200
Amortization of
intangible assets 706 796 3,004 3,952
Stock-based
compensation 337 623 1,968 1,238
Impairment of
goodwill and
other
intangible
assets ---- 980 ---- 27,460
----------- ----------- ----------- -----------
Total costs and
expenses 111,228 110,088 421,599 409,174
----------- ----------- ----------- -----------

Operating loss (4,859) (6,482) (22,169) (49,075)

Interest income,
net 367 139 1,270 360
----------- ----------- ----------- -----------

Loss before income
taxes (4,492) (6,343) (20,899) (48,715)

Income tax benefit ---- 980 ---- 980
----------- ----------- ----------- -----------

Net loss $ (4,492) $ (5,363) $ (20,899) $ (47,735)
----------- ----------- ----------- -----------

Basic and
diluted net
loss per
share $ (0.05) $ (0.07) $ (0.23) $ (0.62)
=========== =========== =========== ===========
Weighted average
shares
outstanding used
to compute basic
and diluted net
loss per share 92,877,328 79,895,117 90,808,817 76,650,915
=========== =========== =========== ===========


SUPPLEMENTAL INFORMATION: Gross Profit, Gross Margin, and Adjusted
EBITDA Loss (See Note 1 below):

USD (in thousands), unless
otherwise indicated Three Months Ended Twelve Months Ended
------------------- -------------------
January January January January
1, 2, 1, 2,
2006 2005 2006 2005
1. Gross Profit and Gross
Margin
--------------------------
Net sales $106,369 $103,606 $399,430 $360,099

Cost of sales 83,575 82,628 317,366 286,858
-------- -------- -------- --------

Gross profit $ 22,794 $ 20,978 $ 82,064 $ 73,241
======== ======== ======== ========

Gross margin 21.4% 20.2% 20.5% 20.3%
======== ======== ======== ========

2. Reconciliation of Net Loss to Adjusted EBITDA Loss (see Note 2
below)
----------------------------------------------------------------------
(a) Reconciliation of Net Loss to Adjusted EBITDA Loss Calculated As:
----------------------------------------------------------------------

USD (in thousands), unless
otherwise indicated Three Months Ended Twelve Months Ended
------------------- -------------------
January January January January
1, 2, 1, 2,
2006 2005 2006 2005

Net loss $ (4,492) $ (5,363) $(20,899) $(47,735)
Amortization of intangible
assets 706 796 3,004 3,952
Amortization of non-cash
marketing 572 573 2,290 2,291
Non-cash litigation settlement -- 17 -- 492
Stock-based compensation 337 623 1,968 1,238
Impairment of goodwill and
other intangible assets -- 980 -- 27,460
Depreciation (see Note 2 below) 1,409 2,301 5,280 7,872
Interest income, net (367) (139) (1,270) (360)
Income tax benefit --- (980) --- (980)
-------- -------- -------- --------
Adjusted EBITDA loss $ (1,835) $ (1,192) $ (9,627) $ (5,770)
======== ======== ======== ========


NOTE 1: Supplemental information related to the company's gross
profit, gross margin and adjusted EBITDA loss for the three
and twelve months ended January 1, 2006 and January 2, 2005,
is presented for informational purposes only and is not
prepared in accordance with generally accepted accounting
principles.

NOTE 2: Adjusted EBITDA loss is defined as loss before interest,
taxes, depreciation, and amortization of intangible assets,
non-cash marketing expense and stock-based compensation, and
adjusted to exclude non-cash charges for impairment of
goodwill and other intangible assets and related deferred tax
benefits, and a non-cash litigation settlement. Depreciation
expense excluded from adjusted EBITDA loss is classified in
the following financial statement line items:


Three Months Ended Twelve Months Ended
------------------------ ----------------------
January 1, January 2, January 1, January 2,
2006 2005 2006 2005
--------- --------- --------- ---------
Fulfillment and order
processing $ 455 $ 1,306 $ 2,288 $ 5,088
Marketing and sales -- -- -- --
Technology and content 855 636 2,514 1,675
General and
administrative 99 359 478 1,109
--------- --------- --------- ---------
Depreciation $ 1,409 $ 2,301 $ 5,280 $ 7,872
--------- --------- --------- ---------


(b) Reconciliation of Forecasted Q1 2006 and FY 2006 Net Loss Range to
Forecasted Q1 2006 and FY 2006 EBITDA Loss/Profit Range Calculated As:
----------------------------------------------------------------------

Three Months Ended Twelve Months Ended
April 2, 2006 December 31, 2006
-------------------- ----------------------
Range High Range Low Range High Range Low
Estimated net loss $ (7,168) $ (8,168) $ (14,975) $ (19,975)
Estimated amortization of
intangible assets 531 531 2,093 2,093
Estimated amortization of
non-cash marketing 572 572 2,290 2,290
Estimated stock-based
compensation 1,350 1,350 5,500 5,500
Estimated depreciation 1,475 1,475 6,724 6,724
Estimated interest income,
net (260) (260) (632) (632)
--------- -------- ---------- ---------
Estimated EBITDA
profit/(loss) $ (3,500) $ (4,500) $ 1,000 $ (4,000)
========= ======== ========== =========

SUPPLEMENTAL INFORMATION: Net sales by reporting segment:


Three Months Ended
------------------------------------------
January 1, October 2, January 2,
2006 2005 2005
------------ ------------ -------------
Over-the-Counter (OTC) $ 51,226 $ 41,701 $ 47,875
Mail-order pharmacy 19,994 19,249 18,104
Local pick-up pharmacy 23,834 23,363 25,739
Vision 11,315 12,283 11,888
------------ ------------ -------------
Consolidated $ 106,369 $ 96,596 $ 103,606
------------ ------------ -------------

SUPPLEMENTAL INFORMATION: Reconciliation of OTC Net Sales to OTC Net
Sales Excluding Wholesale OTC (see Note 3 below):


Three Months Ended
----------------------------------
January 1, October 2, January 2,
2006 2005 2005
----------------------------------
(in thousands, except orders
shipped and per order data)
Over-the-Counter (OTC):
Net sales $ 51,226 $ 41,701 $ 47,875
Wholesale OTC sales 468 1,451 4,523
---------- ----------- ----------
OTC sales, excluding
wholesale OTC 50,758 40,250 43,352
OTC orders shipped 852,518 764,211 814,251
Wholesale OTC orders shipped 18,640 68,365 110,001
OTC orders shipped,
excluding wholesale OTC 833,878 695,846 704,250
OTC sales per order shipped,
excluding wholesale OTC $ 61 $ 58 $ 62
========== =========== ==========

NOTE 3: Supplemental information related to the company's OTC
sales excluding wholesale OTC sales for the three months
ended January 1, 2006, October 2, 2005 and January 2, 2005 is
presented for informational purposes only and is not prepared
in accordance with generally accepted accounting principles.
Effective November 9, 2005, we terminated our wholesale OTC
fulfillment with Amazon.com, Inc. without any material
obligations for either party following the termination.


DRUGSTORE.COM, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)


January 1, 2006 January 2, 2005(4)
--------------- --------------------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents $ 20,291 $ 15,491
Marketable securities 26,172 18,728
Accounts receivable, net of
allowances 34,214 35,344
Inventories 23,468 19,287
Prepaid marketing expenses 2,387 2,290
Other current assets 2,583 3,027
-------------- -------------------
Total current assets 109,115 94,167

Fixed assets, net 15,839 13,626
Other intangible assets, net 7,427 10,399
Goodwill, net 32,202 32,202
Prepaid marketing expenses and
other 5,980 8,117
-------------- -------------------
Total assets $ 170,563 $ 158,511
============== ===================

LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 58,177 $ 57,510
Accrued compensation 3,426 3,559
Accrued marketing expenses 3,382 2,567
Other current liabilities 1,751 1,654
Current portion of long term
debt 2,029 1,158
-------------- -------------------
Total current liabilities 68,765 66,448


Long-term debt, less current
portion 2,685 1,807
Deferred income taxes 945 945
Other long-term liabilities 1,897 2,183

Stockholders' equity:
Common stock, $.0001 par value,
stated at amounts paid in:
Authorized shares --
250,000,000
Issued and outstanding
shares -- 92,904,652 and
81,440,927 as of
January 1, 2006 and
January 2, 2005, respectively 835,557 807,142
Deferred stock-based
compensation (1,968) (3,598)
Accumulated other comprehensive
loss (3) --
Accumulated deficit (737,315) (716,416)
-------------- -------------------
Total stockholders' equity 96,271 87,128
-------------- -------------------
Total liabilities and
stockholders' equity $ 170,563 $ 158,511
============== ===================

NOTE 4: Certain prior year amounts have been reclassified to
conform to the current year presentation.


DRUGSTORE.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

Twelve Months Ended
----------------------
January 1, January 2,
2006 2005
----------------------
Operating Activities:
Net loss $ (20,899)$ (47,735)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 5,280 7,872
Amortization of marketing and sales
agreements 2,290 2,291
Amortization of intangible assets 3,004 3,952
Stock-based compensation 1,968 1,238
Impairment of goodwill and other
intangible assets -- 27,460
Deferred income tax benefit -- (980)
Litigation settlement -- 492
Loss on disposal of assets 674 269
Other 34 --
Changes in:
Accounts receivable 1,130 (9,117)
Inventories (4,181) (5,640)
Other current assets 162 (1,127)
Accounts payable, accrued expenses, and
other liabilities 735 10,333
---------- ----------
Net cash used in operating activities (9,803) (10,692)
---------- ----------

Investing Activities:
Purchases of marketable securities (37,872) (14,731)
Sales and maturities of marketable securities 30,425 32,540
Purchase of fixed assets (6,034) (4,620)
---------- ----------
Net cash provided by (used in) investing
activities (13,481) 13,189
---------- ----------

Financing Activities:

Proceeds from exercise of stock options and
employee stock purchase plan 2,091 4,915
Proceeds from private placement, net 25,952 --
Proceeds from term loan and revolving line of
credit 1,662 2,000
Principal payments on capital lease and term
loan obligations (1,621) (956)
---------- ----------
Net cash provided by financing activities 28,084 5,959
---------- ----------
Net increase in cash and cash equivalents 4,800 8,456
Cash and cash equivalents at beginning of
period 15,491 7,035
---------- ----------
Cash and cash equivalents at end of period $ 20,291 $ 15,491
========== ==========