drugstore.com, inc. Announces Second Quarter 2005 Financial Results; Company Reports Strong Sales in Core Growth Businesses

"We reported strong sales in our core OTC and mail-order pharmacybusinesses, spurred by continued growth in revenues from repeatcustomers, average net sales per order and frequency of orders peractive customer," said Dawn Lepore, chief executive officer andchairman of the board of drugstore.com, inc. "Excluding our smallwholesale business, net sales from repeat OTC customers increased by34%. Moving forward, we believe that increasing the frequency and sizeof orders from our loyal customer base is fundamental to our futuregrowth and achieving long-term profitability."

"In the second quarter, we also made significant progress on keyinitiatives that we believe will benefit the longer-term prospects ofour business," added Ms. Lepore. "Over the past three months, wefinalized our brand campaign, signed a new pharmacy deal with MedicalServices Company, and strengthened our management team with theaddition of a number of key executives. We believe that our focusedbrand campaign, which we will roll out September 1, will help educateour 1.9 million active customers on the breadth and depth of ourproduct offering, while also driving new traffic to our on-linestores."

Net loss for the second quarter was $4.3 million, or $0.05 pershare, compared to a net loss of $5.0 million, or $0.07 per share, forthe second quarter of 2004. EBITDA loss (a non-GAAP financial measuredefined as earnings before interest, taxes, depreciation, andamortization of intangible assets, non-cash marketing expense andstock-based compensation) was $1.8 million for the second quarter,compared to an EBITDA loss of $1.5 million for the second quarter of2004.

"Gross margin was 20.5% for the second quarter, the best we havereported in over a year," said Bob Barton, vice president and chieffinancial officer of drugstore.com, inc. "We expect third quartermargins to decrease slightly, reflecting the seasonally soft period,but to show year-over-year and sequential improvement in the fourthquarter."

Outlook for the Third Quarter 2005

For the third quarter of 2005, drugstore.com, inc. is targeting anet sales range of $93.0 million to $96.0 million, a net loss range of$7.5 million to $8.5 million, and an EBITDA loss range of $5.0 millionto $6.0 million. Explained Barton, "Our net sales range is based onour expectation of continued strong sales growth from our coresegments, OTC (excluding wholesale OTC) and mail-order pharmacy. Ournet loss and EBITDA loss ranges reflect an increased advertising spendof approximately $4.5 million in the second half of 2005 in support ofour brand advertising campaign."

Financial and Operational Highlights for the Second Quarter of2005

(all comparisons are made with the second quarter of 2004, unlessotherwise noted)

Net Sales Highlights:

-- Excluding the company's lower margin wholesale OTC business,(1) OTC net sales grew by 26%. Overall, OTC net sales grew by 17% to $43.1 million,(2) with net sales from repeat OTC customers(3) growing by 34%. Wholesale OTC net sales were down 53% to $1.8 million.

-- Mail-order pharmacy net sales grew by 22% to $18.4 million.

-- Local pick-up pharmacy net sales grew by 4% to $24.0 million.

-- Vision net sales were down 12% to $11.4 million.

-- Total order volume grew by 7% to 1.2 million orders.(4)

-- Average net sales per order were $78, up from $76. Average net sales per order grew by 3% to $57 for OTC ($60 excluding wholesale OTC), by 9% to $145 for mail-order pharmacy, by 5% to $82 for vision, and by 4% to $107 for local pick-up pharmacy.

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

Key Customer Milestones:

-- Approximately 6.6 million customers have been served since inception.

-- The number of active customers(5) grew by 13% to approximately 1.9 million.

-- The average annual spend per active customer(6) grew $15, or 8%, to approximately $193.

Other Financial Highlights:

-- Fulfillment and order processing expenses improved to 9.7% of net sales, an all-time low as a percentage of net sales.

-- Marketing and sales expense per new customer was $25.

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

Conference Call

Investors, analysts, and other interested parties are invited tojoin the drugstore.com(TM) quarterly conference call on Thursday, July28, 2005 at 5:00 p.m. ET (2:00 p.m. PT). To participate, callersshould dial 800-366-7417 (international callers should dial303-262-2142) 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 Saturday, July 30, 2005 at 800-405-2236(enter pass code 11034360) or internationally at 303-590-3000 (enterpass code 11034360) beginning two hours after completion of the call.

Non-GAAP Measures

To supplement the consolidated financial statements presented inaccordance with GAAP, drugstore.com, inc. uses the non-GAAP measure ofEBITDA, defined as earnings before interest, taxes, depreciation, andamortization of intangible assets, non-cash marketing expenses andstock-based compensation. This non-GAAP measure is provided to enhancethe user's overall understanding of the company's current financialperformance and prospects for the future. Management believes thatEBITDA, as defined, provides useful information to the company and toinvestors by excluding certain items that may not be indicative of thecompany's core operating results. In addition, because drugstore.com,inc. has historically provided EBITDA measures to investors,management believes that including EBITDA measures providesconsistency in the company's financial reporting. However, EBITDAshould not be considered in isolation, or as a substitute for, or assuperior to, net loss, cash flows, or other consolidated loss or cashflow data prepared in accordance with GAAP, or as a measure of thecompany's profitability or liquidity. Although EBITDA is frequentlyused as a measure of operating performance, it is not necessarilycomparable to other similarly titled captions of other companies dueto differences in methods of calculation. Net loss is the closestfinancial measure prepared by the company in accordance with GAAP interms of comparability to 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 "expects," "believes," "anticipates," "intends," "may,""will," "plan," "continue," "forecast," "targeting," "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 and 10-Q. drugstore.com,inc. expressly disclaims any intent or obligation to update anyforward-looking statement, except as otherwise specifically stated byit.

(1) Wholesale OTC net sales are generated by the company'sDecember 2003 agreement to provide fulfillment services to Amazon.com,Inc. A reconciliation of OTC net sales to OTC net sales excludingwholesale OTC is included in the financial data accompanying thispress release.

(2) Includes $1.8 million in wholesale OTC net sales.

(3) 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.

(4) Includes wholesale OTC orders.

(5) 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 bydrugstore.com, inc. and its subsidiaries.

(6) See footnote 5.

DRUGSTORE.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)


Three Months Ended Six Months Ended
------------------------- -------------------------
July 3, June 27, July 3, June 27,
2005 2004 2005 2004
----------- ----------- ----------- -----------

Net sales $ 96,892 $ 87,844 $ 196,465 $ 172,206

Costs and expenses:
Cost of sales 77,036 70,283 156,372 136,528
Fulfillment and
order
processing 9,366 9,560 19,651 18,817
Marketing and
sales 7,022 6,339 13,842 12,462
Technology and
content 3,033 2,069 5,961 4,389
General and
administrative 3,923 3,392 7,651 7,055
Amortization of
intangible
assets 752 1,032 1,553 2,084
Stock-based
compensation 405 207 1,253 559
----------- ----------- ----------- -----------
Total
costs
and
expenses 101,537 92,882 206,283 181,894
----------- ----------- ----------- -----------

Operating loss (4,645) (5,038) (9,818) (9,688)

Interest income,
net 340 78 519 159
----------- ----------- ----------- -----------

Net loss $ (4,305) $ (4,960) $ (9,299) $ (9,529)
----------- ----------- ----------- -----------

Basic and
diluted net
loss per
share $ (0.05) $ (0.07) $ (0.10) $ (0.13)
=========== =========== =========== ===========
Weighted average
shares outstanding
used to compute
basic and diluted
net loss per share 92,228,222 75,470,099 88,857,994 74,965,835
=========== =========== =========== ===========


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

$ in thousands Three Months Ended Six Months Ended
----------------- -------------------
July 3, June 27, July 3, June 27,
2005 2004 2005 2004
1. Gross Profit and Gross
Margin
-------------------------
Net sales $96,892 $87,844 $196,465 $172,206

Cost of sales 77,036 70,283 156,372 136,528
------- ------- -------- --------

Gross profit $19,856 $17,561 $ 40,093 $ 35,678
======= ======= ======== ========

Gross margin 20.5% 20.0% 20.4% 20.7%
======= ======= ======== ========

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

$ in thousands Three Months Ended Six Months Ended
----------------- -------------------
July 3, June 27, July 3, June 27,
2005 2004 2005 2004

Net loss $(4,305) $(4,960) $ (9,299) $ (9,529)
Amortization of intangible
assets 752 1,032 1,553 2,084
Amortization of non-cash
marketing 572 572 1,145 1,145
Stock-based compensation 405 207 1,253 559
Depreciation (see Note 2 below) 1,104 1,776 2,706 3,488
Interest income, net (340) (78) (519) (159)
------- ------- -------- --------
EBITDA loss $(1,812) $(1,451) $ (3,161) $ (2,412)
======= ======= ======== ========

NOTE 1: Supplemental information related to the company's gross
profit, gross margin and EBITDA loss for the three and six months
ended July 3, 2005 and June 27, 2004 is presented for informational
purposes only and is not prepared in accordance with GAAP.

NOTE 2: EBITDA loss is defined as loss before interest, taxes,
depreciation, and amortization of intangible assets, non-cash
marketing expense and stock-based compensation. Depreciation expense
excluded from EBITDA loss is classified in the following financial
statement line items:

Three Months Ended Six Months Ended
------------------- -----------------
July 3, June 27, July 3, June 27,
2005 2004 2005 2004
------- ------- ------- -------
Fulfillment and order processing $ 454 $ 1,266 $ 1,395 $ 2,525
Marketing and sales -- -- -- --
Technology and content 535 301 1,042 489
General and administrative 115 209 269 474
------- ------- ------- -------
Depreciation $ 1,104 $ 1,776 $ 2,706 $ 3,488
------- ------- ------- -------


(b) Reconciliation of Forecasted Q3 2005 Net Loss Range to Forecasted
Q3 2005 EBITDA Loss Range Calculated As:
----------------------------------------------------------------------

Three Months Ended
October 2, 2005
------------------------
Range High Range Low
Estimated net loss $ (7,500) $ (8,500)
Estimated amortization of intangible assets 730 730
Estimated amortization of non-cash marketing 572 572
Estimated stock-based compensation 290 290
Estimated depreciation 1,208 1,208
Estimated interest income, net (300) (300)
----------- ----------
Estimated EBITDA loss $ (5,000) $ (6,000)
=========== ==========


SUPPLEMENTAL INFORMATION: Net sales by reporting segment:


Three Months Ended
-----------------------------
July 3, April 3, June 27,
2005 2005 2004
-------- -------- --------
Over-the-Counter (OTC) $ 43,130 $ 44,509 $ 36,730
Mail-order pharmacy 18,416 17,953 15,143
Local pick-up pharmacy 23,953 24,976 23,080
Vision 11,393 12,135 12,891
-------- -------- --------
Consolidated $ 96,892 $ 99,573 $ 87,844
-------- -------- --------


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

Three Months Ended
---------------------------
July 3, April 3, June 27,
2005 2005 2004
---------------------------
(in thousands, except
orders shipped and per
order data)
Over-the-Counter (OTC):
Net sales $ 43,130 $ 44,509 $ 36,730
Wholesale OTC sales 1,826 2,547 3,893
-------- -------- --------
OTC sales, excluding wholesale OTC 41,304 41,962 32,837

OTC orders shipped 754,484 792,286 659,527
Wholesale OTC orders shipped 65,846 83,937 92,079
OTC orders shipped, excluding
wholesale OTC 688,638 708,349 567,448
OTC sales per order shipped, excluding
wholesale OTC $ 60 $ 59 $ 58
======== ======== ========


NOTE 3: Supplemental information related to the company's OTC
sales excluding wholesale OTC sales for the three months ended July 3,
2005, April 3, 2005 and June 27, 2004 is presented for informational
purposes only and is not prepared in accordance with GAAP.


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


July 3, January 2,
2005 2005
----------- ----------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents $ 19,186 $ 15,491
Marketable securities 36,862 18,728
Accounts receivable, net of allowances 33,323 35,344
Inventories 19,878 19,287
Prepaid marketing expenses 2,290 2,290
Other current assets 3,333 3,027
--------- ---------
Total current assets 114,872 94,167

Fixed assets, net 13,742 13,626
Other intangible assets, net 8,846 10,399
Goodwill, net 32,202 32,202
Prepaid marketing expenses and other 6,972 8,117
--------- ---------
Total assets $ 176,634 $ 158,511
========= =========

LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 55,492 $ 57,510
Accrued compensation 4,057 3,559
Accrued marketing expenses 2,946 2,567
Other current liabilities 3,815 3,837
Current portion of long term debt 2,182 1,158
--------- ---------
Total current liabilities 68,492 68,631

Deferred income taxes 945 945
Long term debt, less current portion 1,071 1,807

Stockholders' equity:
Common stock, $.0001 par value, stated at
amounts paid in:
Authorized shares -- 250,000,000
Issued and outstanding shares --
92,455,822 and 81,440,927 as of
July 3, 2005 and January 2, 2005,
respectively 834,401 807,142
Deferred stock-based compensation (2,542) (3,598)
Accumulated other comprehensive loss (18) --
Accumulated deficit (725,715) (716,416)
--------- ---------
Total stockholders' equity 106,126 87,128
--------- ---------
Total liabilities and stockholders' equity $ 176,634 $ 158,511
========= =========



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



Six Months Ended
-----------------
July 3, June 27,
2005 2004 (4)
-----------------
Operating Activities:
Net loss $ (9,299)$(9,529)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 2,706 3,488
Amortization of marketing and sales
agreements 1,145 1,145
Amortization of intangible assets 1,553 2,084
Stock-based compensation 1,253 559
Other 100 (7)
Changes in:
Accounts receivable 2,021 (5,654)
Inventories (591) (1,027)
Other current assets (306) (997)
Accounts payable, accrued expenses, and
other liabilities (1,711) 4,251
-------- -------
Net cash used in operating activities (3,129) (5,687)
-------- -------

Investing Activities:
Purchases of marketable securities (33,477) (9,195)
Sales and maturities of marketable securities 15,325 15,125
Purchase of fixed assets (2,374) (1,401)
-------- -------
Net cash provided by (used in) investing activities (20,526) 4,529
-------- -------

Financing Activities:
-----------------
Proceeds from exercise of stock options and employee
stock purchase plan 1,101 1,839
Proceeds from private placement, net 25,961 --
Advances under revolving line of credit 1,000 --
Principal payments on capital lease and term loan
obligations (712) (477)
-------- -------
Net cash provided by financing activities 27,350 1,362
-------- -------
Net increase in cash and cash equivalents 3,695 204
Cash and cash equivalents at beginning of
period $ 15,491 $ 7,035
Cash and cash equivalents at end of period $ 19,186 $ 7,239

(4) Certain prior year amounts have been reclassified to conform
to the current year presentation.