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Tuesday, January 23, 2001 - Page updated at 12:00 AM

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Online drug company's stock falls despite higher sales

Seattle Times technology reporter

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Drugstore.com's stock fell 17 percent yesterday despite a quarterly report showing that sales doubled and losses were below what analysts expected.

Overall net losses at the Bellevue-based online pharmacy were $43.2 million, or 68 cents per share, in the fourth quarter of 2000, compared with losses of $43.5 million, or $1.02 per share, the year before.

Net sales were $36.2 million for the quarter, nearly double the $18.5 million of the previous year. Pro forma losses, excluding charitable contributions and amortization of intangible assets and stock-based compensation, were 45 cents a share for the quarter. Analysts surveyed by First Call/Thomson Financial expected pro forma losses of 55 cents per share.

With the financial results announced before the market opened, drugstore.com shares closed down 16.67 percent at $2.1875 yesterday.

Peter Neupert, president and chief executive officer, asserted that the company has the cash and strategy needed to survive the e-commerce shakeout and break even in 2004. He noted that the company is still only two years old and it would take a traditional drugstore perhaps three or four years to break even.

"I've always said that this is a marathon and we've barely completed the first two or three miles,'' he told analysts in announcing the results.

Part of the company's new strategy is controlling costs. Since October it has cut 185 jobs, including 125 on Friday, leaving 425 at the company's Eastgate headquarters and a New Jersey distribution center. Layoffs were part of a plan to trim $20 million worth of expenses this year, mostly in marketing and overhead, and slow the rate at which it's burning through $130 million it has left in the bank.

"I believe that their cost cutting is a prudent step in their quest to be profitable in light of current market conditions," said Anthony Vendetti, an analyst with Gruntal & Co. in New York.

Vendetti said the company should manage to break even in 2004 without another cash infusion.

"We believe they'll be one of the survivors in the online space," Vendetti said.

Allyson Rodgers, an analyst with Ragen MacKenzie in Seattle, said the results "were in general positive" and should help build investor confidence.

"They're trying to prove they can grow their business in a sustainable pattern," she said.

Sales for the year were $109.9 million, more than three times the $34.8 million it recorded in 1999. Net losses for the year were $193 million, up from $115.8 million in 1999.

This year the company is expecting net sales of $135 million to $145 million, and losses of $83 million to $88 million. In the first quarter, it expects net sales between $30 million and $31 million, and losses ranging from $25 million to $26 million.

Neupert said the company expects to continue growing with a smaller marketing budget because it's tailoring advertising and focusing on "quality" customers. It's now using direct-mail and online banner ads at Web sites aimed at attracting those higher-end customers.

The thriftier approach contrasts with broad spending last winter, when the company launched a $30 million television and radio advertising campaign, including TV spots during the Academy Awards broadcast.

"I believe that most companies with an e-commerce effort are turning toward a direct-marketing campaign, as opposed to mass advertising," analyst Rodgers said. The new strategy apparently paid off during the holiday season when drugstore.com customers purchased higher-priced goods such as electric shavers, massagers and specialty spa products. Average sales rose to $54 from $49 the quarter before and $38 during fourth-quarter 1999.

That translated into fewer total sales but more revenue. "Even though we had over twice the revenue - we doubled our revenue - on an absolute basis we had fewer customer contacts,'' Neupert said.

Drugstore.com now has a customer base of 1.7 million, including 257,000 new customers added during the fourth quarter. Repeat customers accounted for 62 percent of sales in the quarter.

Customers coming through drugstore.com's links on the Amazon.com Web site generate 20 percent to 30 percent of the company's business, Neupert told analysts. Seattle-based Amazon.com is drugstore.com's largest investor.

Sales during the quarter were also boosted by a drugstore.com representative's appearance on Oprah Winfrey's TV show, he said.

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