posted 04-10-2000 11:26 AM         

Drugstore.com (Nasdaq: DSCM)
Rating: Strong Sell

"At its IPO, in July 1999, Drugstore.com was King of the Forest, Alpha Lion all the way. With venture-capital support from the venerable granddaddy of venture capital, Kleiner Perkins Caufield & Byers, and a 46 percent stake held by Amazon.com, the torch of optimism was burning bright.

Indeed, from a simple business plan 18 months ago that received $3 million in financing, Drugstore.com has become a trusted brand name; it was rated in the fourth quarter of 1999 by Gomez Advisors as the #1 online drugstore in terms of customer confidence, has $200 million in financing, 408 employees, and 695,000 customers. Sales for calendar 1999 were $34.848 million, with a net loss of $115.83 million. This loss is 14.4 times as big as the loss in calendar 1998, when there were no sales.

Do we see a fire hose headed toward that burning torch? Yes, ma'am. This summer, 25 percent of Drugstore.com was sold to plague-ridden drugstore chain Rite Aid (RAD). Through this deal, Drugstore.com accessed PCS, Rite Aid's in-house pharmaceutical benefit management company, as well as millions of dollars' worth of promotions throughout the chain.

But, the Rite Aid deal quickly became a soap opera. With accounting problems and competition from rival chain CVS (CVS) to worry about, Rite Aid quickly took advantage of the inflated market for Internet equities and reduced its stake in Drugstore.com to 15.5 percent. Then Rite Aid sold off PCS, eliminating Drugstore.com's access to its members.

So, how is Drugstore.com planning to get out of this mess? The same way it got into it in the first place: through another public offering. On February 10, just as Rite Aid was decreasing its stake, Drugstore.com filed with the SEC for a second public offering. Of course, this might help with the funding shortfall, but it will lower the already sagging share price even more.

According to CEO Peter Neupert, Drugstore.com won't be profitable for three to six years. We believe that the industry model will have drastically changed by then. Meanwhile, Drugstore.com's revenue has failed to offset mushrooming expenditures. At sales of nearly $16 million in fiscal 1999, the company is losing 8.4 times as much money as it did when it had no sales at all. Charming.

posted 10-22-1999 09:31 AM         

The Bellevue, Washington-based company, backed by e-commerce leader Amazon.com, the Rite Aid drugstore chain, and others, lost $1.04 per share in the third quarter, assuming conversion of preferred shares, on revenues of $12.1 million. The company, which opened its virtual doors February 25, had revenues of $3.6 million in the second quarter.

Excluding charitable contributions and expenses related to stock-based compensation, Drugstore.com lost 72 cents per share, compared with an average estimate of 73 cents by the four brokerages that have published reports on the company.

In one measure of its growth, Drugstore.com said it had served a total of 428,000 unique
customers by the end of the quarter, up from 168,000 at the end of the second quarter.