February 28, 2005, 12:00 AM

Drugstore`s Vitamin Boost

(Page 3 of 3)

One of Drugstore`s fortes in its prescription drug market is a remnant from its early days--the 45,000-square-foot automated pharmaceutical lab, where a staff of 19 certified pharmacists working alongside automated medicine-dispensing machines can crank out up to 15,000 prescriptions a day. Although it may lack the personal touch of a neighborhood pharmacist, says Kimmell, a registered pharmacist who grew up helping out in his father`s pharmacy, the automated system frees up Drugstore`s pharmacists from the mundane chores of filling up pill bottles or directing customers to the toothpaste aisle. "What also distinguishes us from a brick-and-mortar pharmacy is that each prescription order is checked by a minimum of three pharmacists," Kimmell says.

While analysts say there`s little room for pharmacies to compete on the set pricing for prescribed drugs covered under insurance plans, Kimmell notes that Drugstore is often 20% or more cheaper for prescribed drugs, such as Viagra, when they`re not covered by health insurance.

Drugstore also leverages the web channel by e-mailing reminders to customers when it`s time to renew prescriptions, and alerts regarding medicines that may be recalled by the Food and Drug Administration or manufacturers, Kimmell says.

Reaching profits

Drugstore also counts its 290,000-square-foot warehouse in Swedesboro, N.J., as a plus in competing with chains because it does not operate an expensive brick-and-mortar network. "We have one distribution center instead of hundreds, and we have 20,000 SKUs and could easily increase that," Lepore says.

The warehouse could handle a doubling of annual sales, to over $700 million from last year`s $360 million, before Drugstore would have to expand its capacity, she adds.

That could play a crucial role in Drugstore`s ability to scale up without drowning in additional costs. Its potential to turn things around is being picked up by analysts. Spear notes that, despite its 2004 net loss, the retailer`s EBITDA loss actually showed an improvement for 2004 over 2003. He projects that Drugstore will show an EBITDA profit by the fourth quarter of this year and for the full year 2006. (EBITDA is earnings before interest, taxes, depreciation and amortization.)

Drugstore`s gross profit margin should grow from just over 20% to about 21.5% next year, as the retailer reaches positive net income by the fourth quarter of 2006, Spear says. But he cautions that Drugstore will have to find a way to tighten costs as well as grow revenue. "If they can`t get to positive earnings by Q4 2006, then they should consider another business model," he says.

Although she hasn`t made similar projections, Lepore`s enthusiasm for Drugstore indicates such performance is within her expectations. "There`s a great opportunity here, and I`m excited about it," she says.

paul@verticalwebmedia.com

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