Drugstore.com CEO Kal Raman resigns
After three years at the helm of Drugstore.com, a period during which revenue grew 70% to $246 million, CEO Kal Raman is resigning amid expectations of widening losses, the retailer said Friday. CFO Richard Barton will serve as interim CEO as the company searches for Raman’s successor.
Raman’s departure, coming at a time when Drugstore.com is still working through growth issues, was unexpected, analysts say. “It surprised me that he’s leaving,” says Peter Spear, an analyst with investment firm Delafield Hambrecht, adding that he had been planning to meet with Raman later this month. “By no means is that company stabilizing. Profitability is taking a back seat to revenue growth.”
Indeed, in a statement released at the same time as the notice about Raman’s departure, Drugstore.com said it had updated its financial guidance for the second quarter, projecting a Q2 EBITDA loss in the range of $1.1 million to $1.8 million, a widening of more than 60% from an earlier guidance of an EBITDA loss of $600,000 to $1.1 million. EBITDA is a measurement of earnings before costs related to interest, taxes, depreciation and amortization.
Spear says he figures Drugstore.com’s stock price, which at mid-day today remained unchanged at $4.91—compared to a 52-week range of $3.94-$9.19—is overvalued because of the company’s inability to generate cash flow and due to its continuing EBITDA losses. Delafield Hambrecht values the stock at $3.90 based on next year’s expected earnings, he says.
Spear adds that Drugstore.com is struggling under the weight of its acquisition of contact lens business Vision Direct, which has increased marketing costs while producing disappointing revenue. Drugstore said in its revised guidance statement that a new federal law requires contact lens users to renew their prescriptions annually, which has resulted in a drop in customers who decline to renew their prescriptions along with new contact lenses ordered through Drugstore.com. “We believe that cancellations resulting from expired prescriptions have slowed our sales growth and increased our costs in our vision business,” the company said.
Spear says the retailer is still struggling to reach the critical mass needed for a pure-play e-retailer to reach financial stability. “They’re still a b2c dot-com model that many companies weren’t able to be successful with in the dot-com heyday, with fixed costs including two warehouses,” he says. “And they haven’t been able to scale the business to the point that Amazon has. We’re still waiting for a clearer picture to emerge on Drugstore’s cash flow and bottom line profitability.”
Still, Raman has been a strong leader as CEO and has helped it grow, Spear says. “He has done the best he could under the circumstances,” he says. In addition to growing revenues during his four years as CEO, Raman cut operating expenses by $90 million and achieved EBITDA profitability in the fourth quarter of last year. Raman became CEO in April 2001 after having served as COO and CTO. He joined drugstore as CTO in 1998.
Drugstore says it expects full-year net sales this year to grow more than 40% over 2003, to a range of $355 million to $370 million. It expects a full-year 2004 GAAP net loss in the range of $15.8 million to $17.8 million, and a full-year EBITDA loss in the range of $2 million to $4 million.
Driving sales at Bellevue, WA-based Drugstore.com will be a number of new programs including free 3-day shipping to areas in the western half of the U.S. for nonprescription orders of $49 or more, plus product pricing promotions, CFO Barton says. He admits that these programs, along with the decline in Vision Direct sales, will continue to exert financial pressure on the company. “But we believe that they will provide long-term growth opportunities,” he says. “We expect to report decreasing operating expenses as a percentage of net sales in the second quarter, improving gross margins and a return to EBITDA profitability in the fourth quarter of 2004.”
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