Another e-commerce stock tanks on guidance; this time it's Drugstore.com (DSCM) (4Q04 earnings)

Drugstore.com announced reasonably good Q4 earnings and the stock falls by 14%. Why?

Here are the details on Q4 results:

• Net sales were $103.6 million, up 47% year over year.
• Net loss was $5.4 million, or $0.07 per share. The consensus estimate was
• Over-the-counter net sales were $47.9 million, up 28% excluding wholesale sales.
• Mail-order pharmacy net sales were $18.1 million, up 41%.
• Total order volume including wholesale  OTC orders rose 42%, to 1.3 million.
• Average net sales per order were $78, an all-time high. 
• Average net sales per order for the mail-order pharmacy  segment grew 16% to $140, OTC net sales per order grew 2% to  $59 ($62 excluding wholesale OTC sales), vision net sales per order grew 13% to $80, and LPU net sales per order grew 8% to  $107.
• 74% of net sales came from repeat customers.

So what hit the stock? This: CEO Dawn Lepore says in the press release:

We have proven our ability to grow net sales, but I was brought on board to take a hard look at this business, and to leverage its sales growth and produce long-term, sustained profitability. I very strongly believe that drugstore.com has an exciting opportunity, but we need to invest in our brand, marketing and technology. Our fiscal 2005 guidance reflects that plan.

And then this is the guidance:

For the 2005 fiscal year, drugstore.com, inc. is targeting net sales in the range of $400 million to $420 million, with OTC net sales targeted to grow by 20% to 30%, mail-order pharmacy net sales by 15% to 23%, vision net sales by 5% to 16% and local pick-up pharmacy net sales remaining relatively flat. The company is targeting a GAAP net loss in the range of $19 million to $24 million, and an EBITDA loss in the range of $3 million to $8 million, for the full fiscal year. For the first quarter of 2005, the company is targeting a net sales range of $86.5 million to $93.5 million, a net loss range of $7.5 million to $9.5 million, and an EBITDA loss range of $3 million to $5 million. Note: the net loss ranges provided do not reflect the implementation of Statement of Financial Accounting Standards No. 123R ("Share Based Payments"), which will be effective July 1, 2005.

A pattern emerging? Companies' guidance for Q1 and full year 2005 is revealing which Internet companies are capable of attracting traffic, generating revenues at reasonable mark-ups and thus predicting strong profitability, and which are dependent on pay-per-click ads that are rising in price. Guidance from Drugstore.com and Monster Worldwide is the flip side of the coin of Google's guidance: the better Google's search busienss does, the more expensive traffic generation is for e-tailers that advertise.

Which is why Amazon's report tonight will be so interesting. Amazon has strong brand and attracts direct traffic to its web site. But Amazon could suffer from increasing competiton from multi-channel retailers and price pressure from comparison shopping engines and online discounters.

DSCM chart below.