March 2010 Copyright ©2010 drugstore.com, inc. All rights reserved

Safe harbor statement Some of the financial results contained in this presentation are preliminary and un-audited. In addition, this presentation may contains forward-looking statements regarding future events or the future financial and operational performance of drugstore.com, inc. Words such as “targets,” “expects,” “believes,” “anticipates,” “intends,” “may,” “will,” “plan,” “continue,” “forecast,” “remains,” “would,” “should,” “projected,” “focus,” and similar expressions, are intended to identify forwardlooking statements. Forward-looking statements are based on current expectations, are not guarantees of future performance and involve assumptions, risks, and uncertainties. Actual performance may differ materially from those contained or implied in such forward-looking statements. Risks and uncertainties that could lead to such differences could include, among other things: effects of changes in the economy, changes in consumer spending, fluctuations in the stock market, changes affecting the Internet, online retailing and advertising, difficulties establishing our brand and building a critical mass of customers, the unpredictability of future revenues and expenses and potential fluctuations in revenues and operating results, risks related to business combinations and strategic alliances, possible tax liabilities relating to the collection of sales tax, consumer trends, the level of competition, seasonality, the timing and success of expansion efforts, changes in senior management, risks related to systems interruptions, possible governmental regulation and the ability to manage a growing business. Additional information regarding factors that potentially could affect the business, financial condition and operating results of drugstore.com, inc. is included in the company's periodic filings with the SEC on Forms 10-K, 10-Q and 8-K. drugstore.com, inc. expressly disclaims any intent or obligation to update any forward-looking statement, except as required by law.

Copyright ©2010 drugstore.com, inc. All rights reserved

1

Leading online retailer of health, beauty and vision products

Copyright ©2010 drugstore.com, inc. All rights reserved

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What differentiates us

•

Strong consumer value proposition

•

Broad selection - over 45,000 SKU’s

•

High % of replenishment and non-discretionary items

•

One beauty basket with mass and prestige

•

Destination for health and product information

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drugstore.com: the uncommon drugstore

•

Company overview

•

Our unique position

•

Strategic growth initiatives

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Business segments OTC

Vision

RX Mail

Websites

drugstore.com TM Beauty.comTM Microsites Partnership Sites

VisionDirect.comTM LensQuest.comTM TM LensMart.com TM LensWorld.com

Product Offering

Health, beauty & wellness products

Contact lenses and vision related accessories

Prescription medications

U.S. Market Size

$97B (1)

$3B (2)

$291B (3)

11%

15% (2)

n/a

Online Penetration

(1) (2) (3)

(1)

drugstore.comTM

2009 Revenue (53wk)

$307MM

$69MM

$37MM

2009 Gross Margin

31.4%

23.0%

18.9%

Estimated based on data in Barclays Internet Data Book, March 2009 (Includes Cosmetics/Fragrances, Baby, Toys, Pets and OTC/Personal Care categories) Source of Market Size: Packaged Facts (June 2009), Online Penetration estimated based on sales from top 3 online retailers of contact lenses. Per IMS Health Press Release, March 19, 2009

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Our business has evolved 2005 (52wk)

2009 (53wk)

$303M

$413M

Sales

Vision 17%

Vision 15% RX Mail 25%

OTC 60%

RX Mail 9% O TC 74%

Gross Margin

23.3%

Up 560 basis points

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28.9%

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OTC, including beauty and partnerships, has delivered strong growth Net revenue

$92

$ Millions

$70 $65

$72

$71

$71

$61

Q208 Q308 Q408 Q109 Q209 Q309 Q409 YOY Growth

13wk

13wk

13wk

13%

12%

6%

13wk

11%

13wk

10%

13wk

17%

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14wk

32%

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Prestige Beauty: key driver of growth and margins •

Beauty.com sales growth at 18.2% for 2009 vs. industry decline of 6.2%*

•

Prestige offers significantly higher margin structure

TM

•

•

TM

New Beauty.com customers deliver over 100% more contribution margin dollars than drugstore.com OTC customers

Expect to grow Beauty.com 15-20% in 2010 TM

*As reported by NPD Copyright ©2010 drugstore.com, inc. All rights reserved

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Our Vision business has delivered strong growth in a competitive market Net revenue $ Millions

$47

$50

$55

$61

$69

Q409 revenue growth of 13% - basket size up 5%

2005 2006 2007 2008 2009 52wk

Growth

(3)%

52wk

6%

52wk

10%

52wk

12%

53wk

12%

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Rx Mail Order restructured for profit Net revenue

Contribution margin

$ Millions

$ Millions

$76 $67

$3.9

$50

$4.2

$4.8

$4.3

$3.3

$44 $37

Growth

2005 2006 2007 2008 2009

2005

2006

2007

2008

2009

52wk

52wk

52wk

52wk

52wk

53wk

4.4%

5.7%

8.5%

10.7%

18%

52wk (11)%

52wk

52wk

(26)%

(12)%

53wk (16)%

CM

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11.4%

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drugstore.com: the uncommon drugstore

•

Company overview

•

Our unique position

•

Strategic growth initiatives

Copyright ©2010 drugstore.com, inc. All rights reserved

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Q4 2009 highlights NOTE: Q409 is based on a 14-week fiscal calendar compared to a 13-week Q408

•

Overall revenues were $117.4M - up 25% YoY • Our prestige and total beauty business each grew 28% and 33%, respectively

• •

OTC revenue grew an impressive 32%

•

Record quarter of new customer additions at 49%, inclusive of strategic partnerships

• •

Gross Margins were highest in company history at 29.4%, up 90 bps YoY

Our prestige and total beauty business each grew 28% and 33%, respectively

Adjusted EBITDA increased over 125%, excluding discontinued operations and one-time charges

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We continue to deliver improving financial performance $ Millions

* Adjusted EBITDA is a non-GAAP financial measure defined as earnings before interest, taxes, depreciation, and amortization of intangible assets and non-cash marketing expense, adjusted to exclude the impact of stock-based compensation. See full reconciliation on Slide 33 ** Restated to reflect LPU as discontinued operations as detailed in our 8-K filed with SEC on September 4, 2008

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We have performed well in a tough environment Percent Sales Growth Source: U.S. Commerce Department  (Q307‐Q409)* 32% 20%

*

18%

19%

19%

12% 6%

13%

Q4 07

Q1 08

11%

10% 15%

5%

9% Q3 07

17%

16%

15%

Q2 08

Q3 08

2% Q4 08

‐5% U.S. eCommerce

Q109 ‐6% DSCM OTC

Q209

Q309

Q409

‐4%

*US Commerce Dept Growth excludes travel

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We consistently show improving free cash flow $’s in Millions $10,000,000

$5,000,000

$0 2006 (52wk)

2007 (52wk)

2008 (52wk)

2009 (53wk)

‐$5,000,000

‐$10,000,000

‐$15,000,000 Capex

• • • •

Cash flow from Operations*

Free Cash Flow

TTM free cash flow of $1.4M Strong balance sheet with nearly $37 million in cash Projected 2010 capital expenditure of $11-$14M Targeting $100M in cumulative free cash flow by 2014

* Cash flow from operations includes cash received from discontinued operations

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Strong customer acquisition engine 650,000 

60%

600,000 

50%

550,000 

Partners 17%

40%

Search 34%

500,000  30% 450,000  20%

400,000 

Direct 17% Other 17%

10%

350,000  300,000 

Affiliates 15%

0% Q2 08

Q3 08

Q4 08

Q109

New Customers

Q209 Growth Rate

Q309

Q409 For the Quarter Ended, January 3, 2010

New Customer Growth

New Customer Sources

• •

Record Q409 new customer growth up 49% YoY, including partnerships

• •

Added 1.8M new customers in the last twelve months

Despite economic pressures, Q409 customer acquisition cost of $18.03 a decline from $22.44 in 2008 OTC new customer growth in Q409 of 27%, excluding partnerships

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Holiday E-Retail satisfaction index Holiday Results

IR Top 40 Aggregate

Drugstore .com

Satisfaction score

79

79

Improvement YOY

+5

+5

(11/16-12/16)

ForeSee measures satisfaction among the Internet Retailer (IR) Top 40*

drugstore.com scored above or equal to the following retailers:

* Based on revenue. Since drugstore.com was #48 on the IR list in 2009, we were not included in the report. However, because we partner with ForeSee to measure customer satisfaction we can compare our results

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Customer satisfaction 100

drugstore.com fulfillment benchmark comparison (Q4 2009) 90

86 79

80

70

WOW! 60

Range: 70-86

50

40

Customer Satisfaction drugstore.com Fulfillm ent

Retail Fulfillm ent

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drugstore.com: the uncommon drugstore

•

Overview

•

Our unique position

•

Strategic growth initiatives

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Our strategy has continued to evolve through the years

2006/2007 – Correct what wasn’t working

2008 – Optimize the business

2010 – Leverage our 2009 – Deliver technology platform, improving results fixed infrastructure despite down and functional economy expertise • Refine our promotional strategy

• Hone our pricing strategy

• Add new beauty brands

• Discontinue unprofitable partnerships

• Renegotiate shipping and vendor contracts given our larger scale

•

• Redesign Beauty.com

• Refine our pricing strategy

• Expand DC capacity

• Lay groundwork for monetizing traffic

• • •

• Continue strong growth in our base business and add new beauty brands

• Focus on delivering flawless execution for new and Expand internationally existing partnerships Drive productivity • Drive incremental growth improvements in DC through microsite and international marketing Control fixed costs • Proactively seek tuck-in Launch partnership acquisitions platforms

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Our growth initiatives will leverage our current infrastructure and expertise Strategic Partnerships Micro-sites

Acquisitions

Prestige Beauty Brands

International Expansion

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Will expand clinical skincare collection with acquisition of SkinStore.com •

Leading online retailer of clinical skincare and beauty products

• •

Carry over 200 premium brands

•

Operates Spalook.com web store for Sandow Media, parent company of New Beauty Magazine

•

In 2009, Salu is expected to generate at least $40M in revenue, $500k of Net Income and $1.4M of adjusted EBITDA, excluding one-time transaction related expenses

Distribution capabilities in Australia

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SkinStore.com acquisition overview Acquisition will create one of the largest online beauty retailers offering consumers a wide ranging product selection

•

Deal valued at $36M (50% cash, 50% stock) and potential earn out of $2.5M based on achievement of certain performance targets and integration milestones

•

In 2009, excluding one-time charges, Salu’s adjusted EBITDA was about $2 million; we plan to leverage our combined scale in areas such as shipping and labor fulfillment to improve their profitability and EBITDA potential

•

Transaction expected to be accretive in 2010, excluding one-time transaction and integration related costs

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Strategic alliance with Medco Health Solutions •

Who is Medco Health Solutions, Inc? • Medco is a leading health care company serving the needs of more than 60 million people • Medco’s 2009 net revenues were $59.8 billion; it is ranked number 45 on the Fortune 500 list • Medco provides clinically driven pharmacy services designed to improve the quality of care and lower total health care costs for private and public employers, health plans, labor unions, and government agencies of all sizes • Medco’s mail-order business, which generated $22 billion in 2008 net revenues, is one of the largest pharmacy operations in the United States.

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How does this partnership work? • •

Successfully launched new Medco OTC health store in June 2009 Assortment includes over 20K SKUs from DSCM catalogue

•

drugstore.com is operating site in addition to providing merchandising, marketing, fulfillment and customer care support

•

Medco started ramping marketing efforts in Q409 to drive store awareness

•

Expect Medco to contribute 10 to 20 points of OTC growth in 2010

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Strategic alliance with Luxottica to grow contact lens category in North America How will it work?

Who is Luxottica?

•

Luxottica Group, is a global leader in the design, manufacturing and distribution of fashion, luxury and sports eyewear

•

We will collaborate to develop branded, contact lens ecommerce sites for the company’s N.A. business

•

Luxottica’s 2009 net revenues were 5.1 billion Euro

•

•

Ranked as the largest manufacturer of eyewear products in the world

drugstore.com will provide online marketing, customer care and fulfillment services

•

Luxottica will leverage our technology to provide an end to end customer solution

•

drugstore.com and Luxottica will jointly source contact lenses and related products

•

Luxottica operates more than 2,900 optical stores across North America

•

Global leader in optical and sun retail with over 6,200 stores worldwide

The image cannot be display ed. Your computer may not hav e enough memory to open the image, or the image may hav e been corrupted. Restart y our computer, and then open the file again. If the red x still appears, y ou may hav e to delete the image and then insert it again.

* The U.S. Eyewear Market: Prescription and Nonprescription Lenses, Sunglasses, Contact Lenses, and Frames, 2nd Edition, June 2009 by Packaged Facts

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Partnership rationale The image cannot be display ed. Your computer may not hav e enough memory to open the image, or the image may hav e been corrupted. Restart y our computer, and then open the file again. If the red x still appears, y ou may hav e to delete the image and then insert it again.

Best-in-class eCommerce capabilities

Leading eyewear manufacturer and distributor

Website development, online marketing, fulfillment, customer care

Patient awareness, offline marketing, network of eye care professionals

Create supply chain efficiencies

The Result… Seamless end-to-end customer experience

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Micro-sites - focused on attractive product categories with high margins •

Gain scale while leveraging existing assets and organization

•

Provide a more targeted shopping experience

•

Specialized marketing promotions

• •

Alternative shipping options Launched 4 Microsites in past 6 months • • • •

•

•

Copyright ©2010 drugstore.com, inc. All rights reserved

SexualWellBeing.com - 8/09 AtHisBest.com – 11/09 TheNaturalStore.com – 1/10 Allergysuperstore.com – 2/10

Expect to have 5-8 more micro-sites by end of 2010

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Opportunity for incremental international expansion •

Fully integrated E4X’s FiftyOne global ecommerce solution

•

3.7 billion consumers in 52 countries

•

30 “In country” currencies

•

Global logistics & delivery

•

Domestic transaction for our distribution center

•

Testing new marketing strategies with alternative shipping options

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29

Key take-aways

• •

OTC, Beauty and Vision growth outpacing industry

•

Leveraging current infrastructure with key growth initiatives

•

Taking steps to be one of the largest online beauty retailers

•

Targeting $100 million in cumulative free cash flow by 2014

Strong new customer additions, both internal and via partnerships

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30

Q&A

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Appendix

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32

Supplemental Information EBITDA Reconciliation (In thousands, unless otherwise indicated)

Three Months Ended Jan 3, Dec 28, 2010 2009 14wk

Net income (loss) Amortization of intangible assets Amortization of non-cash marketing Stock-based compensation Depreciation Interest income (expense), net Adjusted EBITDA

$ (1,623) 28 1,899 3,195 (8) $ 3,491

Twelve Months Ended Jan 3, Dec 28, 2010 2009

13wk

53wk

52wk

289 206 1,786 3,017 (115) $ 5,183

$ (1,377) 477 5,400 12,682 (46) $ 17,136

$ (8,287) 867 3,435 7,564 10,912 (631) $ 13,860

$

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33

Competitive differentiators – We have what no other store has Niche Internet Players

Department Stores

drugstore.com & Beauty.com

Brick & Mortar Drugstores

Large eCommerce Companies

Unlimited Shelf Space

√

√ 45,000 SKUs

√

Privacy

√

√ Home delivery

√

√

√ Your List/Auto delivery

√

Ability to Shop 24/7

√ Dedicated FSA store/Receipt manager

FSA/HSA tools

√ Integrated shopping experience

Prestige & Mass in Single Cart

Prestige Beauty Partnerships Value/Pricing/ Attractive Promotions

√

√ Over 35 new brands in TTM

√

√ Free shipping/ Loyalty programs

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√

√

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