Zacks senior retail analyst Robert Plaza, CFA says drugstore.com (DSCM) continues to show steady improvement quarter after quarter, and he expects that to continue throughout 2007. Check out an excerpt from his latest research report to learn more.
drugstore.com s first quarter results were solid and demonstrated that the company remains on the path to profitability. The company continues to show steady improvement quarter after quarter, and we expect that to continue throughout 2007. Driving the company s steady improvement its focus on becoming profitable even if it means slower sales growth in the near term. We reiterate our Buy rating on the stock. We also maintain our $4.50 target price, which is derived using a price-to-sales ratio of 1.0x.
While the company s sales growth was just 5.4% in the first quarter, we think investors should focus on what the company is doing to become profitable. For example, drugstore.com s first quarter contribution margin dollars improved by 13%, while fixed costs increased by only 2%. This resulted in its gross margin expanding 120 basis points to 22.5%, which is the highest in the company s history. Moreover, the company again delivered positive EBITDA, which is defined as a non-GAAP financial measure of earnings before interest, taxes, depreciation, and amortization of intangible assets and non-cash marketing expense, adjusted to exclude the impact of stock-based compensation expense.
The company s business model should be able to generate stable revenue and cash flow thanks to the large percentage of repeat customer orders, which accounted for 82% of its first quarter sales.
We think the stock s weak performance in the first four months of 2007 is unwarranted and would use any weakness in the stock to purchase shares.
Read the analyst report on DSCM
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