Technology

New Drugstore.com CFO Stanches the Bleeding

Bob Barton explains how he will make a mere $130 million last through 2004.
Craig SchneiderJanuary 31, 2001

Bob Barton has a daunting task ahead of him. Recently named drugstore.com CFO, he is expected to have the company at cash flow breakeven within three-years time, and he must get there with no additional funding.

Can he do it? His chances are looking pretty good so far. Recent cuts in staff and reductions in marketing expenses helped the company conclude that the $130 million cash left over from equity offerings is sufficient to carry operations through 2004.

In order to make this money last, Barton’s daily management of business operations is key. And he knows it. “We’re at a different stage in our lifecycle,” he tells CFO.com. “Now it’s all about execution.”

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Execution, indeed. Last week, drugstore.com posted a narrower fourth-quarter loss of $0.45 per share, beating analyst estimates by a hearty $0.10 and the $0.84 year-ago loss by even more. Revenue for the quarter grew 96 percent from last year’s level to $36 million, mostly on the strength of holiday season non- pharmacy sales.

Analysts had been expecting the company to break even when it hit $1 billion in annual sales, Barton says. Now the company will try to do the same with $500 million in sales.

Barton replaces CFO David Rosten who steps down in February. He has been with drugstore.com since its inception in 1998 and has served in various senior financial management roles, including senior director of finance. In 2000, Barton became VP and general manager of pharmacy operations, where he says he has gained the most insight into the business.

“I think it’s a huge advantage to walk in the shoes of the people on the front line and the people that they deal with,” he says. “Instead of guessing what levers need to be pulled, I can now sit down and know which levers need to be pulled, because I was there and understand the business operations. I think that’s a huge advantage to any CFO taking on a role in the stage of the lifecycle that we’re in.”

So which levers exactly? Barton says he keeps a close eye on costs per new customer, gross margins, and improving efficiency and fulfillment for the site, all while tracking customer purchases.

“It’s not sitting in a room with these grandiose ideals,” he quips.

For managing cost per new customer, Barton says his firm needs to continue to leverage its relationships with firms such as Rite Aid and Cigna, as well as Amazon.com, which supplies drugstore.com with as much as 30 percent of its customers.

In its latest quarter, it acquired 257,000 new customers at a cost of about $57 per customer, down from the $90 spent on each of the 190,000 customers it acquired in Q3.

Moreover, margins improve by cutting out the discounts, free shipping and product giveaways for customers. “We’ve been hurt in the past on these dollars we spend to acquire customers,” Barton says. “With competition fading out, we can act more intelligently without upsetting the consumer. Still give them value, but be more frugal, if you will, with [our] money.”

He also says it is important to make sure the high-margin products like those of Beauty.com are as visible to the consumer as possible. The company expects gross margins in the range of 14 percent to 16 percent in 2001. Its fourth quarter margins rose to 14.5 percent, up from 9.2 percent in the prior quarter.

Barton will also push for new services and technology offerings to the consumer, such as eMed Alert, which he launched in July, while manager of the site’s pharmacy. eMed provides E-mail notifications to consumers when the FDA recalls a prescription drug.

Will drugstore.com ultimately need a prescription for more financing? Only time will tell. The company’s operations are expected to burn through $55 million in cash in 2001, $42 million in 2002, and $20 million in 2003, leaving $13 million in cash going into 2004, according to a recent analyst report by Morgan Stanley Dean Witter.

In Q4, the company cut its quarterly burn rate from about $30 million to $17 million.

Now as CFO, Barton hopes to further leverage his experience to slow the burning.

“It’s really about rolling up your sleeves and getting your hands dirty, being involved in the day-to-day lifestyle decision making process of the operations to make sure every dollar [we’re] spending makes sense and there’s going to be a return on that,” he says.