Duane Reade Experiences Q1 Sales Surge


Net retail store sales, which exclude pharmacy resale activity, increased 3.7% to $414.9 million from $400.0 million in the first quarter of 2007. Total net sales increased 3.1% to $427.1 million from $414.4 million in the first quarter of 2007. Total same-store sales increased by 4.5% during the first quarter of 2008, with a front-end same-store sales increase of 7.0% and a pharmacy same-store sales increase of 1.5%. During the first quarter, the Company opened one new store and closed one store. At the end of the first quarter of 2008, the Company operated 242 stores, compared to 245 stores at the end of the first quarter of 2007.

Front-end sales growth was driven by continued strong performance in the food and beverage categories, over-the-counter products, and health and beauty care items. The front-end same-store sales increase was favorably impacted by approximately 0.5% due to the earlier timing of the Easter holiday this year. The pharmacy sales growth was partially attributable to increased Medicare Part D sales. Generic drugs, which typically sell at lower prices but yield higher margins and profitability than brand-named drugs, represented approximately 59.1% of pharmacy prescriptions for the first quarter, compared to 54.3% of pharmacy prescriptions in the first quarter of 2007. The higher proportion of generics adversely impacted pharmacy same-store sales growth by 4.2%.

Gross margin for the first quarter was 31.1%, compared to 29.4% during the first quarter of 2007. Gross margin on retail sales, which excludes pharmacy resale activity, increased to 32.0% from 30.5% in the prior year, reflecting the higher selling margins resulting from improvements in front-end margins and increased pharmacy margins due to higher rates of generic utilization. Selling, general and administrative expenses as a percentage of net sales increased to 27.6% from 27.4% in the previous year, primarily due to increased advertising costs and recruitment fees paid in connection with the hiring of the Company's new CEO.

In the fourth quarter of 2007, the Company reclassified its store occupancy costs from cost of sales to selling, general and administrative expenses in accordance with current industry practice. For the 13 weeks ended March 29, 2008 and March 31, 2007, the reclassification resulted in decreases of $41.4 million and $40.8 million in cost of sales, respectively, and corresponding increases in gross profit and selling, general and administrative expenses. This accounting change did not impact the operating loss for either of the periods presented.

The above factors resulted in a 43.2% increase in Adjusted FIFO EBITDA, as defined on the attached schedule of preliminary operating data, to $18.2 million for the first quarter of 2008, compared to $12.7 million in the prior year period. As a percentage of sales, Adjusted FIFO EBITDA increased to 4.3% from 3.1% in the first quarter of 2007.

The first quarter operating loss was $4.1 million, compared to $14.9 million in the prior year period. The improvement was primarily due to the factors described above and a reduction in other expenses from $5.0 million in 2007 to $0.9 million during the first quarter of 2008. The other expenses in the prior year's first quarter included $2.4 million of expenses incurred in connection with the Company's former CEO (Mr. Cuti) and $1.7 million of closed store expenses, compared to $0.3 million and $0.2 million, respectively, in the current year's first quarter.

The net loss for the quarter was $21.0 million, compared to $30.5 million in the prior year period. The improvement in this measure is attributable to the factors discussed above and was partially offset by $1.5 million of additional interest expense in the first quarter of 2008, compared to the prior year. The additional interest expense was primarily due to the non-cash fair value adjustment for the mandatory redemption feature in the Company's outstanding redeemable preferred stock, which is considered a derivative financial instrument, and was partially offset by lower floating interest rates on the Company's variable rate borrowings as compared to the prior year.

At quarter end, the Company's total debt, including capital leases but excluding the liability associated with the issuance of the redeemable preferred stock, was $564.2 million, reflecting an increase of $8.4 million from the balance at the end of fiscal 2007. Availability under the Company's revolving credit facility at quarter end was approximately $63.0 million. The availability at quarter end reflects the benefit of unspent proceeds from the sale of redeemable preferred stock and common stock warrants to Oak Hill Capital Partners L.P. and their affiliates. These proceeds were received in the first half of 2007 and are being used to fund the acquisition of up to eight store leases from the Gristedes supermarket chain as well as certain growth-related capital expenditures. At March 29, 2008, the Company had completed the acquisition and opening of five of the former Gristedes stores.


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