Duane Reade Holdings, Inc. Reports Second Quarter Results

- Second Quarter Adjusted FIFO EBITDA Increases 15.7% to $24.9 Million -

NEW YORK, July 31 /PRNewswire/ -- Duane Reade Holdings, Inc. today
reported financial results for the second quarter ended June 28, 2008.
Second Quarter Key Highlights
-- Adjusted FIFO EBITDA improved 15.7% to $24.9 million from $21.6 million
in the previous year, representing the eighth consecutive quarter of
year-over-year Adjusted FIFO EBITDA growth.
-- Front-end same-store sales increased 5.6% and pharmacy same-store sales
grew 3.6%.
-- Gross margin expanded to 30.9%, compared to 30.3% in the prior year
second quarter.
-- Operating loss improved to $0.2 million, compared to an operating loss
of $4.6 million for the previous year.
-- Second quarter net loss improved to $12.1 million from $20.1 million
for the previous year.
John A. Lederer, Chairman and Chief Executive Officer, commented, "We are
pleased with our second quarter results and with the consistently solid
performance of the business, especially in light of the challenging economic
environment. We have remained focused on refining the merchandise mix,
upgrading customer service, and meeting the needs of our unique and diverse
customer base. These efforts yielded solid results in the reporting period,
including strong comparable store sales increases, continued margin expansion,
and the eighth consecutive quarter of year-over-year Adjusted FIFO EBITDA
growth."
Second Quarter Results
Net retail store sales, which exclude pharmacy resale activity, increased
3.8% to $432.1 million from $416.3 million in the second quarter of 2007.
Total net sales increased 4.5% to $451.4 million from $431.9 million in the
second quarter of 2007. Total same-store sales increased by 4.7%, with a
front-end same-store sales increase of 5.6% and a pharmacy same-store sales
increase of 3.6%. During the second quarter, the Company opened four new
stores and closed five stores. At the end of the second quarter, the Company
operated 241 stores, compared to 244 stores at the end of the second 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 positively impacted by
approximately 0.6% due to the switch of Zyrtec, a prescription allergy
medication, to over-the-counter status. The shift in Easter holiday sales into
the first quarter of 2008 from the second quarter of 2007 adversely impacted
front-end same store sales by approximately 0.5%. In addition, in June 2008 we
raised the sales price on our cigarettes commensurate with an increase in
cigarette excise taxes in New York State and New York City. Although such
additional sales do not result in any additional profit to us, the increase in
the sales price on our cigarettes positively impacted front-end same-store
sales by 0.3%. The pharmacy sales growth was partially attributable to
increased Medicare Part D sales. The aforementioned switch of Zyrtec to over-
the-counter status negatively impacted pharmacy same-store sales by
approximately 0.7%. Generic drugs, which typically sell at lower prices but
yield higher margins and profitability than brand-name drugs, represented
approximately 58.7% of pharmacy prescriptions for the second quarter, compared
to 54.7% of pharmacy prescriptions in the second quarter of 2007. The higher
proportion of generics adversely impacted pharmacy same-store sales growth by
3.6%.
Gross margin for the second quarter was 30.9%, compared to 30.3% during
the second quarter of 2007. Gross margin on retail sales, which excludes
pharmacy resale activity, increased to 32.3% from 31.5% in the prior year,
reflecting the impact of improved front-end selling margins resulting from a
more favorable sales mix of higher selling margin products, increased pharmacy
margins due to higher rates of generic utilization and reductions in the level
of inventory shrink losses. Selling, general and administrative expenses as a
percentage of net sales increased slightly to 26.3% from 26.2% in the previous
year and were adversely impacted by higher executive recruitment related
costs.
In the fourth quarter of 2007, the Company reclassified its store
occupancy costs from cost of sales to selling, general and administrative
expenses in order to align these store occupancy cost components to the nature
of expenses included in the Company's financial statement captions, and to
improve the comparability of the Company's financial statement presentation
with its industry peers. For the 13 weeks ended June 28, 2008 and June 30,
2007, the reclassification resulted in decreases of $41.1 million and $39.7
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 15.7% increase in Adjusted FIFO EBITDA, as
defined on the attached schedule of operating data, to $24.9 million for the
second quarter of 2008, compared to $21.6 million in the prior year period.
As a percentage of sales, Adjusted FIFO EBITDA increased to 5.5% from 5.0% in
the second quarter of 2007.
The second quarter operating loss was $0.2 million, compared to an
operating loss of $4.6 million in the prior year period. The improvement was
primarily due to the increase in Adjusted FIFO EBITDA of $3.4 million
discussed above and a $1.0 million reduction in other expenses from $4.2
million in the second quarter of 2007 to approximately $3.2 million during the
second quarter of 2008. The breakdown of other expenses compared to the
previous year is provided on table 6 of this press release.
The net loss for the second quarter was $12.1 million, compared to $20.1
million in the prior year period. The improvement is attributable to the
factors discussed above as well as reduced interest expense of $3.3 million in
the second quarter of 2008, compared to the prior year. The reduction in
interest expense was primarily due to lower interest rates on the Company's
variable rate borrowings as compared to the prior year, lower outstanding
borrowings on the revolving credit facility and a favorable non-cash fair
value adjustment for the preferred stock's mandatory redemption feature, which
is considered a derivative financial instrument.
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 $554.8 million, reflecting a decrease of $1.1 million
from the balance at the end of fiscal 2007. Availability under the Company's
revolving credit facility at quarter end was approximately $71.4 million.
Six Months Results
For the six month period, total net sales were $878.5 million, reflecting
an increase of 3.8% compared to $846.3 million last year. Net retail store
sales increased 3.8% to $847.0 million, from $816.2 million in the prior year
period. Total same-store sales increased 4.6%, with a front-end same-store
sales increase of 6.3% and a pharmacy same-store sales increase of 2.5%.
Gross margin increased to 31.0% for the six month period, compared to
29.9% in the prior year, primarily due to improved front-end selling margins
and increased pharmacy margins due to higher rates of generic utilization.
Selling, general and administrative expenses as a percentage of total net
sales increased to 26.9% from 26.8% in the prior year period, mainly due to
recruitment and relocation fees paid in connection with the hiring of senior
management executives.
For the six months ended June 28, 2008 and June 30, 2007, the previously
discussed change in accounting for store occupancy costs decreased cost of
sales by $82.5 million and $80.5 million, respectively, with a corresponding
increase to gross profit and selling, general and administrative expenses.
This change in accounting had no effect on the operating loss for either of
the periods presented.
Adjusted FIFO EBITDA, as defined on the attached schedule of operating
data, increased by 25.9% to $43.2 million or 4.9% of sales from $34.3 million,
or 4.1% of sales, in the prior year period. Operating loss was $4.3 million in
the first half of 2008, compared with $19.6 million in the first half of 2007,
primarily attributable to the factors discussed above and a $5.1 million
decrease in other expenses from $9.2 million in the first half of 2007 to $4.1
million in the first half of 2008. Other expenses were higher in the prior
year primarily due to an accounting investigation and matters associated with
a former CEO. See table 6 attached to this press release for a breakdown of
these expenses compared to the previous year.
The net loss for the first six months of 2008 was $33.1 million, compared
to $50.7 million in the prior year period. The improvement in this measure is
attributable to the factors discussed above as well as reduced interest
expense of $1.8 million in the first six months of 2008. The reduction in
interest expense was primarily due to lower interest rates on the Company's
variable rate borrowings as compared to the prior year and lower outstanding
borrowings on the revolving credit facility.
Company Outlook
With respect to the remainder of 2008, the Company reaffirmed its
previously provided expectations for the fiscal year's Adjusted FIFO EBITDA in
the range of $90 million to $95 million. The Company has lowered its expected
range for net retail store sales, excluding pharmacy resale activity, to $1.70
billion to $1.72 billion from its previously anticipated range of $1.720
billion to $1.736 billion. The Company has raised its expected same-store
sales growth range to 3.5% to 4.5% from its previously anticipated range of
3.3% to 4.3%.
Mr. Lederer concluded, "As we move into the second half of 2008, we
continue to be optimistic about Duane Reade's future prospects and are pleased
that we are able to reaffirm our Adjusted FIFO EBITDA expectations for the
year. While we are confident that we have a solid foundation in place, there
is room to improve our business and build our brand equity. We are currently
in the process of finalizing our go-forward strategy and fine-tuning our plans
to elevate Duane Reade to the next level and maximize the many market
opportunities that exist for our business."
Conference Call Information
The Company will hold a conference call on July 31, 2008 at 10:30 a.m.
Eastern Time to discuss financial results for the second quarter ended June
28, 2008. A live webcast of the call will be accessible from the Investor
Information section of the Duane Reade website (http://www.duanereade.com),
and the call will be archived on the website approximately one hour after
completion of the call through August 13, 2008. Additionally, a replay of the
conference call will be available from approximately 12:00 PM Eastern Time on
July 31, 2008 through August 13, 2008. The replay can be accessed by dialing
(800) 642-1687 access code 54610081.
About Duane Reade
Founded in 1960, Duane Reade is the largest drug store chain in the
metropolitan New York City area, offering a wide variety of prescription and
over-the-counter drugs, health and beauty care items, cosmetics, greeting
cards, photo supplies and photofinishing. As of June 28, 2008, the Company
operated 241 stores.
Except for historical information contained herein, the statements in this
release and the accompanying discussion on the earnings conference call are
forward-looking and made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. In addition, this document may
contain statements, estimates or projections that constitute "forward-looking"
statements as defined under U.S. federal securities laws. Forward-looking
statements involve known and unknown risks and uncertainties, which may cause
the Company's actual results in future periods to differ materially from
forecasted or expected results. Those risks include, among other things, the
competitive environment in the drug store industry in general and in the New
York metropolitan area, the ability to open and operate new stores, the
continued efforts by payers and government agencies to reduce prescription
reimbursement rates and prescription drug benefits, the strength of the
economy in general, the economic conditions in the New York greater
metropolitan area, changes in federal and state laws and regulations,
including the potential impact of changes in regulations surrounding the
importation of pharmaceuticals from foreign countries and changes in laws
governing minimum wage requirements, changes in the Company's operating
strategy, capital expenditure plans or development plans, the Company's
ability to attract, hire and retain qualified pharmacy and other personnel,
the Company's significant indebtedness, labor disturbances, the continued
impact of, or new occurrences of, terrorist attacks in the New York greater
metropolitan area and any actions that may be taken in response, demographic
changes, the Company's ability to limit fraud and shrink, the results of the
Company's legal proceedings and recalls of pharmaceutical products due to
health concerns or other reasons. Those and other risks are more fully
described in Duane Reade's reports filed with the SEC from time to time,
including its annual reports on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K. You should not place undue reliance on forward-
looking statements, which speak only as of the date they are made. Except to
the extent otherwise required by federal securities laws, we do not undertake
to publicly update or revise any forward-looking statements.
Contacts: Duane Reade Holdings, Inc.
John Henry
(212) 273-5746
SVP - Chief Financial Officer

Investors: Cara O'Brien/Caren Barbara
Press: Diane Zappas
(212) 850-5600
Financial Dynamics

Table 1

Duane Reade Holdings, Inc.
Consolidated Statements of Operations
(Unaudited)
(In thousands)

For the For the
13 Weeks Ended 26 Weeks Ended
June 28, June 30, June 28, June 30,
2008 2007 2008 2007

Net sales $451,395 $431,930 $878,532 $846,318
Cost of sales (1) (2) 311,960 300,868 606,405 593,454
Gross profit (1) (2) 139,435 131,062 272,127 252,864
Selling, general &
administrative expenses (1) 118,496 113,059 236,450 226,595
Depreciation and amortization 17,674 18,416 35,593 36,453
Store pre-opening expenses 200 - 247 150
Other expenses (see Table 6) 3,250 4,223 4,149 9,241
Operating loss (185) (4,636) (4,312) (19,575)
Interest expense, net 11,375 14,645 27,281 29,080
Loss before income taxes (11,560) (19,281) (31,593) (48,655)
Income taxes 518 856 1,478 2,016
Net loss $(12,078) $(20,137) $(33,071) $(50,671)

(1) During the fourth quarter of 2007, the Company changed its accounting
for the store occupancy costs reflected on the statements of
operations. The impact of the change in accounting was a
reclassification of store occupancy costs from cost of sales to
selling, general and administrative ("SG&A") expenses. This change in
accounting more closely aligns these store occupancy cost components
to the nature of expenses included in the Company's financial
statement captions, and will improve the comparability of the
Company's financial statement presentation with industry peers. For
the 13 weeks ended June 28, 2008 and June 30, 2007, the impact of the
accounting change was a reclassification that decreased cost of sales
by $41.1 million and $39.7 million, respectively, with a corresponding
increase to gross profit and SG&A expenses. For the 26 weeks ended
June 28, 2008 and June 30, 2007, the impact of the accounting change
was a reclassification that decreased cost of sales by $82.5 million
and $80.5 million, respectively, with a corresponding increase to
gross profit and SG&A expenses. This reclassification had no effect on
the operating loss for any of the periods presented.

(2) Shown exclusive of depreciation expense for the Company's distribution
centers which is included in depreciation and amortization shown
separately.

Table 2

Duane Reade Holdings, Inc.
Consolidated Balance Sheets
(Unaudited)
(In thousands)

June 28, December 29,
2008 2007

Current Assets
Cash $1,372 $1,380
Receivables, net (1) 48,564 55,707
Inventories 208,742 211,678
Prepaid Expenses and Other Current Assets 11,806 13,205
Total Current Assets 270,484 281,970

Property and Equipment, net 192,116 195,740
Goodwill 70,099 70,099
Other Assets, net (2) 187,212 194,680
Total Assets $719,911 $742,489

Current Liabilities
Accounts Payable $73,553 $75,769
Accrued Expenses 54,493 52,244
Current Portion of Debt and
Capital Leases (3) (4) 146,438 145,346
Total Current Liabilities 274,484 273,359

Long Term Debt and Capital Leases 408,328 410,507
Deferred Income Taxes 27,904 27,423
Redeemable Preferred Stock and
Accrued Dividends (5) 34,225 31,786
Other Liabilities (6) 80,467 72,737
Total Liabilities 825,408 815,812

Total Stockholders' Deficit (105,497) (73,323)

Total Liabilities and Stockholders' Deficit $719,911 $742,489

(1) Includes third party pharmacy receivables of $33,990 and $37,608 at
June 28, 2008 and December 29, 2007, respectively.

(2) Decrease in other assets from December 29, 2007 is primarily due to
the amortization of intangible assets.

(3) The increase in the current portion of debt and capital leases from
December 29, 2007 is primarily due to the $0.8 million increase in the
Company's outstanding revolving loan balance.

(4) The outstanding revolver loan balance of $142.2 million at June 28,
2008 and $141.4 million at December 29, 2007 has been classified as a
current liability because cash receipts controlled by the lenders are
used to reduce outstanding debt, and the Company does not meet the
criteria of SFAS No. 6 -- "Classification of Short-Term Obligations
Expected to be Refinanced," to classify the debt as long-term. It
should be noted that this classification is not a result of a change
in status or compliance with the terms of this indebtedness. The
Company expects to continue to borrow under this facility until its
maturity in 2011.

(5) The increase in the balance of the redeemable preferred stock and
accrued dividends from December 29, 2007 is due to the accretion of
the discount on the liability recorded for the preferred stock
offering completed during the second quarter of 2007 and the
cumulation of the quarterly dividends on the preferred stock.

(6) Increase in other liabilities from December 29, 2007 is primarily due
to an increase in the deferred rent liabilities resulting from the
addition of new leases in 2008 and the related receipt of lease
construction incentives, which are recognized over the lives of the
respective leases.

Table 3

Duane Reade Holdings, Inc.
Operating Data
(Unaudited)
(Dollars in thousands)

For the For the
13 Weeks Ended 26 Weeks Ended
June 28, June 30, June 28, June 30,
2008 2007 2008 2007

LIFO EBITDA (1) $17,489 $13,780 $31,281 $16,878
LIFO Expense 800 600 1,600 1,200
FIFO EBITDA (1) $18,289 $14,380 $32,881 $18,078

FIFO EBITDA as a percentage
of net sales 4.1% 3.3% 3.7% 2.1%

Adjusted FIFO EBITDA (2) $24,940 $21,562 $43,185 $34,308

Adjusted FIFO EBITDA as
a percentage of net sales 5.5% 5.0% 4.9% 4.1%

Capital expenditures $9,085 $6,457 $16,321 $13,406
Lease acquisitions, customer
files and other costs $8,464 $5,421 $10,169 $8,811

Same-store sales growth 4.7% 7.9% 4.6% 8.1%
Pharmacy same-store
sales growth 3.6% 6.1% 2.5% 7.5%
Front-end same-store
sales growth 5.6% 9.4% 6.3% 8.5%
Pharmacy sales as
a % of net sales 45.7% 45.8% 45.6% 46.4%
Third Party sales as
a % of prescription sales 93.3% 93.0% 93.2% 93.0%

Average weekly prescriptions
filled per store (3) 854 848 851 845

Number of stores at
end of period 241 244
Retail square footage at
end of period 1,638,450 1,713,831
Average store size (sq.ft.)
at end of period 6,799 7,024

(1) As used in this report, FIFO EBITDA means earnings before interest,
income taxes, depreciation, amortization, non-cash charges and credits
related to the LIFO inventory valuation method, extraordinary charges
and other non-recurring charges. We believe that FIFO EBITDA, as
presented, represents a useful measure for assessing the performance
of our ongoing operating activities, as it reflects our earnings
trends without the impact of certain non-cash charges and other
non-recurring items. Targets and positive trends in FIFO EBITDA are
used as performance measures for determining certain compensation of
management. FIFO EBITDA is also used as a performance measure in our
various debt agreements. LIFO EBITDA reflects FIFO EBITDA adjusted to
include the effect of non-cash charges and credits related to the LIFO
inventory valuation method.

We understand that, although securities analysts frequently use FIFO
EBITDA in the evaluation of companies, it is not necessarily
comparable to other similarly titled captions of other companies due
to potential inconsistencies in the method of calculation. FIFO EBITDA
is not intended as an alternative to net income as an indicator of our
operating performance, or as an alternative to any other measure of
performance in conformity with generally accepted accounting
principles, nor as an alternative to cash flow from operating
activities as a measure of liquidity.

Reconciliations of net loss to FIFO EBITDA, Adjusted FIFO EBITDA and
operating cash flow for each period included above and highlighted
elsewhere in this document are provided in the tables on the following
pages of this press release.

(2) As used in this report, Adjusted FIFO EBITDA means FIFO EBITDA as
defined above, adjusted to exclude non-cash rent expenses, management
fees paid to Oak Hill, closed store costs, accounting investigation
costs, former CEO (Mr. Cuti) matters, non-cash stock option expense
and certain other non-recurring payments that are not included in the
definition of EBITDA used for our various debt agreements.

(3) Comparative stores only, does not include new stores.

Table 4

Duane Reade Holdings, Inc.
Reconciliation of Net Sales to Retail Store Sales
(Unaudited)
(In thousands)

13 Weeks Ended 26 Weeks Ended
June 28, June 30, June 28, June 30,
2008 2007 2008 2007

Net sales $451,395 $431,930 $878,532 $846,318
Resale activity 19,320 15,658 31,540 30,094
Net retail store sales $432,075 $416,272 $846,992 $816,224

Reconciliation of Non-GAAP Financial Measures to Net Loss and
Net Cash Provided by Operating Activities
(Unaudited)
(In thousands)

13 Weeks Ended 26 Weeks Ended
June 28, June 30, June 28, June 30,
2008 2007 2008 2007

FIFO EBITDA $18,289 $14,380 $32,881 $18,078
LIFO Expense 800 600 1,600 1,200
LIFO EBITDA 17,489 13,780 31,281 16,878

Depreciation and
amortization (17,674) (18,416) (35,593) (36,453)
Interest expense (11,375) (14,645) (27,281) (29,080)
Income tax provision (518) (856) (1,478) (2,016)
Net loss $(12,078) $(20,137) $(33,071) $(50,671)

Net loss $(12,078) $(20,137) $(33,071) $(50,671)
Adjustments to reconcile
net loss to cash provided
by (used in) operating
activities:
Depreciation and
amortization 18,587 19,331 37,418 38,281
Deferred tax provision 495 801 1,399 1,908
Non-cash rent expense 3,095 2,804 5,816 6,320
Non-cash interest expense
(benefit) on redeemable
preferred stock (342) 395 2,556 412
Other non-cash expense 306 1,750 153 2,264
Changes in operating assets
and liabilities:
Receivables 4,500 (1,241) 7,143 1,975
Inventories 5,235 (467) 2,936 (1,633)
Prepaid expenses and
other assets 1,683 1,476 1,400 442
Other assets/liabilities,
net 2,126 (2,051) 1,860 193
Accounts payable 14 (5,394) (2,216) (2,552)
Accrued expenses 3,222 2,187 1,373 (4,514)
Cash provided by (used in)
operating activities $26,843 $(546) $26,767 $(7,575)

Calculation of Adjusted
FIFO EBITDA

FIFO EBITDA as above $18,289 $14,380 $32,881 $18,078

Non-cash rent expense 3,095 2,804 5,816 6,320
Former CEO (Mr. Cuti) matters 1,018 1,403 1,300 3,807
Oak Hill management fee 313 313 625 625
Stock option expense 306 155 339 669
Closed store costs 1,919 660 2,117 2,349
Accounting investigation
costs - 1,798 - 2,183
Miscellaneous other - 49 107 277
Adjusted FIFO EBITDA $24,940 $21,562 $43,185 $34,308

Table 5

Duane Reade Holdings, Inc.
Reconciliation of Range of Projected Non-GAAP
Financial Measures to Net Loss
(Unaudited)
(In thousands)

For the 52 Weeks Ended
December 27, 2008

Net sales $1,760,000 $1,780,000
Resale activity 60,000 60,000
Net retail store sales $1,700,000 $1,720,000

EBITDA (Adjusted FIFO Basis) $90,000 $95,000

Deferred rent expense (10,100) (10,100)
Other expense (1) (7,300) (7,300)
EBITDA (FIFO Basis) 72,600 77,600

LIFO expense (3,200) (3,200)
EBITDA (LIFO Basis) 69,400 74,400

Depreciation and amortization expense (74,500) (74,500)
Interest expense (55,700) (55,700)
Income taxes (2,500) (2,500)
Net loss $(63,300) $(58,300)

(1) Includes Oak Hill management fees, stock option expenses in accordance
with SFAS No. 123R and expenses attributable to Mr. Cuti.

Table 6

Duane Reade Holdings, Inc.
Components of "Other Expense"
(Unaudited)
(In thousands)

For the For the
13 Weeks Ended 26 Weeks Ended
June 28, June 30, June 28, June 30,
2008 2007 2008 2007

Closed Store Costs $1,919 $660 $2,117 $2,349
Oak Hill Management Fees 313 313 625 625
Accounting Investigation - 1,798 - 2,183
Former CEO (Mr. Cuti) matters 1,018 1,403 1,300 3,807
Other - 49 107 277
Total Other Expense $3,250 $4,223 $4,149 $9,241

SOURCE Duane Reade Holdings, Inc.

John Henry, SVP - Chief Financial Officer, Duane Reade Holdings, Inc.,
+1-212-273-5746; or Investors, Cara O'Brien and Caren Barbara, or Press, Diane
Zappas, +1-212-850-5600, all of Financial Dynamics