China Nepstar Reports Revenue of $83 Million

China Nepstar Chain Drugstore Ltd. (NPD 3.04, −0.03, −0.98%) ("Nepstar" or "the Company"), the largest retail drugstore chain in China based on the number of directly operated stores, today announced its unaudited financial results for the quarter ended June 30, 2010.

 Financial Highlights for the quarter ended June 30, 2010:
–        Revenue was RMB565 million (US$83 million), reflecting a 5.8% increase compared to a revenue of RMB534 million in the second quarter of 2009
–        Gross margin improved to 50.1%, from 48.0% in the second quarter of 2009 and the first quarter of 2010
–        Before charging the SAFE penalty of RMB26 million, operating profit was RMB13 million (US$2 million), compared to operating loss of RMB4 million in the first quarter of 2010
–        Net cash flow from operations was RMB39 million (US$6 million)

"Starting from May, we began to expand our product offerings by introducing high turnover convenience merchandise such as beverages, health food, household consumables, personal care products and other non-pharmaceutical items. Our aim is to transform Nepstar stores into neighborhood drugstores with one-stop convenience for many day-to-day needs. The core of this strategic transition is to leverage on our large store network and customer base in urban neighborhoods, expand our product offerings into high quality and competitively priced selections of general food, personal care products and household consumables, and to address the wider needs of our customers for a healthy and convenient lifestyle," commented Mr. Jason Wu, Acting Chief Executive Officer of Nepstar. "While we wait for the PRC government's progressive healthcare reform policies to revitalize the healthcare sector and the drugstore industry, we are adopting a highly proactive approach to adjust our business strategy so as to withstand the short term disruption. We believe that our established brand name, economy of scale and strong financial position will help us gain market share through this challenging time for all the drug retailers."

Second Quarter Results

Revenue for the quarter ended June 30, 2010 increased by 5.8% to RMB565 million (US$83 million) from RMB534 million for the same period in 2009.

Second quarter revenue contribution from prescription drugs was 19.9%, over-the-counter ("OTC") drugs was 37.7%, nutritional supplements was 19.9%, traditional Chinese herbal products was 4.1% and other products was 18.4%.

Despite constant price reduction pressure, same store sales (for 2,176 stores opened before December 31, 2008) for the second quarter of 2010 increased by 1.4% compared to the same period in 2009. The increase was mainly attributable to effective marketing campaigns and the mature of the stores opened in 2008.

Nepstar's portfolio of private label products included 1,625 products as of June 30, 2010. Sales of private label products represented approximately 29.2% of revenue and 41.4% of gross profit for the second quarter of 2010.

Second quarter gross profit was RMB283 million (US$42 million), compared to RMB256 million for the same period in 2009. Gross margin for the second quarter of 2010 was 50.1% compared to 48.0% for the same period in 2009 and the first quarter of 2010. The increase in gross margin for the second quarter of 2010 was largely due to the optimization of product mix.

Sales, marketing and other operating expenses as a percentage of revenue for the second quarter of 2010 increased to 42.7% compared to 38.6% for the same period in 2009. This increase was primarily due to the opening of 156 new stores in the fourth quarter of 2009 and 173 new stores in the first half of 2010, which resulted in an increase in associated operating expenses. The increase was also attributable to the minimum wage increase during the second quarter in 12 cities in which we operate.

General and administrative expenses as a percentage of revenue for the second quarter of 2010 decreased to 5.1% from 5.3% for the same period in 2009.

On July 30 2010, the State Administration of Foreign Exchange imposed on four subsidiaries of the company a one-time non-recurring penalty in the amount of RMB26 million (US$3.8 million) for the conversion of approximately US$349 million net proceeds from the initial public offering into Renminbi in December 2007 and January 2008. The penalty was booked in second quarter of 2010 as an expense item before loss from operations.

As a result, operating loss for the second quarter of 2010 with the SAFE penalty included was RMB13 million (US$2 million) compared to an operating income of RMB22 million for the same period in 2009 and an operating loss of RMB4 million in the first quarter of 2010.

Interest income for the second quarter of 2010 was RMB5 million (US$1 million) compared to RMB20 million for the same period in 2009. Other investment income (dividend income from cost method investments and equity in income of an equity method investee) was RMB2 million (US$0.2 million), compared to other investment income of RMB1 million in same quarter of 2009. The decrease in interest income was mainly due to (i) the maturity of all held-to-maturity investment securities which had been earning higher interest income; and (ii) lower cash balances as a result of the dividend payments in 2009 and the second quarter of 2010.

Nepstar's effective tax rate was -130.2% for the second quarter of 2010, compared to 29.2% for the same period in 2009. The drastic change in the effective tax rate was primarily due to the RMB26 million non-deductible SAFE penalty booked in the second quarter. Should such penalty be excluded from Nepstar's operating result, its effective tax rate for the second quarter of 2010 would become 44.9%. Other factors which affected the effective tax rate include an increase in the deferred tax asset valuation allowance for the second quarter, and the increase in transitional tax rate from 20% in 2009 to 22% in 2010 for our subsidiaries in Shenzhen.

Net loss for the second quarter of 2010 was RMB13 million (US$2 million). This compares to net income of RMB30 million for the same period in 2009. The total number of outstanding ordinary shares of the Company as of June 30, 2010 was 211 million. The weighted average number of ADSs for the second quarter of 2010 was 105.5 million. One ADS represents two ordinary shares.

As of June 30, 2010, Nepstar's total cash, cash equivalents and current bank deposits were RMB1,161 million (US$171 million) and total shareholders' equity was RMB1,577 million (US$233 million).

In the second quarter, net cash flow from operations was RMB39 million (US$6 million).

Operating Highlights

During the second quarter of 2010, the Company opened 69 new stores and closed 46 stores. As of June 30, 2010, Nepstar had a total of 2,582 stores in operation.

In May 2010, Nepstar started to expand its product offerings by introducing high turnover convenience merchandise such as beverages, health food, household consumables, personal care products and other non- pharmaceutical items. The Company expects that the expansion of product offerings will not only meet consumers' growing demand for shopping convenience and increase Nepstar's revenue, but also help mitigate the near- term negative impact of ongoing healthcare reform and government policies, which have caused price reductions to pharmaceuticals that are on the national Essential Drug List and Reimbursement List.

On July 20, 2010, Nepstar announced the sale of a total of 50,000 Shopper's Cards with a total face value of approximately RMB19 million. Beginning in May 2010, the Company rolled out the Nepstar Shopper's Card Program nationwide. The Nepstar Shopper's Card is a prepaid card, bearing face values ranging from RMB300 to RMB3,000. Customers can use their Nepstar Shopper's Cards to purchase beverages, health food, household consumables and personal care products at Nepstar stores. Starting from July 1, for every RMB6 of the face value of the Shopper's Card, card owner receives a bonus credit of RMB1. Bonus credits can be used to purchase pharmaceutical and nutritional products in Nepstar stores.

Business Outlook

Mr. Jason Wu commented, "We believe our strategic transition will not only help us improve the status quo of weak per store output and hence upgrade store profitability, but will also serve as a defensive mechanism to mitigate the negative impact of government policies on drug prices."

"Industry data is projecting attractive potential growth rates for sales of household consumables, as inflation of food prices and urban expansion continues throughout China. We believe that our established store footprint, proven central procurement program, advanced computer inventory replenishment systems and well-developed logistics network will enable us to develop a successful non-pharmaceutical line of business and provide the maximum level of convenience and value to our customers."

Conference Call Information

The Company will host a conference call, to be simultaneously webcast, on Wednesday, August 11, 2010 at 8:00 a.m. Eastern Daylight Time / 8:00 p.m. Beijing Time. Interested parties may participate in the conference call by dialing +1-877-407-9210 (North America) or +1-201-689-8049 (International) approximately five to ten minutes before the call start time. A live Web cast of the conference call will be available on the Nepstar web site at http://www.nepstar.cn .

A replay of the call will be available starting on August 11, 2010, at 11:00 a.m. Eastern Daylight Time or 11:00 p.m. Beijing Time through August 18, 2010 at 11:59 p.m. Eastern Daylight Time or August 19, 2010 at 11:59 a.m. Beijing Time. An archived Web cast of the conference call will be available on the Nepstar web site at http://www.nepstar.cn . Interested parties may access the replay by dialing +1-877-660-6853 (North America) or +1-201-612-7415 (International) and entering account number 286 and conference ID number 354038.

About China Nepstar Chain Drugstore Ltd.

China Nepstar Chain Drugstore Ltd. (NYSE:NPD - News) is China's largest retail drugstore chain based on the number of directly operated stores. As of June 30, 2010, the Company had 2,582 stores across 74 cities, one headquarter distribution center and 13 regional distribution centers in China. Nepstar uses directly operated stores, centralized procurement and a network of distribution centers to provide its customers with high-quality, professional and convenient pharmacy services and a wide variety of other merchandise, including OTC drugs, nutritional supplements, herbal products, personal care products, family care products, and convenience products including consumables. Nepstar's strategy of centralized procurement, competitive pricing, customer loyalty programs and private label offerings has enabled it to capitalize on the robust economic growth in China and to take advantage of the demographic trend in China to achieve a strong brand and leading market position. For further information, please go to http://www.nepstar.cn .

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