China Nepstar Chain Drugstore fourth quarter revenues increase 1.0% to US$95 million

Mar 16 2011

China Nepstar Chain Drugstore Ltd. (NYSE: NPD) ("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 fourth quarter and fiscal year ended December 31, 2010.

Fourth Quarter Financial Highlights

For the quarter ended December 31, 2010:

• Same store sales declined slightly by 1.1% compared to the higher sales of the same period in 2009 due to the H1N1 epidemic


• Gross margin increased to 49.6% compared to 47.9% for the same period of 2009


• Revenue increased by 1.0% to RMB627 million (US$95 million) compared to RMB621 million in the fourth quarter of 2009


• Income from operations was RMB24 million (US$4 million) compared to RMB42 million in the same period of 2009 and RMB14 million in the third quarter of 2010


• Net income was RMB17 million (US$3 million)

Mr. Jason Wu, Chief Executive Officer of Nepstar, commented, "We are pleased to say that our strategic transition to a neighborhood store for one-stop pharmacy and convenience shopping contributes to stabilizing our business despite disruptive changes in our operating environment caused by government initiatives related to healthcare reform and macroeconomic adjustment."

"We continue to implement our new merchandising strategy and marketing tactics. Based upon our principle of improving the quality of life for urban residents in China, we have carefully researched, selected and introduced high-quality household consumables at competitive prices. Our experience in central procurement and private labeling is helping our expansion into new product categories and we are seeing these new products start to gain traction. For example, our new lines of stainless steel cooking ware and kitchen cutlery are being well accepted by our customers due to their outstanding quality and attractive price."

"We are testing many new products in different markets and closely monitoring both sales performance and customer feedback. As a result, we have successfully improved the average spending per customer visit and maintained our productivity," Mr. Wu concluded.

Fourth Quarter Results

During the fourth quarter of 2010, the Company opened 31 new stores and closed 61 stores.  As of December 31, 2010, Nepstar had a total of 2,547 stores in operation.

Revenue for the quarter ended December 31, 2010 increased 1.0% to RMB627 million (US$95 million), compared to revenue of RMB621 million for the same period in 2009. The increased sales of newly introduced convenience products continued to offset the negative impact on drug sales from the Chinese government's healthcare reform policies leading to price reductions and diversion of customers from drugstores to community clinics.

Fourth quarter revenue contribution from prescription drugs was 19.3%, OTC drugs was 37.3%, nutritional supplements was 18.9%, traditional Chinese herbal products was 3.8% and convenience and other products was 20.7%. During the fourth quarter, the Company introduced 117 new SKUs (Stock Keeping Units) within the scope of convenience products. The sales of convenience products accounted for approximately 12.0% of the total revenue of the fourth quarter.

Same store sales (for 2,078 stores opened before December 31, 2008) for the fourth quarter of 2010 declined slightly by 1.1% compared to the same period in 2009. This decline was mainly due to higher level of prescription and OTC drug sales in the fourth quarter of 2009 related to the H1N1 epidemic.  

Nepstar's portfolio of private label products included 1,770 products as of December 31, 2010. Sales of private label products represented approximately 30.4% of revenue and 40.6% of gross profit for the fourth quarter of 2010.

Fourth quarter gross profit was RMB311 million (US$47 million), compared to RMB298 million in the same period of 2009. Gross margin in the fourth quarter of 2010 was 49.6%, compared to 47.9% in the same period of 2009. The increase in gross margin was mainly due to changes in revenue mix as the sales of flu related low-margin prescription and OTC cough-and-cold drugs were at a relatively high level in the fourth quarter of last year. The Company also made greater efforts to provide high-quality yet reasonably-priced private label products in the convenience products category. In the fourth quarter, private label products' contribution in the convenience products category also reached 30.0%, which effectively helped to maintain sales of the convenience products category at a reasonably favorable gross margin level.

Sales, marketing and other operating expenses as a percentage of revenue in the fourth quarter of 2010 increased to 40.0% compared to 37.1% in the same period of 2009. This increase from the same period of last year was primarily due to higher labor costs associated with upward minimum wage adjustments in all of the regions in which Nepstar operates. Increased rental expenses in the inflationary property-for-rent market and logistics costs associated with the changes in the Company's product mix also contributed to higher operating expenses.

General and administrative expenses as a percentage of revenue in the fourth quarter of 2010 were 5.3%, compared to 4.1% in the same period of 2009. The increase was due to higher labor costs in maintaining competitive salary standard for core management team especially at branch level.

Primarily as a result of the factors discussed above, income from operations in the fourth quarter of 2010 was RMB24 million (US$4 million), compared to RMB42 million in the same period of 2009 and RMB14 million in the third quarter of 2010. Operating margin was 3.8% in the fourth quarter of 2010, compared to 6.7% in the same quarter of 2009 and 2.4% in the third quarter of 2010.

Interest income for the fourth quarter of 2010 was RMB4.9 million (US$0.7 million), compared to RMB15 million in the same period of 2009. Equity income of an equity method investee was RMB0.2 million (US$0.03 million), compared to that of RMB2.4 million in the same quarter of 2009. The decrease in interest income was mainly due to (i) the maturity of all held-to-maturity investment securities which earned higher interest income, and (ii) lower cash balances as a result of the dividend payments and share buyback program in 2010.

Nepstar's effective tax rate was 40.9% for the fourth quarter, compared to 35.3% for the same period in 2009. The increase in the effective tax rate was primarily due to the varying profitability among subsidiary companies for the fourth quarter of 2010, an increase in the deferred tax asset valuation allowance mainly for tax loss carry forwards, and an increase in the transitional tax rate from 20% in 2009 to 22% in 2010 for subsidiaries in Shenzhen.

Net income in the fourth quarter of 2010 was RMB17 million (US$3 million), which represented RMB0.16 (US$0.02) basic and diluted earnings per American depositary share ("ADS"). This compares to net income of RMB43 million, which represented RMB0.40 basic earnings per ADS and RMB0.40 diluted earnings per ADS in the same period of 2009. The total number of outstanding ordinary shares of the Company as of December 31, 2010 was 208 million. The weighted average number of ordinary shares in the fourth quarter of 2010 was 208 million. Each ADS represents two ordinary shares of the Company.

As of December 31, 2010, Nepstar's total cash, cash equivalents and other bank deposits were RMB1,140 million (US$173 million) and its shareholders' equity was RMB1,569 million (US$238 million).

In the fourth quarter of 2010, net cash outflow from operations was RMB0.4 million (US$0.07million).

Fiscal Year 2010 Financial Results

Total revenue for 2010 increased to RMB2,357 million (US$357 million), an increase of 6.3% compared to RMB2,218 million for 2009.

Same store sales (for stores opened before December 31, 2008) for 2010 increased by 2% compared to 2009. Since the second quarter of 2010, Nepstar underwent a strategic transition to expand offerings of convenience products. By introducing convenience products such as beverages, health food, household consumables, and personal care products, Nepstar aims to transform traditional drugstores into neighborhood drugstores with one-stop convenience for many day-to-day needs.

In 2010, revenue contribution from prescription drugs was 21.4%, OTC drugs was 36.8%, nutritional supplements was 19.2%, herbal products was 3.7%, and other products was 18.9%.

In 2010, private label products accounted for 29.4% of total revenue and 41.1% of gross profit, respectively, compared to 29.0% of revenue contribution and 43.3% of gross profit contribution in 2009.

Gross profit was RMB1,164 million (US$176 million) for 2010 compared to RMB1,074 million for 2009. In 2010, gross margin was 49.4% compared to 48.4% in 2009. The increase in gross margin for 2010 compared to 2009 was mainly due to changes in product mix and the effort of providing more high-quality yet reasonably-priced private label products.

Total operating expenses accounted for 48.5% of total revenue in 2010 as compared to 43.5% in 2009. This increase was largely due to a non-recurring penalty of RMB26 million by State Administration of Foreign Exchange ("SAFE") in second quarter of 2010, an overall wage rise related to the mandatory minimum wage increases, and higher rental costs in the inflationary property-for-rent market. As a result, income from operations was RMB21 million (US$3 million) for 2010 compared to RMB110 million for 2009.

Net income attributable to Nepstar's ordinary shareholders was RMB17 million (US$3 million) for 2010 compared to RMB140 million for 2009. The Company reported RMB0.16 (US$0.02) basic earnings per ADS, and RMB0.16 (US$0.02) diluted earnings per ADS for 2010. This compares to RMB1.34 basic earnings per ADS, and RMB1.32 diluted earnings per ADS for 2009. In comparison with 2009, the lower net income of the Company was mainly due to lower operating income, lower interest income, and a higher effective tax rate in 2010.

On August 13, 2010, the Company announced a share repurchase program to purchase up to US$20 million of outstanding shares of the Company in the form of ADSs over 12 months. The repurchases shall be made on the open market at prevailing market prices or in block trades and subject to restrictions relating to volume, price and timing under the applicable laws, including Rule 10b-18 under the U.S. Securities Exchange Act of 1934, as amended. By the end of the fourth quarter of 2010, approximately 1.9 million ADSs have been repurchased at an average price of US$2.8 per ADS.

On January 18, 2011, the Company announced a special cash dividend of US$0.30 per ADS, which represents a total value to shareholders of approximately US$31 million. The distribution of the special dividend was paid around February 28, 2011 to shareholders of record as of the close of business on January 31, 2011.

Business Outlook

"We expect the whole pharmaceutical retailing sector to be subject to continuous macroeconomic and industry-related policy uncertainties in 2011," Mr. Jason Wu, CEO of Nepstar, commented.

"However, we are encouraged by the progress of our transition to a neighborhood one-stop shopping platform, which we believe will sharpen our competitive advantage in a rapidly changing operating environment. Our product and marketing innovations seem to be appealing to customers and driving higher spending per visit, as well as creating steady sales flow to offset the negative external disturbances. We will continue to conduct product and marketing tests, as well as further develop our logistics capabilities and seek greater efficiencies.  While many of our competitors are struggling for survival at this difficult time, we are focused on optimizing product mix and expansion beyond pharmaceutical products. Our established store footprint, brand loyalty, proven central procurement program, and advanced IT systems remain our prominent assets and we believe these assets will continue to be the foundation for our future success."