Nepstar's Q2 2014 revenue increases by 7.5% to RMB686.6 million (US$110.7 million)

Aug 28 2014

China Nepstar Chain Drugstore Ltd. (NYSE: NPD) ("Nepstar" or the "Company"), a leading retail drugstore chain in China based on the number of directly operated stores, today announced its unaudited financial results for the second quarter ended June 30, 2014.

Financial Highlights

For the quarter ended June 30, 2014:

• Revenue increased by 7.5% to RMB686.6 million (US$110.7 million) compared to RMB638.8 million in the second quarter of 2013
• Same store sales increased by 6.2% compared to the second quarter of 2013
• Net loss was RMB15.9 million (US$2.6 million) compared to net loss of RMB3.9 million in the second quarter of 2013.

Mr. Fuxiang Zhang, Chief Executive Officer, commented: "Our ongoing efforts to support same store sales and overall revenue growth through promotion of non-prescription products and nutritional supplements continue to deliver results. We increased same store sales by 6.2% and average value per transaction by 14.5% in the second quarter compared to the corresponding period in 2013. However, higher labor cost and lease expense had weighed on our profitability. In response, we began streamlining managerial personnel to reduce costs and improve workflow efficiencies. Looking ahead, we will remain focused on achieving a sustainable balance between top line growth and operational efficiency."

Second Quarter Results

During the second quarter of 2014, the Company opened 31 new stores and closed 40 stores. As of June 30, 2014, the Company had 2,048 directly operated stores in total.

Revenue for the second quarter of 2014 increased by 7.5% to RMB686.6 million (US$110.7 million) from RMB638.8 million for the same period in 2013. Same store sales (for the 1,890 stores opened before December 31, 2012 and which were still operating as of June 30, 2014) for the second quarter increased by 6.2% compared to the same period in 2013. The increase in same store sales was primarily due to in-store promotional initiatives and marketing of pharmaceutical products and nutritional supplements.

Second quarter revenue by product contribution was 23.9% attributable to prescription drugs (22.3% for the same period in 2013), 39.0% attributable to over-the-counter ("OTC") drugs (38.2% for the same period in 2013), 18.8% attributable to convenience and other products (20.7% for the same period in 2013), 14.8% attributable to nutritional supplements (14.8% for the same period in 2013), and 3.5% attributable to herbal products (4.0% for the same period in 2013).

Second quarter gross profit increased to RMB292.9 million (US$47.2 million) from RMB280.8 million for the same period in 2013. Gross margin in the second quarter of 2014 was 42.7%, compared with 44.0% for the same period in 2013. The year-over-year decrease in gross margin was primarily the result of proactive promotional activity such as more discounts on certain pharmaceutical and nutritional products.

The Company's portfolio of private label products included 2,115 types of products as of June 30, 2014. Sales of private label products represented approximately 18.4% of the Company revenue and 25.7% of the gross profit for the second quarter of 2014.

Sales, marketing and other operating expenses as a percentage of revenue remained relatively stable and increased slightly to 39.0% for the second quarter of 2014 from 38.9% for the same period in 2013.

General and administrative expenses as a percentage of revenue remained at 4.6% for the second quarter of 2014, same with the second quarter of 2013.

During the second quarter of 2014, we recognized impairment loss of RMB5.2 million (US$0.8 million), compared to RMB3.4 million for the same period in 2013, representing the reduction of the carrying amount of the property and equipment of certain underperforming stores.

Loss from operations in the second quarter of 2014 was RMB11.5 million (US$1.8 million) compared with loss from operations of RMB1.0 million in the same period of 2013. The loss from operations was mainly due to the increase in sales, marketing and other operating expenses which outpaced the increase in gross profit.

Interest income for the second quarter of 2014 was RMB1.9 million (US$0.3 million), compared with RMB4.2 million for the same period in 2013.

The Company's income tax expense was RMB7.2 million (US$1.2 million) for the second quarter of 2014, compared with RMB7.5 million for the same period in 2013. Loss before income tax expense for the second quarter of 2014 was RMB8.7 million (US$1.4 million), while we generated an income before income tax expense of RMB3.6 million for the same period in 2013. The effective tax rate was therefore negative 82.8% for the second quarter of 2014, compared to 208.0% for the same period in 2013. Such difference in the effective income tax rate was primarily attributable to the higher operating losses from certain of our loss-making subsidiaries, for which full valuation allowances were made on their deferred tax assets.

Net loss for the second quarter of 2014 was RMB15.9 million (US$2.6 million), or RMB0.16 (US$0.03) basic and diluted losses per ADS compared to net loss of RMB3.9 million, or RMB0.04 basic and diluted losses per ADS for the second quarter of 2013. As of June 30, 2014, the Company had 197.4 million outstanding ordinary shares. Each ADS represents two ordinary shares of the Company.

In the second quarter of 2014, net cash outflow from operating activities was RMB79.0 million (US$12.7 million), compared to net cash inflow of RMB14.6 million for the same period in 2013. The cash outflow is primarily due to more prepayments made to suppliers and greater operating losses incurred in the second quarter of 2014 compared to the same period in 2013.

As of June 30, 2014, the Company's total cash, cash equivalents, short-term and long-term bank deposits and restricted cash were RMB306.0 million (US$49.3 million) and its shareholders' equity was RMB811.3 million (US$130.8 million), compared with total cash, cash equivalents, bank deposits and restricted cash of RMB622.8 million and shareholders' equity of RMB845.5 million as of December 31, 2013. The decrease in the Company's total cash, cash equivalents, short-term and long-term bank deposits and restricted cash was primarily due to cash dividend of approximately RMB191.2 million (US$31.6 million) being paid to the shareholders in January 2014 and the net cash outflow of RMB101.6 million (US$16.3 million) from operating activities for the first half year of 2014.

Business Outlook 

"We are taking proactive steps to improve customer experience and further gain loyalty, such as offering free consultations on basic health issues at our stores. We believe our optimized product offerings, continuously improved service, strong store network and customer loyalty program will help us achieve greater economies of scale and improve operational efficiency," Mr. Zhang concluded.