omniture

China Nepstar Chain Drugstore Reports Second Quarter 2010 Financial Results

- Sequential Improvement in Operations -

- Strategic Store Transition to Convenience Merchandise Underway -

    SHENZHEN, China, Aug. 11 /PRNewswire-Asia-FirstCall/ -- 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 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 .
 
    Safe Harbor Statement

    This press release contains forward-looking statements. These statements constitute "forward-looking" statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as "will," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates" and similar statements. Among other things, the quotations from management in this press release and the Company's strategic operational plans and business outlook, contain forward-looking statements. Such statements involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Further information regarding these and other risks is included in the Company's filings with the U.S. Securities and Exchange Commission, including its annual report on Form 20-F. The Company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under applicable law.

    Exchange Rate Information 
    The United States dollar (US$) amounts disclosed in this press release are presented solely for the convenience of the reader. Translations of amounts from RMB into United States dollars for the convenience of the reader were calculated at the certified exchange rate of US$1.00 = RMB6.7815 on June 30, 2010 as set forth in the H.10 weekly statistical release of the Federal Reserve Board. No representation is made that the RMB amounts could have been, or could be, converted into US$ at that rate on June 30, 2010, or at any other date. The percentages stated are calculated based on RMB amounts.

    For more information, please contact:

    In China:
     Lucia Qian
     China Nepstar Chain Drugstore Ltd.
     Vice President, IR
     Phone: +86-755-2641-4065
     Email: qianrt@nepstar.cn

    In the United States:
     Dixon Chen
     Grayling
     Investor Relations
     Phone: +1-646-284-9403
     Email: dixon.chen@grayling.com

     Ivette Almeida
     Grayling
     Media Relations
     Phone: +1-646-284-9455
     Email: ivette.almeida@grayling.com


                                  Tables Follow



                       China Nepstar Chain Drugstore Ltd.                    
            Unaudited Condensed Consolidated Statements of Operations        
                 (amounts in thousands - except per-share data)              
                                                                         
                                                Three-month period ended        
                                                      June 30                
                                              2009        2010         2010 
                                               RMB         RMB          USD     
    Revenue                                 534,119     565,216       83,346 
    Cost of goods sold                     (277,698)   (281,990)     (41,582)
    Gross profit                            256,421     283,226       41,764 
                                                                         
    Sales, marketing and other                                           
     operating expenses                    (206,287)   (241,427)     (35,601)
    General and administrative                                           
     expenses                               (28,461)    (28,863)      (4,256)
    Other expense-SAFE penalty                   --     (25,540)      (3,766)
    Income/(loss) from operations            21,673     (12,604)      (1,859)
                                                                         
    Interest income                          19,975       5,279          778 
    Interest expense                            (13)         --           -- 
    Dividend income from cost method                                     
     investments                                 --          31            5 
    Equity in income of an equity                                        
     method investee                            921       1,475          218 
    Income/(loss) before income tax                                      
     expense                                 42,556      (5,819)        (858)
    Income tax expense                      (12,430)     (7,576)      (1,117)
    Net income/(loss) attributable to                                    
     China Nepstar Chain Drugstore Ltd.      30,126     (13,395)      (1,975)
                                                                         
    Basic earnings/(loss) per ordinary                                   
     share                                     0.15       -0.06        -0.01 
                                                                         
    Basic earnings/(loss) per ADS              0.30       -0.12        -0.02 
                                                                         
    Diluted earnings/(loss) per                                          
     ordinary share                            0.14       -0.06        -0.01 
                                                                         
    Diluted earnings/(loss) per ADS            0.28       -0.12        -0.02 



                        China Nepstar Chain Drugstore Ltd.                    
                 Unaudited Condensed Consolidated Balance Sheets              
                              (amounts in thousands)                          
                                                                         
                                                As of            As of         
                                              December 31,      June 30,       
                                                 2009             2010 
                                                  RMB        RMB        USD    
    ASSETS                                                               
    Current assets                                                       
    Cash, cash equivalents and bank                                      
     deposits                                  666,012  1,160,706    171,158 
                                                                         
    Restricted cash                            765,000         --         -- 
                                                                         
    Held-to-maturity investment securities     400,000         --         -- 
                                                                         
    Accounts receivable, net of allowance                                
     for doubtful accounts                      72,561     87,917     12,964 
    Prepayments for purchase of                                          
     merchandise paid to related parties        38,102     24,507      3,614 
    Amounts due from related parties             7,306     10,069      1,485 
                                                                         
    Prepaid expenses, deposits and other                                 
     current assets                            144,154    132,631     19,558 
                                                                         
    Inventories                                369,775    359,894     53,070 
                                                                         
    Deferred tax assets                          6,907      3,897        574 
                                                                         
    Total current assets                     2,469,817  1,779,621    262,423 
                                                                         
    Non-current assets                                                   
                                                                         
    Property and equipment, net                204,710    209,888     30,950 
                                                                         
    Rental deposits                             38,557     40,386      5,955 
                                                                         
    Cost method investments                     12,638     12,638      1,864 
                                                                         
    Equity method investment                    29,343     32,664      4,817 
                                                                         
    Land use right                               8,622      8,442      1,245 
                                                                         
    Intangible assets, net                         725        442         65 
                                                                         
    Goodwill                                    40,462     52,971      7,811 
                                                                         
    Deferred tax assets                          2,914      4,518        666 
                                                                         
    Deposits for acquisitions                   12,788      2,000        295 
                                                                         
    Total non-current assets                   350,759    363,949     53,668 
                                                                         
                                                                         
    TOTAL ASSETS                             2,820,576  2,143,570    316,091 
                                                                         
    LIABILITIES AND SHAREHOLDERS' EQUITY
    Current liabilities                                                  
    Short-term bank loans                      470,000         --         -- 
                                                                         
    Accounts payable                           313,794    297,572     43,880 
                                                                         
    Amounts due to related parties              12,533     30,740      4,533 
                                                                         
    Accrued expenses and other payables        121,645    143,941     21,226 
                                                                         
    Income tax payable                          38,599     44,934      6,626 
                                                                         
    Dividend payable                            38,631         --         -- 
                                                                         
    Total current liabilities                  995,202    517,187     76,265 
                                                                         
    Non-current liabilities                                              
                                                                         
    Deferred income                             27,002     35,881      5,291 
                                                                         
    Deferred tax liabilities                    20,640     13,062      1,926 
                                                                         
    Total non-current liabilities               47,642     48,943      7,217 
                                                                         
    Total liabilities                        1,042,844    566,130     83,482 
                                                                         
    Shareholders' equity                                                
                                                                         
    Share capital                                  166        166         24 
                                                                         
    Additional paid-in capital               1,605,762  1,534,899    226,336 
                                                                         
    Accumulated other comprehensive loss       (38,485)   (39,078)    (5,762)
                                                                         
    Retained earnings                          210,289     81,453     12,011 
                                                                         
    Total China Nepstar Chain Drugstore                                  
     Ltd. shareholders' equity               1,777,732  1,577,440    232,609 
                                                                         
                                                                         
    TOTAL LIABILITIES AND                                                
     SHAREHOLDERS' EQUITY                    2,820,576  2,143,570    316,091
Source: China Nepstar Chain Drugstore Ltd.
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