China Nepstar Chain Drugstore Ltd. Reports Second Quarter 2014 Financial Results

SHENZHEN, China, August 28, 2014 /PRNewswire-FirstCall/ — 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.

Conference Call Information

The Company will host a conference call, to be simultaneously webcasted, on Thursday, August 28, 2014 at 8:00 a.m. Eastern 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 minutes before the call start time. A live webcast of the conference call will be available on Nepstar’s website at www.nepstar.cn.

A replay of the call will be available shortly after the conclusion of the conference call through September 4, 2014 at11:59 p.m. Eastern Time. An archived webcast of the conference call will be available on Nepstar’s website 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 conference ID number 13588202.

About China Nepstar Chain Drugstore Ltd.

China Nepstar Chain Drugstore Ltd. (NYSE: NPD) is a leading retail drugstore chain in China. As of June 30, 2014, the Company had 2,048 directly operated stores across 77 cities, one headquarter distribution center and 16 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 pharmaceutical products and services and a wide variety of other merchandise, including OTC drugs, nutritional supplements, herbal products, personal care products, family care products, and convenience products. Nepstar’s strategy of centralized procurement, competitive pricing, customer loyalty programs and private label offerings has enabled it to capitalize on the continuing economic growth in China and 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 were calculated at the certified exchange rate of US$1.00 = RMB6.2036 on June 30, 2014 as set forth in the H.10 weekly statistical release of the Federal Reserve Board. No representation is made that the RMB amounts could have been, or could be, converted into US$ at that rate on June 30, 2014, or at any other date. The percentages stated are calculated based on RMB amounts.

Contacts

Zixin Shao
China Nepstar Chain Drugstore Ltd.
Chief Financial Officer
+86-755-2641-4065
ir@nepstar.cn

Dixon Chen
Grayling
Investor Relations
+1-646-284-9403
npd@grayling.com

Tables follow

China Nepstar Chain Drugstore Ltd.

Unaudited Condensed Consolidated Statements of Comprehensive Income/(Loss)

(amounts in thousands – except per-share and per-ADS data)

Three-month period ended

June 30,

2013

2014

2014

RMB

RMB

USD

Revenue

638,758

686,553

110,670

Cost of goods sold

(358,000)

(393,606)

(63,448)

Gross profit

280,758

292,947

47,222

Sales, marketing and other operating expenses

(248,719)

(267,539)

(43,126)

General and administrative expenses

(29,698)

(31,703)

(5,110)

Impairment losses

(3,380)

(5,182)

(835)

Loss from operations

(1,039)

(11,477)

(1,849)

Interest income

4,218

1,863

300

Dividend income from cost method investments

436

920

148

Income/(loss) before income tax expense

3,615

(8,694)

(1,401)

Income tax expense

(7,520)

(7,201)

(1,161)

Net loss

(3,905)

(15,895)

(2,562)

Basic losses per ordinary share

(0.020)

(0.081)

(0.013)

Basic losses per ADS

(0.040)

(0.162)

(0.026)

Diluted losses per ordinary share

(0.020)

(0.081)

(0.013)

Diluted losses per ADS

(0.040)

(0.162)

(0.026)

Net loss

(3,905)

(15,895)

(2,562)

Other comprehensive (loss)/income, net of tax:

Foreign currency translation adjustments

(512)

25

4

Comprehensive loss

(4,417)

(15,870)

(2,558)

China Nepstar Chain Drugstore Ltd.

Unaudited Condensed Consolidated Balance Sheets

(amounts in thousands)

As of

As of

As of

December 31,

June 30,

June 30,

2013

2014

2014

RMB

RMB

USD

ASSETS

Current assets

Cash and cash equivalents

361,146

166,114

26,777

Short-term bank time deposits

184,440

63,000

10,155

Restricted cash

37,000

36,631

5,905

Accounts receivable, net of allowance for doubtful

accounts

131,984

107,694

17,360

Amounts due from related parties

379

1,960

316

Prepaid expenses, deposits and other current assets

169,210

223,784

36,073

Inventories

551,783

556,832

89,759

Deferred tax assets

6,330

4,468

720

Total current assets

1,442,272

1,160,483

187,065

Non-current assets

Long-term bank time deposits

40,256

40,256

6,489

Property and equipment, net

123,183

124,355

20,046

Rental deposits

41,946

42,796

6,899

Cost method investments

12,638

12,638

2,037

Intangible assets, net

2,509

2,509

404

Goodwill

51,819

51,819

8,353

Deferred tax assets

11,723

16,673

2,688

Accrued interest income

769

1,673

270

Total non-current assets

284,843

292,719

47,186

Total assets

1,727,115

1,453,202

234,251

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities

Accounts payable

403,558

382,168

61,604

Bills payable

4,334

666

107

Amounts due to related parties

29,247

27,427

4,421

Accrued expenses and other payables

123,065

111,838

18,028

Income tax payable

34,567

21,878

3,527

Dividend payable

191,246

Deferred income

22,477

29,599

4,771

Total current liabilities

808,494

573,576

92,458

Non-current liabilities

Deferred income

17,391

15,559

2,508

Deferred tax liabilities

16,541

12,536

2,021

Other non-current liabilities

39,163

40,225

6,484

Total non-current liabilities

73,095

68,320

11,013

Total liabilities

881,589

641,896

103,471

Shareholders’ equity

Share capital

158

158

25

Additional paid-in capital

640,341

640,341

103,221

Accumulated other comprehensive loss

(41,623)

(41,759)

(6,731)

Retained earnings

246,650

212,566

34,265

Total shareholders’ equity

845,526

811,306

130,780

Total liabilities and shareholders’ equity

1,727,115

1,453,202

234,251