- Same Store Sales Increased 3.8%, Gross Margin of 49.6%, Continued Strong Free Cash Flow Generation -
SHENZHEN, China, Dec. 1 /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 third quarter ended September 30, 2009.
Financial Highlights
In January 2009, Nepstar terminated a voting rights assignment agreement, which assigned 30% of the total voting rights of Yunnan JianZhiJia Chain Drugstore Co. Ltd. ("JZJ") to Nepstar. As of December 31, 2008, JZJ had 355 drugstore outlets, all located in the Yunnan province. As a result, Nepstar no longer consolidated JZJ's financials beginning in the first quarter of 2009, and the financial results of JZJ were accounted for under the equity method.
To facilitate comparability of figures between periods presented, pro forma financial information is presented to show the accounting impact of the termination of the voting rights assignment agreement as if that had taken place in the beginning of the relevant period.
For the quarter ended September 30, 2009:
-- Revenue increased 8.0% to RMB556 million (US$81 million) compared to
RMB515 million in the third quarter of 2008 on a pro forma basis
-- Operating income rose 92.1% to RMB34 million (US$5 million) compared to
RMB18 million in the third quarter of 2008 on a pro forma basis
-- Net income was RMB37 million (US$5 million)
-- Net cash flow from operations was RMB93 million (US$14 million)
"Our continuous efforts to improve store merchandise offerings and grow foot traffic have started to show encouraging results," commented Mr. Ian Wade, Chief Executive Officer of Nepstar. "As the Chinese economy continues to recover, we are encouraged by rising consumer spending in the healthcare sector. The value of our combination of quality products, reliable service and maximum convenience is becoming more and more recognized by community residents."
Third Quarter Results
During the third quarter of 2009, the Company opened 47 new stores and closed 22 stores. As of September 30, 2009, Nepstar had a total of 2,337 stores in operation.
Revenue for the third quarter of 2009 was RMB556 million (US$81 million), compared to RMB613 million for the same period in 2008, and RMB515 million for same period in 2008 on a pro forma basis.
For the third quarter of 2009 revenue contribution from prescription drugs was 22.0%, from over-the-counter ("OTC") drugs was 36.7%, from nutritional supplements was 21.6%, from traditional Chinese herbal products was 3.4% and from other products was 16.3%.
Same store sales (for the 1,589 stores opened before December 31, 2007) for the third quarter of 2009 increased by 3.8% from the same period in 2008. The increase was mainly due to streamlining of operations and further optimization of product mix and recovery of the overall Chinese economy.
Nepstar's portfolio of private label products included 1,499 products as of September 30, 2009. Sales of private label products represented approximately 30.1% of revenue and 44.4% of gross profit for the third quarter of 2009.
For the third quarter of 2009, gross profit was RMB276 million (US$40 million), compared to RMB298 million for the same period in 2008 and RMB267 million for the same period in 2008 on a pro forma basis. Gross margin for the third quarter of 2009 was 49.6% compared to 48.6% for the same period in 2008 and 51.8% for the same period in 2008 on a pro forma basis. The decrease in gross margin for the third quarter of 2009 compared with the same period in 2008 on a pro forma basis was mainly due to expansion of the breadth of product offerings and price ranges to maintain competitiveness and address evolving consumer consumption patterns.
Sales, marketing and other operating expenses as a percentage of revenue for the third quarter of 2009 decreased to 38.4% compared to 41.1% for the same period in 2008 and 43.4% for the same period in 2008 on a pro forma basis. This decrease was primarily due to implementation of effective cost control measures, which resulted in a reduction in headcount and a reduction in rental expenses. The decrease was also due to the closing of non-performing stores.
General and administrative expenses as a percentage of revenue for the third quarter of 2009 were 5.1% compared to 4.4% for the same period in 2008 and 5.0% for the same period in 2008 on a pro forma basis. This increase compared to the same period in 2008 on a pro forma basis was primarily due to increased labor costs associated with the recruitment of additional middle and senior management.
As a result of previously mentioned factors, operating income for the third quarter of 2009 increased to RMB34 million (US$5 million) compared to RMB19 million for the same period in 2008 and RMB18 million for the same period in 2008 on a pro forma basis. Operating margin improved to 6.1% for the third quarter of 2009, from 3.4% for the third quarter of 2008 on pro forma basis, and subsequently improved from 4.1% for the second quarter of 2009.
Interest income for the third quarter of 2009 was RMB17 million (US$2 million) compared to RMB30 million for the same period in 2008 on a pro forma basis. The decrease in interest income was primarily due to (i) the maturity of a majority of the held-to-maturity investment securities of which the proceeds were placed in bank deposits; (ii) a general decrease of interest rates for bank deposits; and (iii) lower cash balances as a result of the dividend payment of approximately RMB248 million in May 2009.
Nepstar's effective tax rate was 28.4% for third quarter of 2009, compared to 26.7% for the same period in 2008 on pro forma basis. The increase in effective tax rate was primarily due to relatively higher portion of Nepstar's taxable profits being generated by subsidiaries subject to the PRC statutory tax rate, rather than the preferential rate.
Net income for the third quarter of 2009 was RMB37 million (US$5 million), which represented RMB0.18 (US$0.03) basic and diluted earnings per ordinary share and RMB0.35 (US$0.05) basic and diluted earnings per American depositary share ("ADS"). This compares to net income of RMB36 million, which represented RMB0.17 basic and RMB0.16 diluted earnings per ordinary share and RMB0.34 basic and RMB0.32 diluted earnings per ADS for the same period in 2008. The total number of outstanding ordinary shares of the Company as of September 30, 2009 was 210 million. The weighted average number of ADSs for the third quarter of 2009 was 105 million. Each ADS represents two ordinary shares of the Company.
As of September 30, 2009, Nepstar's total cash, cash equivalents and current bank deposits were RMB1,807 million (US$265 million), long-term bank deposits were RMB200 million (US$29 million), held-to-maturity investment securities were RMB400 million (US$59 million) and total shareholders' equity was RMB1,735 million (US$254 million).
Mr. William Dai, the Chief Financial Officer of Nepstar, stated, "We continue to exercise financial discipline on cost control and cash flow management. Our ability to consistently generate strong free cash flow demonstrates that our financial health strengthened throughout the economic recovery, and paves the way for the further expansion of our store network in 2010."
On August 24, 2009, Nepstar declared a special dividend of US$1.50 per ADS, or approximately US$156 million. Around December 1, 2009, the special cash dividend was paid out to shareholders of record as of the close of business on September 25, 2009.
Latest Developments and Business Outlook
In July 2009, Nepstar entered into a definitive agreement with Beijing Ze Run Tang Drugstore, to acquire its five drugstores in Beijing. This acquisition represents Nepstar's first retail presence in Beijing. The five stores have an average store size of 170 square meters, and are located in densely populated residential areas in Beijing. The acquisition was completed and the stores have been transferred to Nepstar by end of November and are serviced by the Company's regional logistics center in Tianjin, where Nepstar has over 100 stores.
In October 2009, Nepstar entered into a definitive agreement with Wenzhou Ren Ren Hao Chain Drugstore Ltd. ("Ren Ren Hao") to acquire the operations of all of its eight drugstores in Wenzhou City. This acquisition represents China Nepstar's first retail presence in Wenzhou, one of the most affluent markets in Zhejiang province in terms of consumption power. The eight Ren Ren Hao drugstores have an average store size of 250 square meters and are located in the city center or in prime locations in nearby major townships. The transaction is expected to be completed by the end of 2009.
In November 2009, Nepstar entered into a strategic cooperation agreement with ATMU (China) Technology Co., Ltd., a subsidiary of ATMU Inc., one of the largest ATM operators in China, to install ATMs in Nepstar stores. This cooperation is not only designed to provide convenience to customers and generate rental revenue for Nepstar, but will also help increase store traffic and accelerate the development of electronic payment services at Nepstar stores. ATMU plans to complete the initial 1,000 ATM installations in Nepstar's existing stores by end of 2010.
Mr. Wade commented, "Our strategy to increase overall revenues includes opening additional stores in selective areas of China, where economic trends are more favorable; establishing presence in lucrative markets through acquisitions; improving product mix; and increasing marketing and co-marketing programs to grow foot traffic. We are delighted to see our efforts to strengthen our product selection and broaden our price range result in positive same store sales growth and increased store traffic, which has continued into October and November."
Mr. Wade continued, "In general, we remain cautiously optimistic about the economic recovery and are pleased to see some positive elements coming together. The Chinese government's implementation of the Essential Drug List has had an adverse effect on many smaller drugstore chains. However, we at Nepstar view healthcare reform as a strategic opportunity to leverage our large retail network. We are also more optimistic on the outlook for acquisitions, as we expect more smaller-sized competitors may look to exit the sector due to increasing margin erosion on Essential Drug List products which may lead to their worsened financial conditions."
Conference Call Information
The Company will host a conference call, to be simultaneously Web cast, on Tuesday, December 1, 2009 at 8:30 a.m. Eastern Standard Time / 9:30 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 through December 11, 2009 at 11:59 p.m. Eastern Standard Time or December 12, 2009 at 12:59 p.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 337391.
About China Nepstar Chain Drugstore Ltd.
China Nepstar Chain Drugstore Ltd. (NYSE: NPD) is China's largest retail drugstore chain based on the number of directly operated stores. As of September 30, 2009, the Company had 2,337 stores across 67 cities, one headquarter distribution center and 12 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$1.00 = RMB6.8262 on September 30, 2009 as set forth in the H.10 weekly statistical release of the Federal Reserve Board. No representation is made that the RMB amounts could have been, or could be, converted into US$ at that rate on September 30, 2009, or at any other certain date. The percentages stated are calculated based on RMB.
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@us.grayling.com
Ivette Almeida
Grayling
Media Relations
Phone: +1-646-284-9455
Email: ivette.almeida@us.grayling.com
Tables follow
China Nepstar Chain Drugstore Ltd.
Unaudited Condensed Consolidated Statements of Operations
(amounts in thousands - except share and per-share data)
Three-month period ended
September 30,
2008 2009 2009
RMB RMB USD
Revenue 612,981 556,179 81,477
Cost of goods sold (315,191) (280,240) (41,053)
Gross profit 297,790 275,939 40,424
Sales, marketing and other
operating expenses (251,758) (213,642) (31,297)
General and administrative
expenses (26,779) (28,231) (4,137)
Income from operations 19,253 34,066 4,990
Interest Income 30,149 16,672 2,443
Dividend income from cost method
investments 150 -- --
Equity in income of an affiliate -- 789 116
Earnings before income tax
expense 49,552 51,527 7,549
Income tax expense (13,394) (14,637) (2,145)
Net Income 36,158 36,890 5,404
Net Income attributable to
non-controlling interests (505) -- --
Net income attributable to China
Nepstar Chain Drugstore Ltd.
shareholders 35,653 36,890 5,404
Basic earnings per ordinary share 0.17 0.18 0.03
Diluted earnings per ordinary share 0.16 0.18 0.03
Diluted earnings per ADS 0.32 0.35 0.05
China Nepstar Chain Drugstore Ltd.
Unaudited Condensed Consolidated Balance Sheets
(amounts in thousands)
As of As of
December 31, September 30,
2008 2009
RMB RMB USD
ASSETS
Current assets
Cash, cash equivalents and
other bank deposits 1,197,884 1,806,693 264,670
Held-to-maturity
investment securities 641,000 400,000 58,598
Accounts receivable, net
of allowance for doubtful
accounts 88,136 65,849 9,647
Prepayments for purchase
of merchandise paid to
related parties 70,306 45,728 6,699
Amounts due from
related parties 7,244 8,162 1,196
Prepaid expenses, deposits
and other current assets 178,354 128,384 18,808
Inventories 373,689 301,131 44,113
Deferred income taxes 15,863 7,540 1,104
Total current assets 2,572,476 2,763,487 404,835
Non-current assets
Long-term bank deposits 200,000 200,000 29,299
Held-to-maturity
investment securities 400,000 -- --
Property and equipment, net 240,396 198,721 29,112
Deposits for purchases of
properties paid to
related parties 2,100 -- --
Rental deposits 28,873 35,996 5,273
Cost method equity
investments 12,638 12,638 1,851
Equity method investments -- 18,005 2,638
Intangible assets, net 2,390 1,134 166
Goodwill 35,177 36,603 5,362
Deferred income taxes 4,723 4,211 617
Other non-current assets -- 10,816 1,585
Total non-current asset 926,297 518,124 75,903
Total Assets 3,498,773 3,281,611 480,738
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities
Accounts payable 267,250 273,506 40,067
Amounts due to related
parties 64,200 12,523 1,835
Accrued expenses and
other payables 123,905 126,209 18,489
Income tax payable 35,344 31,364 4,594
Dividend payable -- 1,072,834 157,164
Total current liabilities 490,699 1,516,436 222,149
Non-current liabilities
Deferred income 14,992 19,568 2,867
Deferred income taxes 10,443 11,047 1,618
Total non-current
liabilities 25,435 30,615 4,485
Total liabilities 516,134 1,547,051 226,634
Shareholders' equity
Share capital 165 166 24
Additional paid-in
capital 2,823,668 1,603,563 234,913
Accumulated other
comprehensive loss (38,009) (36,928) (5,409)
Retained earnings 173,650 167,759 24,576
Total China Nepstar
Chain Drugstore Ltd.
shareholders' equity 2,959,474 1,734,560 254,104
Non-controlling
interests 23,165 -- --
Total shareholders'
equity 2,982,639 1,734,560 254,104
Total liabilities and
shareholders' equity 3,498,773 3,281,611 480,738
CHINA NEPSTAR CHAIN DRUGSTORE LTD.
Unaudited Condensed Consolidated Cash Flows Information
(amounts in thousands)
Three-month period ended
September 30,
2008 2009
RMB RMB USD
Cash flows provided by
operating activities 59,160 93,375 13,679
Cash flows provided by
investing activities 11,373 606,769 88,888
Cash flows (used in)/
provided by financing
activities (72,161) 8,135 1,192
China Nepstar Chain Drugstore Ltd.
Key Financials Presented with Pro forma Comparisons
(amounts in thousands - except ratios)
Three-month ended
September 30,
Pro Forma 2008 2009
RMB RMB
Revenue 514,817 556,179
Gross profit 266,860 275,939
Gross Margin 51.8% 49.6%
Income from operations 17,732 34,066
Operating Margin 3.4% 6.1%
Net income attributable
to ordinary shareholders 35,653 36,890
Net Margin 6.9% 6.6%
Pro Forma
As of December As of September
31, 2008 30, 2009
RMB RMB
Cash, cash equivalents
and other bank deposits 1,190,873 1,806,693
Total held-to-maturity
investment securities 1,041,000 400,000
Long-term bank deposits 200,000 200,000
Total assets 3,383,238 3,281,611
Total liabilities 423,764 1,547,051
Total shareholders' equity 2,959,474 1,734,560
Pro forma financial information is presented to show the accounting
impact of the termination of the JZJ voting rights agreement as if that
had taken place in the beginning of the relevant period.
