Nepstar's revenue increases 7.7% to RMB683.2 million in third quarter 2013

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, 2013.

Financial Highlights

For the quarter ended September 30, 2013:

• Same store sales increased by 10.5% compared with the third quarter of 2012
• Revenue grew by 7.7% compared with the third quarter of 2012
• Net loss was RMB4.7 million
• Net cash-flow from operating activities was RMB10.6 million (US$1.7 million), compared to RMB0.05 million in the third quarter of 2012

Mr. Fuxiang Zhang, Chief Executive Officer of Nepstar, commented, "We are pleased to report that our strategy of strong promotional activities and marketing campaigns resulted in continued momentum in revenue growth. During the third quarter, daily store traffic increased by 11 visits and same store sales grew by 10.5% from the same quarter in 2012. Our higher sales garnered attention internally among store staff, as well as externally from our suppliers who have shown their support. We believe that we are well positioned for the recovery of the retail pharmacy industry in China. While this strategy has had a near-term impact on our gross margin, we believe we will make it up through positive contributions to our market share, customer relationships and long term growth prospects."

Third Quarter Results

During the third quarter of 2013, the Company opened 32 new stores and closed 44 stores. As of September 30, 2013, the Company had 2,059 directly operated stores in total.  

Revenue for the third quarter of 2013 increased by 7.7% to RMB683.2 million (US$111.6 million) from RMB634.6 million for the same period in 2012. Same store sales (for the 1,925 stores opened before December 31, 2011 and still operating) for the third quarter of 2013 increased by 10.5% compared with the same period in 2012. The increase in same store sales was primarily due to promotional initiatives aimed at increasing store traffic.

Third quarter revenue contribution by product category was 23.1% from prescription drugs; 38.2% from over-the-counter ("OTC") drugs; 15.0% from nutritional supplements; 3.9% from herbal products; and 19.8% from convenience and other products.

Third quarter gross profit was RMB289.6 million (US$47.3 million), a slight decrease from RMB293.0 million for the same period in 2012. Gross margin in the third quarter of 2013 was 42.4% compared with 46.2% for the same period of 2012. This decrease in gross margin was primarily the result of a more proactive marketing strategy on certain pharmaceutical products, nutritional supplements and convenience and other products.

The Company's portfolio of private label products increased to 2,103 types of products as of September 30, 2013. Sales of private label products represented approximately 24.4% of the Company's revenue and 33.4% of gross profit for the third quarter of 2013.

Sales, marketing and other operating expenses, as a percentage of revenue, in the third quarter of 2013, decreased to 38.3% from 40.1% in the same period of 2012. This decrease was primarily due to growth in same store sales and closure of underperforming stores.  

General and administrative expenses as a percentage of revenue in the third quarter was 5.2%, compared with 5.0% for the same period in 2012. This increase was mainly due to RMB5.7 million (US$0.9 million) penalty imposed by Price Bureau of Yuexiu District in Guangzhou City of Guangdong Province on our subsidiary Guangzhou Nepstar for noncompliance with certain local government-guided pricing policies.

During the third quarter, the company recognized an impairment loss of RMB 1.0 million, which represents the reduction of the carrying amount of the property and equipment of certain underperforming stores.

Loss from operations in the third quarter of 2013 was RMB8.5 million (US$1.4 million), compared with income from operations of RMB4.2 million in the same period in 2012. The loss from operations in the third quarter of 2013 was mainly due to lower gross margin and the above mentioned RMB5.7 million (US$0.9 million) penalty.

Interest income for the third quarter of 2013 was RMB3.9 million (US$0.6 million) compared with RMB3.6 million in the same period in 2012.

Dividend income from cost method investments was RMB3.0 million (US$0.5 million) in the third quarter of 2013, compared with nil in the same period of 2012. On December 28, 2012, the Company completed the sale of its entire 40% equity interests in Yunnan Jianzhijia Chain Drugstore Ltd. for a total cash consideration of approximately RMB 81.5 million. Equity in income of an equity method investee was nil in the third quarter of 2013, compared with RMB0.3 million in the same period in 2012.

Excluding the effect of the above mentioned penalty at RMB5.7 million (US$0.9 million) from loss before income tax expenses, which is not tax deductible, the Company's effective tax rate was 75.3% for the third quarter of 2013.  The Company's income tax expense was RMB 3.1 million (US$0.5 million) for the third quarter of 2013, compared with RMB6.3 million for the same period in 2012. As compared to the PRC statutory tax rate of 25% applicable to our major operating subsidiaries, the difference in the effective income tax rate for the current quarter was primarily due to non-deductible expenses and the relatively high amounts of operating losses from loss-making subsidiaries, for which full valuation allowances were made on their deferred tax assets, as compared to the overall results of the Company.

Net loss for the third quarter of 2013 was RMB4.7 million (US$0.8 million), which represented RMB0.05 (US$0.008) basic and diluted loss per ADS. Net income for the third quarter of 2012 was RMB1.9 million, which represented RMB0.02 basic and diluted earnings per ADS.

Net cash-flow from operating activities in the third quarter of 2013 was RMB10.6 million (US$1.7 million), compared with RMB0.05 million for the same period in 2012.

As of September 30, 2013, the Company's total cash, cash equivalents, short-term and long-term bank deposits were RMB665.3 million (US$108.7 million) and its shareholders' equity was RMB1.0 billion (US$167.3 million), compared with total cash, cash equivalents, bank deposits and restricted cash of RMB664.4 million and shareholders' equity of RMB1.03 billion as of December 31, 2012.

Business Outlook  

"Fourth quarter is important for us as winter is the high season for cold-cough medicines and nutritional supplements. We are working hard to maintain same store sales growth and per store transactions. Our focus remains on optimizing product mix and improving margins," Mr. Zhang concluded.

Conference Call Information

The Company will host a conference call, to be simultaneously webcasted, on Tuesday, November 26, 2013 at 8:00 a.m. Eastern Time / 9:00 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 appointed starting time. A live web cast of the conference call will be available on the Nepstar website at www.nepstar.cn.

A replay of the call will be available shortly after the conclusion of the conference call through December 3, 2013 at 11:59 p.m. Eastern Time. An archived Web cast of the conference call will be available on the Nepstar 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 13572581.