Nepstar’s first quarter revenue increases to RMB627.4 million

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 first quarter ended March 31, 2013.

Financial Highlights

For the quarter ended March 31, 2013:

• Same store sales increased by 6.1% compared with the first quarter of 2012
• Revenue increased to RMB627.4 million (US$101.0 million) from RMB625.8 million in the first quarter of 2012
• Net income increased slightly to RMB7.1million (US$1.1 million) from RMB7.0 million in the first quarter of 2012
• Basic and diluted earnings per American depositary share ("ADS") were RMB0.07 (US$0.01), the same as in the first quarter of 2012

"We are pleased to see continuing same store sales growth in the first quarter of 2013, compared with the same period of 2012," Mr. Fuxiang Zhang, Chief Executive Officer, commented. "Our focus on increasing store efficiencies and maximizing customer transactions per visit, enabled the Company to maintain top line growth momentum, even given a lower store count. In the current competitive market environment, we strive to broaden and optimize our product portfolio. We believe that our dedication to product line development and optimization has provided a solid foundation for the company to stabilize its gross margins over time."

First Quarter Results

During the first quarter of 2013, the Company opened 25 new stores and closed 63 stores. As of March 31, 2013, the Company had 2,094 directly operated stores in total.  

Revenue for the first quarter of 2013 increased by 0.2% to RMB627.4 million (US$101.0 million) from RMB625.8 million for the same period in 2012. Same store sales (for the 2,015 stores opened before December 31, 2011 and which were still operating) for the first quarter of 2013, increased by 6.1% compared with the same period in 2012. The increase in same store sales was primarily due to promotional initiatives aimed at increasing transactions per store.

First quarter revenue analysed by product group comprised 22.1% by sales of prescription drugs; 40.0% by over-the-counter ("OTC") drugs; 14.9% by nutritional supplements; 4.1% by herbal products; and 18.9% from convenience and other products.

First quarter gross profit was RMB290.9 million (US$46.8 million), which was slightly decreased from RMB291.6 million in the same period of 2012. Gross margins in the first quarter of 2013 were 46.4%, compared with 46.6% in the same period of 2012. The small year-over-year decrease in gross margin was mainly the result of mandatory price cuts on certain pharmaceuticals imposed by the Chinese government together with changes in product mix, as the Company introduced more convenience products with lower gross margins.

The Company's portfolio of private label products extended to 2,024 types of products as of March 31, 2013. Sales of private label products represented approximately 24.5% of the Company revenue and 33.9% of the gross profit for the first quarter of 2013.

Sales, marketing and other operating expenses, as a percentage of revenue, in the first quarter of 2013 decreased to 40.2% from 40.4% in the same period of 2012. The year-over-year decrease was primarily due to the growth in same store sales and closure of underperforming stores.  

General and administrative expenses, as a percentage of revenue, in the first quarter of 2013 was 4.4%, compared with 4.8% for the same period of 2012. The decrease was mainly due to the continued implementation of the Company's overall cost management measures.

Income from operations in the first quarter of 2013 increased by 30.3% to RMB11.3 million (US$1.8 million) from RMB8.7 million in the same period of 2012.

Interest income for the first quarter of 2013 was RMB4.1 million (US$0.7 million), compared with RMB5.4 million in the same period of 2012. Interest income decreased as a result of reduced cash balances following the distribution of a special dividend in the second quarter of 2012.

Dividend income from cost method investments was RMB1.8 million (US$0.3 million) in the first quarter of 2013, compared with RMB1.4 million in the same period of 2012. Equity in income of an equity method investee was nil in the first quarter of 2013, compared with the income of RMB0.7 million in the same period of 2012. On December 28, 2012, the Company completed the sales of its entire 40% equity interests in Yunnan Jianzhijia Chain Drugstore Ltd. for a total cash consideration of approximately RMB 81.5 million.

The Company's effective tax rate was 58.6% for the first quarter of 2013, compared with 56.8% for the same period in 2012. The higher effective tax rate for the first quarter of 2013 was caused by non-deductible expenses and the effect of operating losses from loss-making subsidiaries, for which full valuation allowances were made on their deferred tax assets.

Net income in the first quarter of 2013 was RMB 7.1 million (US$1.1 million), which represented RMB0.07 (US$0.01) basic and diluted earnings per ADS. Net income in the first quarter of 2012 was RMB7.0 million, which also represented RMB0.07 basic and diluted earnings per ADS.

In the first quarter of 2013, net cash-flows from operating activities were RMB6.9 million (US$1.1 million), compared with RMB0.9 million in the same period of 2012.

As of March 31, 2013, the Company's total cash, cash equivalents, bank deposits and restricted cash were RMB662.1 million (US$106.6 million) and its shareholders' equity was RMB1.03 billion (US$166.3 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  

"The ongoing avian flu epidemic in the second quarter of 2013 has clearly caused more visits of customers to the Company drugstores for preventive medications. Fever reducing and detoxicating drugs in our pharmaceutical category contributed to be the strong growth category in same store sales, in second quarter-to-date as compared with the same period in 2012," Mr. Zhang remarked. "We continue to execute our strategy of focusing on store productivity and cost control."