Dixon Chen - Investor Relations, Grayling
Simin Zhang - Chairman
Fuxiang Zhang - Chief Executive Officer
Zixin Shao - Chief Financial Officer
Yolanda Hu - Morgan Stanley
Serena Shao - Bank of America/Merrill Lynch
China Nepstar Chain Drugstore Ltd. (NPD) Q1 2013 Earnings Conference Call May 28, 2013 8:00 AM ET
Greetings, and welcome to the China Nepstar First Quarter 2013 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Dixon Chen with Grayling. Thank you Mr. Chen, you may begin.
Thank you. If you have not received a copy of Nepstar’s first quarter 2013 earnings press release, it is currently available on the company’s website at www.nepstar.cn. A presentation to accompany today’s call and live webcast is also available on the website under the Investor Relations section.
Before we start, I would like to remind you that certain statements are not of historical facts made during the course of this conference call about future events, financial results constitute forward-looking statements that are made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. You should note that the company’s actual results may differ materially from those projected in these statements due to variety of factors affecting the business. Forward-looking statements are subject to risks and uncertainties. Discussions of factors that may affect future results are contained in our filings with the Securities and Exchange Commission. We undertake no obligation to correct or update any forward-looking statements provided as a result of new information, future events, or even changes in expectations.
Joining us on today’s call are Mr. Simin Zhang, Chairman of the Board, Mr. Fuxiang Zhang, Chief Executive Officer and Mr. Zixin Shao, Chief Financial Officer. I will be your translator during the question-and-answer session. We will be translating question and answers and ask your patience at that time.
With that, I would like to turn the call over to Mr. Shao. Please go ahead, Mr Shao.
Thank you. Good morning and good evening to all of you. We are very pleased to see continued same store sales growth in the first quarter of 2013 compared with the same period over 2012. 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.
I will now review results for the first quarter. During the first quarter we opened 25 new stores and closed 63 stores. The company had 2,094 directly operated stores in total.
Revenue for the first quarter increased to RMB627.4 million or US$101 million from RMB625.8 million. Same store sales for the 2,015 stores opened before December 31, 2011, for the first quarter increased by 6.1%. The increase in same store sales was primarily due to promotional initiatives aimed at increasing transactions per store.
First quarter revenue contributed by product category was 22.1% from [prescription drugs], 40% from over-the-counter drugs, 14.9% from nutritional supplements, 4.1% from herbal products and 18.9% from convenience and other products.
First quarter gross profit was RMB290.9 million or US$46.8 million, a slightly decrease from RMB291.6 million. Gross margin was 46.4%, compared with 46.6% in the same period of 2012. The modest year-over-year decrease in gross margin was mainly the result of mandatory price cuts on certain pharmaceuticals imposed by the Chinese government and changes in product mix, as we introduced more convenience products with lower gross margins.
Our portfolio of private label products included 2,024 types of products as of March 31. Sales of private label products represented approximately 24.5% of revenue and 33.9% of gross profit for the first quarter.
Sales, marketing and other operating expenses, as a percentage of revenue decreased to 40.2% from 40.4% in the same period of 2012. The 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 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 increased by 30.3% to RMB11.3 million or US$1.8 million from RMB8.7 million in the same period of 2012. Interest income was RMB4.1 million or 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 after distribution of a special dividend in the second quarter of 2012.
Dividend income from cost method investments was RMB1.8 million or US$0.3 million, compared with RMB1.4 million in the same period of 2012. Equity 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, we completed the sales of our 40% equity interests in Yunnan Jianzhijia Chain Drugstore Ltd. for a total cash consideration of approximately RMB81.48 million.
Our effective tax rate was 58.6% for the first quarter, compared with 56.8% for the same period last year. The higher effective tax rate was driven by non-deductible expenses and the relatively high proportion of operating losses from loss-making subsidiaries, for which full valuation allowances were made on their deferred tax assets as compared to their net operating results.
Net income in the first quarter was RMB7.1 million or US$1.1 million, which represented RMB0.07 or US$0.01 basic and diluted earnings per ADS. Net income in the first quarter of 2012 was RMB7 million, which also represented RMB0.07 basic and diluted earnings per ADS.
First quarter, net cash-flows from operating activities were RMB6.9 million or US$1.1 million, compared with RMB0.9 million in the same period of 2012.
Our total cash, cash equivalents, bank deposits and restricted cash were RMB662.1 million or US$106.6 million and its shareholders' equity was RMB1.03 billion or 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.
As we progress into the second quarter, we can share the same-store sales will remain on track for continuing increase. The avian flu epidemic has clearly propelled more visits of customers to our drugstores for preventive purpose. Fever reducing and detoxicating drugs in our pharmaceutical category continue to be the strong growth category in same store sales.
We remain cautious optimistic about the rest of 2013. We continue to execute our strategy of focusing on store productivity and cost control. We believe these efforts will help us remain competitive in the unpredictable environment of the ongoing healthcare reform.
With that, our CEO, Mr. Zhang and I will address your questions. Operator, please begin the Q&A. Thank you.
Thank you. (Operator Instructions) Our first question comes from the line of Bin Li with Morgan Stanley. Please proceed with your question.
Hi, this Yolanda Hu on behalf of Bin. Since you've taken my question, as you mentioned in the press release that there are [more] store customers in the second quarter to-date, so how should we look at 2Q topline growth, both year-over-year and sequentially? My second question is how many stores do you plan to close in the rest of 2013? Thank you.
So the store visits as we stated in our press release, we see some increase in store visits. We believe this patent will continue going into the second quarter. So we see some year-over-year increase as well as quarter-over-quarter increase.
To your second question regarding store closing, we are looking at approximately 200 stores for 2013 will be closed, but however we will maintain total store counts above 2,000. So after store closing and reopening we still keep about 2,000 above 2,000 stores in total.
Okay. Thank you.
Thank you. Our next question comes from the line of Serena Shao with Bank of America/Merrill Lynch. Please proceed with your question.
Serena Shao - Bank of America/Merrill Lynch
Hi. Good evening. So my question here is full of the store closing strategy and also your margins. So it seems like you have very stable margin in the first quarter and do you think it was -- the store closing strategy will further improve your margin in the following quarters and now when do you think it's the turning point that would be more positive. Thank you so much.
As we continue to streamline our operation, we see a increase in our store productivity that's the very encouraging sign. There are some factors that we will like to let you know, the gross margin is general market pressure, we see some headwind on the gross margin and also there are some uncertainties in -- regarding the labor cost as well as the rental cost.
So we still -- we believe we still need some time to build up our revenue stream to reach a certain level to create a significant earning change. So that being said, as what we are seeing taking away and see an approach to see how this structure change and help us on the margin.
Serena Shao - Bank of America/Merrill Lynch
Okay. Thank you so much.
Thank you. Mr. Chen, there are no further questions at this time. I would like to turn the floor back over to you for closing comments.
Thank you for attending China Nepstar's first quarter 2013 earnings conference call. We look forward to speaking with you. Thank you. Have a good day.
Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.
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