Parsing China Nepstar's Q2 FY2014 Results

Aug.31.14 | About: China Nepstar (NPD)

Originally published on Thursday, 28 August 2014

China Nepstar (NPD, profile) released Q2 FY2014 earnings results that included continued top-line growth (revenue +7% YoY, +1% QoQ), driven by another quarter of strong same store sales (+6% YoY). Despite improvements on the top-line and comparable store sales, the company was still in the process of rationalizing its store network, and recognized impairment losses during the quarter which negatively affected operating margins.

Although the Q2 loss may have been contrary to what investors were expecting, there were signs that management's efforts to shift the product mix toward profitability and improve store-level performance were making progress. Along with strong comp sales in the quarter, average sales per store increased to 335,000 RMB, representing an increase of about 8% YoY. The product mix showed signs of improvement with non-drug sales rebounding to over 37% of sales, an improvement vs. levels seen in Q1. In prepared remarks, management noted that other initiatives to control costs included streamlining managerial personnel and trying to boost internal efficiency were underway. On balance, although the company recorded another quarter of net losses, it was making headway despite the macro headwinds.

Recent Quarterly Performance FY2014
(000) RMB, Except Amounts Per Share Q2 Q3 Q4 Q1 Q2
Revenue 638,758 683,156 749,829 678,281 686,553
Gross profit 280,758 289,637 316,989 278,377 292,947
Operating profit -1,039 -8,460 21,203 -28,761 -11,477
Net income -3,905 -4,657 13,280 -18,189 -15,895
Earnings per share (GAAP, diluted, per ADS) -0.04 -0.05 0.13 -0.18 -0.16
Comparison YoY
Revenue 3% 8% 12% 8% 7%
Gross profit -2% -1% 3% -4% 4%
Operating profit n.a. n.a. -30% n.a. n.a.
Net income n.a. n.a. -83% n.a. n.a.
Earnings per share n.a. n.a. -83% n.a. n.a.
Comparison QoQ
Revenue 2% 7% 10% -10% 1%
Gross profit -3% 3% 9% -12% 5%
Operating profit n.a. n.a. n.a. n.a. n.a.
Net income n.a. n.a. n.a. n.a. n.a.
Earnings per share n.a. n.a. n.a. n.a. n.a.
Margin analysis
GPM 44% 42% 42% 41% 43%
OPM 0% -1% 3% -4% -2%
NPM -1% -1% 2% -3% -2%
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The Q2 balance sheet included about 229 million RMB of highly liquid cash assets (cash and cash equivalents, short-term bank time deposits), down from 322 million RMB in Q1.

Operating cash flow for Q2 was a net outflow of 79 million RMB, vs. an outflow of about 23 million RMB in Q1, and an operating cash inflow of about 15 million RMB in Q2 FY2013. Although the company did reduce working capital investments by approximately 24 million RMB, operating losses during the quarter contributed to the operating cash outflow during the quarter.

Operating Metrics

In addition to improved comparable store sales, management noted that the average transaction size increased by about +14.5% YoY.

The company opened 31 stores during the quarter and closed 40, for a net increase of 9 stores during the quarter, and reported 2,048 locations in operation.

Sales mix by category FY2014
Pct. Of Total Sales Q2 Q3 Q4 Q1 Q2
Prescription drugs 22.3% 23.1% 21.8% 22.3% 23.9%
OTC drugs 38.2% 38.2% 40.5% 40.3% 39.0%
Nutritional supplements 14.8% 15.0% 13.5% 14.8% 14.8%
Herbal products 4.0% 3.9% 4.2% 4.5% 3.5%
Other 20.7% 19.8% 20.0% 17.1% 18.8%
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Financial Performance

China Nepstar Income Statement FY2014
(000) RMB Q2 Q3 Q4 Q1 Q2
Revenue 638,758 683,156 749,829 678,281 686,553
YoY 3% 8% 12% 8% 7%
Cost of good sold -358,000 -393,519 -432,840 -399,904 -393,606
Gross profit 280,758 289,637 316,989 278,377 292,947
YoY -2% -1% 3% -4% 4%
Gross profit margin 44% 42% 42% 41% 43%
Operating expenses
Sales, marketing, other -248,719 -261,485 -264,509 -270,760 -267,539
General and administrative -29,698 -35,565 -28,721 -36,378 -31,703
Impairment losses -3,380 -1,047 -2,556 0 -5,182
Operating profit -1,039 -8,460 21,203 -28,761 -11,477
YoY n.a. n.a. -30% n.a. n.a.
Operating profit margin 0% -1% 3% -4% -2%
Interest income 4,218 3,891 3,492 2,529 1,863
Dividend income from cost method investments 436 2,999 0 4,932 920
Pretax income 3,615 -1,570 24,695 -21,300 -8,694
Pretax margin 1% 0% 3% -3% -1%
Tax expense -7,520 -3,087 -11,415 3,111 -7,201
Net income -3,905 -4,657 13,280 -18,189 -15,895
YoY n.a. n.a. -83% n.a. n.a.
Net profit margin -1% -1% 2% -3% -2%
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Disclosure: None.