As of December 31, 2009, Nepstar's total cash, cash equivalents and other bank deposits were RMB666 million (US$98 million), restricted cash was RMB765 million (US$112 million), held-to-maturity investment securities were RMB400 million (US$59 million) and total shareholders' equity was RMB1,778 million (US$260 million). Short-term loans stood at RMB470 million (US$69 million), which were the bank borrowings utilized to pay the special dividend, since some investment securities and fixed deposits had not yet matured. Bank deposits of RMB750 million were pledged to obtain the short-term bank loans and credit facilities. As of the date of this press release, the short-term loans have been repaid and the restriction on the pledge bank deposits has been released. The net cash provided by operating activities during the fourth quarter of 2009 was RMB31 million (US$4.5 million).
Fiscal Year 2009 Financial Results
Total revenues for 2009 was RMB2,218 million (US$325 million) compared to RMB2,397 million for 2008, and RMB2,014 million for 2008 on an adjusted basis.
Same store sales (for stores opened before December 31, 2007) for 2009 increased by 2.6% compared to 2008. Since the second quarter of 2009, Nepstar undertook a series of measures to boost same stores sales, including expanding product offerings, adjusting price ranges, streamlining store operation and enhancing marketing campaigns. As a result, same store sales experienced a 3.8% increase in the third quarter, and a 10.5% increase in the fourth quarter, respectively.
In 2009, revenue contribution from prescription drugs was 23.2%, OTC drugs was 36.9%, nutritional supplements was 20.6%, herbal products was 3.6%, and other products was 15.7%.
In 2009, private label products accounted for 29.0% of total revenue and 43.3% of gross profit, respectively. This compares to 28.4% of revenue contribution and 40.6% of gross profit contribution by private label products in 2008 on an adjusted basis.
Gross profit was RMB1.1 billion (US$157 million) for 2009 compared to RMB1.1 billion for 2008 and RMB1.0 billion for 2008 on an adjusted basis. In 2009, gross margin was 48.4% compared to 47.5% in 2008, and 50.8% in 2008 on an adjusted basis. The decrease in gross margin for 2009 compared to 2008 on an adjusted basis was mainly due to the expansion of the breadth of product offerings and more proactive marketing approach to maintain competitiveness.
Income from operations was RMB110 million (US$16 million) for 2009 compared to RMB141 million for 2008, and RMB128 million for 2008 on an adjusted basis. Total operating expenses accounted for 43.5% of total revenue in 2009 as compared to 41.6% in 2008, and 44.4% in 2008 on an adjusted basis. This improvement was largely due to stringent cost control measurement, store efficiency enhancement, and closure of some non-performing stores. As a result, operating margin was improved from 2.6% in the first quarter of 2009, to 4.1% in the second quarter, 6.1% in the third quarter, and 6.7% in the fourth quarter.
Net income attributable to Nepstar's ordinary shareholders was RMB140 million (US$21 million) for 2009 compared to RMB193 million for 2008. The Company reported RMB1.34 (US$0.20) basic earnings per ADS, and RMB1.32 (US$0.20) diluted earnings per ADS for 2009. This compares to RMB1.80 basic earnings per ADS and RMB1.76 diluted earnings per ADS for 2008. In comparison with 2008, Nepstar's lower net income was mainly due to lower interest income, which was attributable 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 (US$36 million) in May 2009 and special dividend payment of approximately RMB1,034 million (US$151 million) in the fourth quarter of 2009.
On March 16, 2009, Nepstar declared a cash dividend of US$0.35 per ADS, or approximately RMB248 million. The cash dividend was paid in May 2009, to shareholders of record as of the close of business on April 16, 2009.
On August 24, 2009, Nepstar declared a special dividend of US$1.50 per ADS. In November and December 2009, approximately RMB1,034 million (US$151 million) was paid out to shareholders of record as of the close of business on September 25, 2009.
On March 2, 2010, the three independent directors of the Company voluntarily forfeited options to purchase an aggregate of 150,000 ordinary shares of the Company at an exercise price of US$8.10 per ordinary share (US$16.2 per ADS), which were granted in November 2007, and waived the right to certain payments from the Company, which provided for a minimum return from the exercise of such options. In exchange, the Company granted the independent directors an aggregate of 150,000 restricted ordinary shares, which vested immediately. In addition, 50,000 restricted ordinary shares of the Company subject to a vesting schedule were granted to an executive of the Company. The exchange and grants were conducted to provide additional incentive and retention value and was approved by the board of directors of the Company and its compensation committee.
Latest Developments and Business Outlook
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 was completed in February 2010 with the eight stores transferred to Nepstar.
In December 2009, Nepstar entered into a definitive agreement with Beijing Xiang Yun Kang Drugstore, to acquire all of its six drugstores in Beijing. This acquisition will be Nepstar's second acquisition in Beijing. The six drugstores are all located in densely populated residential areas in Beijing. The transaction was completed in February 2010 with the six stores transferred to Nepstar.
Mr. Wade concluded, "In 2010, we will continue to focus on executing our strategy of improving store efficiencies and enhancing product offerings. Our close attention to same store sales, operating margin and free cash flow generation remains unchanged. We will be more active in opening and acquiring stores in areas where economic trends are favorable. With more smaller-sized competitors struggling with margin erosion as a result of healthcare reform in China, the consolidation of the fragmented drugstore industry is bound to accelerate. We believe Nepstar is well-positioned to capture opportunities brought by the evolving competition landscape."
SOURCE China Nepstar Chain Drugstore Ltd.