Business Intelligence on Retailing, Franchising, and Consumerism in China

China Nepstar Chain Drugstore Reports 512.6% Increase In Net Income

China Nepstar Chain Drugstore has announced its unaudited financial results for the third quarter and nine months ended September 30, 2007.

"We are very pleased to report a strong quarter characterized by significant growth in our gross margin and bottom line," said Jiannong Qian, CEO of Nepstar. "We have increased our penetration within existing markets by opening more stores. As a leader in the retail drugstore market in China, we have not only continued to generate solid revenue from each store, but also leveraged our sourcing capabilities to increase profit margins through our private label products and centralized procurement."

Revenue for the third quarter ended September 30, 2007 was RMB484.3 million, representing an increase of 6.6% compared to RMB454.4 million for the third quarter of 2006. Third quarter revenue contribution from prescription drugs was 23.3%, over-the-counter, or OTC, drugs was 34.4%, nutritional supplements was 19.3%, traditional Chinese herbal products was 2.7% and other products was 20.3%.

Same store sales (for stores opened before December 31, 2005) for the third quarter decreased 1.9% over the third quarter in 2006, due to a strategic decision to discontinue certain low margin products in August 2007, as a special initiative to refine our product portfolio and increase sales contribution from higher margin products.

Third quarter gross profit was RMB228.2 million, an increase of 40% over RMB163.0 million for the same period in 2006. Gross margin for the quarter increased to 47.1%, compared with 35.9% for third quarter of 2006. The increase in gross margin was driven largely by changes in product mix, including increased contributions from private label products and the centralization of merchandise procurement.

During the first nine months of 2007, the company opened 376 new stores, 179 of which were opened in the third quarter. As of September 30, 2007, Nepstar had a total of 1,791 stores in operation.

Nepstar also increased its portfolio of private label products to 1,177 as of September 30, 2007. Sales of private label products represented approximately 18.3% of the company's revenue and 28.6% of the gross profit for third quarter; and approximately 17.8% of the revenue and 30.2% of the gross profit for the nine-month period.

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