Activist Lays Out Six Recommendations to Turnaround China Nepstar Chain Drugstore Ltd (NPD)

Heng Ren Investments LP, which dubs itself a friendly activist, has laid out a host of recommendations to China Nepstar Chain Drugstore Ltd.'s (NYSE: NPD) Board of Directors to turnaround the company's dismal performance.

With shares of the leading Chinese drug store chain down 91% since its 2007 IPO, Heng Ren's Managing Partner Peter Halesworth said, "On behalf of all shareholders, we ask the management and Board of Directors of China Nepstar to perform a strategic review and implement our recommendations to end this downward spiral."

Specifically, in a letter to the Board, Heng Ren has laid out six recommendations to turn around the company:

1) Accelerate Store Closings – A 10% reduction in stores in 2013 would have increased operating margin to 5.7% (vs. 0.9% actually reported in 2013), with earnings per share (EPS) of $0.08 (vs. $0.01 reported in 2013).

2) Reduce Staffing Levels – A 10% reduction in pharmacists would have increased operating margin to 4.3% (vs. 0.9%), with EPS of $0.03 (vs. $0.01).

3) Combine Store Closings and Staff Cuts – A 10% reduction in stores, combined with a 10% reduction in pharmacists, would have increased operating margin to 9.2% (vs. 0.9%), and EPS of $0.11 (vs. $0.01 actual).

4) Revive Loyalty Program – The average number of active loyalty members is approximately 2,400 per store vs. an average of 8,100 at major US drug store chains (2013). While Nepstar had 12.3 million total members, only 4.9 million were active (2013). Although drug stores of U.S. chains are much larger, should all of Nepstar’s members become active, it would average 5,900 active loyalty members per store, bringing it to the level of the U.S.’s Rite Aid Corp. (NYSE: RAD).

5) Increase Private-Label Sales – Typically drug store chains attempt to increase their sales mix of private-label brands to improve profit margins. For Nepstar private-label product gross margins in 2013 were 59% vs. its 44% total gross margin. However, its percentage of private-label sales dropped. This deserves deeper analysis and corrective action to reverse this negative trend.

6) Expand Online Sales - Nepstar has made a promising start in online sales. It immediately needs to be expanded and improved. Back office systems to electronically coordinate the filling of online drug prescription orders need to be readied as soon as possible. This will enable Nepstar to remain a leader in offline and online prescription drug sales if, and when, online prescription drug sales are permitted in China.

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