China Jo-Jo Drugstores, Inc.

For fiscal 2014 second quarter, revenue decreased 36.8% year over year to $16.9 million from $26.7 million. Gross profit decreased 13.8% to $2.9 million, while gross margin improved to 17.8% from 12.5%. Operating loss was $0.5 million versus operating income of $9,000 a year ago, and net loss was $1.0 million; the company also reported a separate net loss of $0.5 million in Dr. Liu’s remarks, before taking into account $1.3 million of marketing practice related to the 10-year anniversary. Online pharmacy sales rose 85.6% to $1.6 million. For guidance, management said sales and marketing expenses are expected to be lower in the third quarter of fiscal 2014, and it expects to continue opening clinics next to drugstores, reducing G&A and financing expenses, and focusing on more profitable wholesale customers.

Dr. Liu’s message was that the business is shifting toward higher-quality growth rather than chasing sales volume. He highlighted store closures as a reason for slightly lower drugstore sales, but said same-store sales grew and the company is adding clinics and doctors to improve customer service and drive traffic. He also framed China’s healthcare reform and the industry outlook as positive and said he believes market conditions will improve later in the year and that the company can grow faster over the next three years.

Frank Zhao said the quarter’s revenue decline was driven primarily by lower wholesale sales, while gross margin improved because wholesale profit margin increased. He noted retail gross margin averaged 23.0% and wholesale gross margin averaged 10.6%, and said online pharmacy sales increased to $1.6 million from $0.9 million. He also pointed to higher sales and marketing expense from the anniversary campaign, a $0.8 million reduction in G&A largely tied to a lower allowance for advances to suppliers, and ended the quarter with $6.3 million of cash, $46.8 million in current assets, and $32.3 million in current liabilities.

There were no analyst questions on the call. Management did, however, address investor concerns preemptively by explaining that the company is intentionally reducing low-margin wholesale volume in favor of profitability, even if that affects first-tier distributor status. They also said the 10-year anniversary marketing spend was temporary and expected sales and marketing expenses to come down in the third quarter.