Why Vita Group Limited shares are going NUTS today

Credit: Olivia Wilson

Shares in Vita Group Limited (ASX: VTG) are up 15% today after the company finally updated the market on its negotiations with Telstra Corporation Ltd (ASX: TLS).

Vita Group stated that as a result of a changing remuneration structure with Telstra, the group would have several Telstra stores added to its network. However, it would also experience compression in its profit margins as a result of a reduction in some incentives that were deemed to be less effective.

Management expects to see higher volumes overall, and stated that the actual impact on earnings is difficult to forecast given that much of Vita’s remuneration is performance-driven. Vita’s total profit margins (Net Profit After Tax as a percentage of revenue) were just 5.5% at the last full-year report. Any reduction to these margins would result in a hefty hit to profit, and would conversely require a big lift in revenues to offset smaller margins. This is concerning because Vita has previously noted that it may only be able to generate revenue growth from its current stores for another couple of years.

Although shares were up 15% today on the news, they began surging at around 2.30pm yesterday, rising from $2.80 to $3.10 before closing and reopening stronger this morning. A similarly suspicious move in Vita Group shares was seen 3 weeks ago, when shares began plunging from $5 and the company was forced to answer a ‘please explain’ letter from the ASX. Vita Group subsequently explained that it was involved in ‘confidential’ negotiations with Telstra over changes to its remuneration.

Given that shares have twice moved significantly in response to specific events – and in advance of those events being released to the market – readers must surely be wondering how confidential the company’s discussions really were.

CEO Maxine Horne’s decision to dispose of $10 million shares at $5 per share at the end of September is looking inspired in hindsight. She is still a very significant shareholder in the company, and her decision may mean nothing. However, her decision to sell was in direct contrast to her public bullishness on Vita’s prospects.

Although Vita looks attractive at today’s prices, it’s certainly burned through a fair amount of investor trust. Readers should bear that in mind before considering a purchase.

HOT OFF THE PRESSES: Motley Fool's #1 Dividend Pick for 2017!

With its shares up 155% in just the last five years, this 'under the radar' consumer favourite is both a hot growth stock AND our expert's #1 dividend pick for 2017. Now we're pulling back the curtain for you... And all you have to do to discover the name, code and a full analysis is click the link below!

Simply click here to receive your copy of our brand-new FREE report, "The Motley Fool's Top Dividend Stock for 2017."

Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.