Telstra store operator Vita Group Limited (ASX: VTG) updated the market yesterday on changes to its agreement with Telstra Corporation Ltd (ASX: TLS). While the certainty added by the update was welcome, Vita’s announcement was one of the rare cases where the negotiations were everything the market feared, and more.
As a result, Vita will see its remuneration cut severely over the next 3 years. From July 1 2017, Vita’s remuneration will be cut by 10%. It will be reduced by a further 10% at the start of financial year 2019 (i.e. July 1, 2018) and another 10% in financial year 2020.
It’s unclear exactly what the impact will be on Vita Group’s revenue and bottom line, but a 30% cut in remuneration over the next 2.5 years suggests that it is going to really hurt. Markets have already factored in a mighty haircut to profits, with the 30% plunge in shares yesterday pricing the business at just 4 times last year’s earnings.
It’s hard to quantify a possible impact on Vita’s profits since the group’s costs (e.g. with performance-based staff remuneration) are variable. However, Vita’s biggest overall expense is by far its employees, and the changes to Telstra remuneration suggest that staff will feel the impact.
Even putting aside the issue of Vita’s share price and earnings, I’m curious about what might happen to the company’s culture and motivation because of the changes. If Vita’s sales force is reduced in size and/or the rewards for being a high performer are reduced, it’s not hard to see morale taking a dive and staff leaving for greener pastures.
This is a concern because, outside of the Telstra-branded store network, Vita’s major assets are its people and its corporate culture. Having said that, there are few barriers of entry to that type of sales role, and there is usually a steady stream of job-seekers from which to train more.
Vita Group could be cheap, but I would suggest doing some in-depth research to measure the likely changes to the group’s revenues, costs, and assets (the people) before considering an investment.
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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.