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Vita Group Limited shares sink 12% lower on trading update

Unfortunately for its long-suffering shareholders, it has been another day of declines for the Vita Group Limited (ASX: VTG) share price.

At the time of writing the Telstra Corporation Ltd (ASX: TLS) retail store operator’s shares are down 12% to $1.38.

Why are its shares in the red today?

This morning Vita held its annual general meeting and provided the market with a trading update and its full-year earnings guidance.

According to the release, the company expects the remuneration impacts from its negotiations with Telstra to cause an annual impact of $25 million.

While the company does aim to offset this with a $5 million cost reduction program, continued performance optimisation, increased retail information and communication technology (ICT) store numbers, and an improved business ICT channel, first-half EBITDA is forecast to come in between $16 million and $18 million.

By comparison, Vita delivered first-half EBITDA of $35 million in FY 2017.

For the full-year management expects a slight improvement in the second-half will lead to EBITDA of between $36 million and $43 million in FY 2018.

This will be a decline of between 34% and 43% year-on-year.

Should you buy the dip?

While Vita’s shares do look cheap, I would caution against an investment at this stage as things could yet get worse before they get better.

Furthermore, although the company is trying to diversify its business away from being reliant on Telstra, only time will tell whether this move is a success.

As such, I would suggest investors consider other retailers such as Premier Investments Limited (ASX: PMV) and Super Retail Group Ltd (ASX: SUL) instead.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Premier Investments Limited, Super Retail Group Limited, and Telstra Limited. 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.

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