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Why the Vita Group Limited share price rocketed higher today

Much to the relief of its long-suffering shareholders the Vita Group Limited (ASX: VTG) share price has made a notable jump higher in morning trade.

At the time of writing the shares of the operator of Telstra Corporation Ltd (ASX: TLS) retail stores are up 10% to $1.76.

Why are Vita Group’s shares higher?

While Vita Group has gained a reputation for issuing profit downgrades in recent times, on this occasion the company has come out with a surprise upgrade to its guidance.

According to today’s release, the company is expected to deliver earnings before interest, tax, depreciation, and amortisation (EBITDA) of approximately $20 million for the six months to 31 December 2017.

This exceeds the guidance given in October EBITDA in the range $16 million to $18 million. It is, however, still a sharp decline from first-half EBITDA of $35 million in FY 2017.

Management advised that this better-than-expected performance is the result of its rigorous focus on cost control and strong Christmas trading thanks to the earlier than expected relaxation on allocations of iPhone 8 and iPhone X inventory.

In light of this improved performance, management has shifted its FY 2018 guidance slightly. Instead of EBITDA between $36 million and $43 million, management has narrowed this to the range of $38 million to $43 million.

Should you invest?

Although this guidance upgrade is a pleasant surprise, I still wouldn’t be in a rush to buy Vita Group’s shares despite how cheap they look.

Vita Group has been given a big boost from the iPhone 8 and iPhone X release. But this is a one-off and is unlikely to be replicated next year, possibly leading to another decline in earnings.

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

As a result, I would skip Vita Group and consider retail stars such as Lovisa Holdings Ltd (ASX: LOV) and Premier Investments Limited (ASX: PMV).

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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 and has recommended Premier Investments 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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