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Vita Group Limited shares sink lower on 48% drop in profits

The Vita Group Limited (ASX: VTG) share price has been one of the worst performers in early trade following the release of its half-year results. At the time of writing the retail company’s shares are down 11% to $1.50.

Key takeaways from today’s release are:

  • First-half revenue from continuing operations fell 4% to $329.6 million.
  • Earnings before interest, tax, depreciation, and amortisation slumped 43% to $35 million.
  • Net profit after tax fell 48% to $11.2 million or 7.3 cents per share.
  • Interim fully franked dividend cut 49% to 4.7 cents per share.
  • Outlook: On target to achieve full-year EBITDA guidance of between $38 million and $43 million.

According to the release, revenues fell during the period due to remuneration reductions from Telstra Corporation Ltd (ASX: TLS) for the retail stores it operates on the telco giant’s behalf.

In addition to this, management has blamed softer than expected consumer demand during the first four months of FY 2018 and a longer than usual period of time between the announcement and shipment of new Apple iPhone products.

This resulted in Vita’s key retail information and communications technology (ICT) channel posting a 4% decline in revenue and 38% reduction in EBITDA.

It was, however, a far more positive story in the business ICT channel. Although segment revenues fell 10% due to lower enterprise sales, segment EBITDA increased 8% on the prior corresponding period due to the benefits of scale and its cost savings.

Outside of its core business, Vita Group’s surprise expansion into the non-invasive medical aesthetics market has started positively. Management advised that the Clear Complexions brand it acquired is performing to expectations and is on track to deliver annual revenue of around $10 million and annual EBITDA of more than $1 million in the year post acquisition.

Elsewhere, its accessories brand, Sprout, continued to grow its points of distribution, and its lifestyle brand, SQDAthletica, is building momentum in retail, online and wholesale channels.

As a result, management expects the company to deliver EBITDA in the range of $38 million to $43 million in FY 2018, in line with the guidance it provided to the market last month. Which will mean second-half EBITDA of between $3 million and $8 million.

Should you invest?

Based on today’s result and its subsequent share price decline, I estimate Vita Group’s shares to be changing hands at approximately 19x full-year earnings. I think this is expensive given its current growth profile and sizeable dividend cut, and would suggest investors stay clear of its shares.

Instead, investors might want to consider retail stars such as Lovisa Holdings Ltd (ASX: LOV) or 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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