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Vita Group share price crashes lower on Telstra remuneration changes

The Vita Group Limited (ASX: VTG) share price has started the week on a disappointing note and is trading notably lower in morning trade.

At the time of writing the retailer’s shares are down 11% to $1.40.

Why is the Vita Group share price trading lower?

After the market closed on Friday Vita Group released its guidance for the full year and outlined its FY 2020 plan and remuneration changes.

According to the release, Vita Group expects FY 2019 earnings before interest, tax, depreciation and amortisation (EBITDA) to be in the range of $45 million to $46.5 million. This represents growth of 10% to 13% on FY 2018’s result and is reflective of the strong performance in its Retail ICT and Sprout accessory businesses.

Looking ahead, the company revealed changes in its remuneration construct with strategic partner, Telstra Corporation Ltd (ASX: TLS). Vita Group operates a large number of the telco giant’s retail stores.

The release explains that Telstra’s plan to introduce new, simplified mobile plans to the market before the end of June 2019, will necessitate revised remuneration arrangements.

Under the new remuneration arrangements, Vita expects to enjoy higher remuneration attached to the sale of devices, including smartphones, tablets, connected devices, wearables, and non-transactional performance metrics.

However, it expects to see lower remuneration from sales of connections to the Telstra network.

In addition to this, as was previously announced, Vita has agreed to forego some legacy remuneration components, amounting to approximately $12 million to $13 million per annum, effective 1 July 2019.

Management advised that these reductions were agreed in exchange for an extension of its master license tenure (currently to June 30 2024), the introduction of an annual performance-based extension mechanism, and an increase in the number of allowable Vita owned stores in the Telstra retail network to 115.

What will be the overall impact of these changes?

The overall impact on the company’s earnings at this stage is unclear.

The release advises that the net impact on group earnings will be dependent on Vita’s success in selling across the ecosystem of Telstra products and services, as consumers and small businesses transition to the new plans. At this stage it is too early to determine the financial impact, given the new plans are yet to launch.

This uncertainty is likely to be the reason why its shares have come under significant pressure this morning.

However, Vita Group’s chief executive officer, Maxine Horne, remains optimistic on the company’s prospects.

She said: “We have seen many changes to plan construction and channel remuneration, which have been necessary as markets, channels and products evolve. Whilst the FY20 changes are structurally significant, I am confident in the Vita team’s ability to adapt to change. Our team will continue to consult with our customers to understand their needs and provide multi-product solutions. Our product knowledge is exceptional, our customer service second to none, and our Sprout accessories brand provides a great opportunity to create additional value.”

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended 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 Scott Phillips.

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