Vita Group halts store expansion amid Telstra negotiations

Vita Group halts store expansion amid Telstra negotiations

Follows remuneration reductions agreed to by Telstra and Vita Group between December and February

Vita Group (ASX:VTG) has halted all plans to expand the number of Telstra stores in its network while it negotiates with Telstra over remuneration and commercial terms.

The company, which owns and operates over 100 Telstra-licensed retail outlets around the country, announced late last year that it was in discussions with Telstra over commercial terms.

The remuneration reductions agreed to by Telstra and Vita Group between December and February were part of a response to margin pressures faced by the telco in a “very” competitive mobility market, as well as the ongoing rollout of the National Broadband Network (NBN), the company said.

“Those conditions continue to impact Telstra and the market generally, as we head into FY18 and beyond, and have the potential to impact remuneration in the future,” the company told shareholders on 11 May.

Vita Group said that, while it continues to work with Telstra on remuneration and other commercial terms to find “mutually acceptable ways of dealing with the challenges that lie ahead,” it has suspended any plans to expand the number of stores in its network.

This is a backflip from the company's stance in February, when it announced it would acquire five additional Telstra stores, bringing its total to 107.

The move comes as Telstra works to restructure its company owned and licensed Telstra-branded stores into geographic clusters – a development of which Vita Group CEO, Maxine Horne, said the company was supportive.

“An added advantage is the lower cost that comes from clustering,” she said. “Vita is already well-positioned in this area, as it adopted this strategy a number of years ago.”

Vita Group said it expects to retain a sizeable portion of the network, of which it currently owns and runs 107 stores, with a presence in 35 of the 48 Telstra-determined geographic clusters.

Yet Horne warned that Vita Group will look to ensure that the interests of its stakeholders, including team members and shareholders, are taken into account, as it works to assist Telstra with its strategy going forward.

In its outlook, released in February, along with its financial report for the six months ending December 2016, the company said that, subsequent to agreeing to changes in its commercial terms with Telstra, there would likely be some “softening” of profitability on a per-connection basis in the second half of the year.

At the time, Vita Group told shareholders that it would further increase its retail presence with the acquisition of five Telstra stores which, in the short term, was expected to take its tally of Telstra-licensed stores to 107.

“Further optimisation of the portfolio is expected, with acquisitions, divestments and closures likely,” the company said in a statement at the time.

Telstra announced propose remuneration changes to its channels on 28 October last year, which unfavourably impacted Vita group’s share price.

Horne subsequently moved to reassure shareholders, stating in late November hat such changes occur frequently.

“They can be material in nature and likewise can sometimes be immaterial,” she said during an investor call on 28 November 2016.

“Remuneration has to change to reflect the changing economic conditions and product life cycle changed within our industry, and it has been changing over the life of our re-year partnership with Telstra.

“Some changes impact favourably, others adversely,” she said.

While the nature of the changes to the remuneration structure remains confidential, Horne indicated that they would result in greater incentives to encourage up-sell and cross-sell of products across the portfolio.

The company’s share price stood at $1.595 at the time of writing.

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