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Communications giant Telstra (ASX: TLS) has pulled the rug from under its biggest store operator Vita Group (ASX: VTG) after calling an end to its 26-year partnership with the Brisbane company when it expires in 2025.
The move casts a cloud over Vita Group's future as Telstra plans to convert to purely a corporate store model.
Shares in Vita Group slumped more than 31 per cent in morning trading, although they still remained above the COVID-led low of 55 cents, reached in March last year.
Vita Group operates more than 100 Telstra retail stores and Telstra Business Technology Centres, and they account for the bulk of the company's revenue.
In FY20, group revenue surged to a record $773.1 million, with $751.9 million of that attributed to the company's information and communications technology (ICT) division. Vita's mobile phone accessories brand Sprout added to growth and profitability in the division.
In recent years, Vita Group has moved to diversify its business profile with the roll-out of Artisan Aesthetic Clinics, which provides skin health and wellness services.
While Vita Group has 19 Artisan Aesthetics clinics on the east coast of Australia, they are yet to return a pre-tax profit for the group.
However, CEO Maxine Horne has indicated the profits from the existing Telstra business will help the company pursue its diversification strategy over the next four years.
"Vita is strategically prepared for a range of outcomes and has been investing in the very attractive category of skin health and wellness for some time, thus creating a new growth opportunity for the group," Horne says in a statement to the ASX.
"We have a 26-year partnership with Telstra and are committed to working professionally with them to ensure the best possible outcome for all parties.
"In addition to discussions with Telstra regarding transition arrangements, the remaining period of the Telstra licence arrangement will provide cashflow as we continue to grow the Artisan brand."
Business News Australia has contacted Vita Group seeking further comment from the company.
In line with the conditions of the master agreement with Telstra, Vita Group's existing dealer arrangement with Telstra will end on 30 June 2025.
Telstra and Vita group have yet to confirm the details of the transition and whether this will result in any job losses. Vita says is "intends to work collaboratively with Telstra to finalise these arrangements as soon as possible".
"Vita and Telstra will commence discussions to ensure that the transition arrangements are suitable for both parties, shareholders and team members," it says.
"In the meantime, Vita will continue to manage its Telstra store network providing the usual level of exceptional service to customers, whilst continuing to execute its strategy to expand the Artisan skin health and wellness business."
Telstra's decision poses a massive challenge for Vita Group after Horne last year pinned the company's future growth on the ongoing relationship with the telco giant.
"Our role as strategic partner to Telstra stays at the forefront of our strategy, as we play an integral role in the delivery of the Telstra branded experience," Horne said in the FY20 annual report.
"This includes building a connected future for our customers as the industry shifts towards an omnichannel ecosystem and the role of retail further evolves."
Telstra struck a preliminary blow three years ago with a series of cuts to commissions paid to its retail store operators. Those cuts continued into FY19 and FY20.
Vita group performed well in FY20 under those circumstances and in light of store closures during the pandemic lockdown. The ICT division delivered a 5 per cent increase in revenue last financial year.
Vita Group plans to release its interim FY21 results on 19 February.
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