Does Telstra’s Kevin Russell have his eyes on Vita Group’s stores?
What a week it’s been for Vita Group (VTG), which operates over 100 Telstra stores. On 4 April, Fairfax published an article referring to a ‘leaked’ Telstra draft document that said it is considering taking back high performing stores from licensees. VTG’s share price promptly plummeted. After VTG rebutted the leak, its share price rebounded. So, who should we believe?
For us, it’s worth hearing from those who have most recently heard from the company directly.
We believe the investment case for VTG rests on the outcome of two issues. The first is whether Kevin Russell will have as big an impact on Telstra’s store network as he had at Optus. And the second is whether Telstra can actually change the nature of its contracted relationship with VTG – remembering that unlike other licensees, VTG brought an existing network of 100 Fone Zone stores to the Telstra brand (inferring a special legal relationship) and VTG holds the master leases on its sites.
Telstra appointed Kevin Russell in early 2016 to lead its giant retail division, reporting to CEO Andy Penn. Russell previously held executive roles at SingTel Optus and was most recently country chief officer and chief executive of consumer, Australia. It is perhaps helpful to know that Russell quit his post at Optus in February 2014 after just two years in the role.
We note the departure was less than a year after he appeared on the ABC’s Inside Business program with Alan Kohler, where he stated:
“I am saying that the industry in Australia in my view has gone backwards over the last five or six years in terms of how it treats its customers. I think that’s a collective issue, I think it’s across all of the major carriers.
“I’m also saying to SingTel our board, that we are also going to save things, we’re going to reduce 45 per cent of our retail footprint, 45 per cent of our stores we will cease to trade in or exit and there is significant savings there which we will invest into network, we will invest into service capability, we are reducing our marketing budget this year because to me, trying to shout loudly and spend your marketing dollars when your core service needs to get better doesn’t make sense so it isn’t just a case of spending, it’s a case of balancing how you invest your money in my view in a smarter way, in a customer centric way.”
At the time of Kevin Russell’s resignation Informa senior analyst Tony Brown was quoted by the SMH as saying: “Over the last few years, Optus has been the forgotten tale of Australia’s telco sector.”
The SMH also observed on March 16, 2016 that:
“Mr Russell(‘s)…near-two-year stint at the top of Optus saw it reshape the mobile industry by launching bigger download data plans. He was also successful at growing profits by cutting costs and hundreds of jobs.
“But Optus, under Mr Russell, wasn’t able to capitalise on the exodus of customers from Vodafone Hutchison Australia and did not grow its fixed-line internet or mobile subscribers.”
At the Australia-Israel Chamber of Commerce address on 30 May 2013 entitled Transforming Customer Experience, Russel said:
“We have closed, or are closing, 45 per cent of our retail distribution, from last month to three months out, which is pretty big. We’ve done that because we believe there are poor selling practices in large parts of our retail, and we think we can get a fundamentally better experience for customers in a smaller, branded, retail channel.”
The release of the leaked paper this week suggests Russell is again exploring the selling practices and structure of Telstra’s retail network.
On the other side of the coin is the fact that unlike other licensees, Maxine Horne of VTG brought to Telstra an already-operating network of stores. It is reasonably safe to assume that the agreements would not give Telstra many rights other than to ensure no harm is done to the brand by VTG.
To help cut through the supposition, one of our brokers spoke to Ms Horne and reported the following:
“The [Telstra leaked] report was 60 pages long, and was prepared a few months ago. All conversations with Telstra (including Kevin Russell) in recent months have contradicted those statements in the leaked document. The fact that VTG recently bought 5 Telstra stores off them illustrates how inaccurate the leaked document is about the current state of affairs.
“Kevin Russell called Maxine to apologise. Telstra is tracking down the source of the leak. Maxine’s hope is that Kevin and Telstra will see fit to correct the inaccuracies in the document with a joint statement.
“The Telstra Dealer Agreement expires in 2020. The nature of the agreement is that it is ‘all or nothing’. Telstra cannot ‘cherry pick’ certain VTG stores. They either withdraw the whole agreement or nothing. Maxine reiterated that VTG operate 1/3 of Telstra’s retail store network and 25% of its Business Centre network, so changes to their Telstra Dealer Agreement are not one sided…
“She did say that Telstra may buy some VTG stores, but this would be to aid Telstra’s own ‘clustering’ strategy but …The price would be determined by mutual agreement.
“From VTG’s perspective, it is business as usual. They are mighty annoyed…twice in 6 months that ‘leaks’ have hurt their share price and reputation. VTG will continue optimising their Telstra Store Optimisation programme, including the ‘clustering’ strategy.”
The Montgomery funds own shares in VTG.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Justin Carroll
:
“… The remuneration reductions agreed to between December and February were part of a response to margin pressures faced by Telstra in a very competitive mobility market, and the ongoing impact of the NBN rollout…”.
This statement is from VTG’s 11 May 2017 release to the market. The fact that Tesla is able to make its compressing margins VTG’s problem tells you everything that you need to know about who has the power in this relationship.
That said, VTG is not totally neutered. It remains the master franchisee and everything that it has said so far is consistent with its business remaining intact except for some margin compression.
At just under $1.50 a share, the risk/reward is attractive here. I am buying.
Sridhar Venkataraman
:
It looks like Kevin Russell is turning the screw…
Greg Scott
:
Hi again Roger.
My previous comments of 10th May have obviously been “gazumped” by the most recent announcement of 11th May. It seems that some may have guessed that Telstra would apply even more squeeze to their partners as the competitive environment bites ever more rapidly.
Unfortunately, it seems I should have stuck to my initial thought that VTG has too little power in the relationship to make them an extraordinary business. Do you think I am giving up on them too early? It seems that their diversification plans are the best hope of a substantial market re-rate.
Of course, we need to wait for a definitive announcement around the outcome of current negotiations before any final conclusions can be drawn I suppose.
david klumpp
:
Your review of the situation in this article, Roger was very informative and appreciated.
The situation with VTG remains confused to say the least, with the big partner Telstra “disrupting” perceptions around prospects for the VTG business, and the market thinks so too with a 30% decline today following Maxine Horne’s latest update on the relationship with Telstra. Is this one of those great opportunities offered up now and again by the fickle and impatient market, or is VTG a business to stay away from because it holds no great advantage? For me, Roger’s comment in the article articulated many of the advantages that VTG seems to have. There is a VTG teleconference today, which should be interesting. Maxine cannot be accused of hiding information this time, as one contributor unfairly implied. In fact Telstra has not even issued a statement on the matter. Note I own VTG since mid 2016.
Greg Scott
:
Hi Roger.
Thanks for your insights regarding VTG. I am a new shareholder in VTG and am trying to get my head around their recent price decline(s).
I understand the initial decline to about $3 on the uncertainty regarding Kevin Russell’s announcement, but am wondering about the subsequent drift down to the low $2 area. I am thinking that TPGs future plans may have something to do with it?.
I guess TGP will take a chunk of future Telstra business, which would impact VTG’s revenue. However, I am thinking that this scenario is not so straight forward. It may be possible that because TPG does not currently have physical points of retail presence, VTG may be able to resell product for TPG?. I am not sure about the contractual terms of the Telstra licence, but VTG may become even more valuable to Telstra if the licence prevents this.
I would very much appreciate any thoughts you have on possible future scenarios. At the moment, the risks seems to favour a wait and see approach, but alternatively this could prove to be a great time to top up a holding in VTG.
Samantha
:
As an ex sales consultant who worked for vita group all I can say is never again. Vita group brain wash bully and commit many acts of fraud. They push you make you feel that your never good enough and go against telstra at every turn all in a bid to make money. If only telstra knew the truth what vita group do behind their backs. How many memos telstra send to vita don’t do this don’t do that as it’s gaming or fraudulent and time and time again vita group push their consultants to ignore these warnings all because they want the money. Vita group have a massive staff turn over, customers are pressured and pressured time and time again to buy buy buy! When a customer says no vita group hate taking no for an answer. Your dragged thru mentally draining techniques, as a consultant how to over come objections, cost vs benefits pushing survey after survey calling emails texting constantly reminding the customer “don’t forget the survey” and then more sales training why your never good enough. I’m happy to work again for telstra but vita group are a joke.
Roger Montgomery
:
Hi Samantha, Many organisations have former staff who didn’t like working at the organisation they left, hence the “former” before “staff”.
Mike Williams
:
Your experience working for Vita Group, is pretty well how I imagined it would be…Maxine would be a formidable and ruthless boss.
As a shareholder, I was dismayed at how one could invest in a business that provides so little information to its shareholders, always hiding behind the cloak of confidentialy. In myhumble opinion, Maxine is treating shareholders with similar disrespect to what you experienced as an employee. Hence, i now use the word “former” before shareholder now.
Roger Montgomery
:
Hi Mike, can you substantiate your claim that Maxine new something, didn’t disclose it, and told the market the information was confidential. These sorts of comments are thrown around in low rent forums as if they were fact, when more often than not they are merely opinion.
Mike Williams
:
Roger,,apols got out of the grumpy side of the bed this morning and and didn’t mean to denigrate or lower the high calibre of this forum …but I had a bit of sympathy for Samantha.
I do enjoy and learn from your and your team’s articles. Re VTG .. I tuned into the last conference call and Maxine read out a scripted piece extolling Vita Group virtues..no one doubts her’s and the business’ success…but was it necessary to go on for so long?. .When it got down to business, most questions were not answered due to “commercial confidence”. I for the life of me could not understand the purpose of the conference. They “confirmed” guidance, by saying they were aware of their responsibilities , but nothing else. How does one invest in a business, if so much of the pertinent information is confidential? It seems to me it very much a case of backing the jockey…an act of faith base on past business performance.
A combination of the “leaks”, Maxine’s selldown (yes I know she still holds a motza), the lack of information, the way the conference was conducted, the move into sports apparel and now \ TPG’s move into the mobile space make me wary of investing. If I’m wrong , I’ve learnt my instincts need an overhaul. Can I ask you Roger, and I am being genuine, what was your key take away from the conference.? Apologies again and I genuinely thank you for contributing so much to my development as an investor…and I will humbly accept that I may need to develop a lot further. Cheers, thanks and Happy Easter, Mike.
Peter Vassiliou
:
Montgomery was very excited on the business not to long ago in the media and saw the sell down as opportunity. So are you still interested at this price ?
Graeme Cox
:
I suspect the answer is ‘Yes,’ depending of course on Montgomery’s individual asset allocation cap.
Kelvin Ng
:
Hi Roger, the fact that the Telstra Dealer Agreement expires in 2020 and has to be renegotiated is an inherent weakness in VTG’s business model and it deserves to trade at a lower multiple, but for sure that multiple may well be higher than what its trading at now.
Kelvin
Richard Vidal
:
Hi Roger & Co, has this changed your opinion of Vitagroups quality moving forward?
I note Scott’s article last month started to hint at there being some uncertainty ……
Dave B
:
Thanks for that insight Roger, great to hear your thoughts so quickly on possible holdings in The Montgomery Fund (also I bought VTG on Friday – quite a ride).
How likely do you think it is that Telstra would simply not renew the agreement in 2020 (i.e. just lose 100 stores)? Or use the expiry date along with VTG’s dependence on this revenue, as leverage for negotiations to either buy some stores, or reduce commissions?