After another sharp fall yesterday the shares of Vita Group Limited (ASX: VTG) have now plunged an incredible 56% in the last three months.
The decline comes on the back of new commercial terms agreed recently with telco giant Telstra Corporation Ltd (ASX: TLS). Vita Group operates 103 Telstra retail stores and business centres.
Although the new terms will see an increase in the store network, commissions look likely to fall. As a result management expects the new terms to provide volume growth, but also some margin compression.
Margin compression is certainly not ideal for the company, especially with a reasonably low profit margin of 5.5%.
Investors appear concerned that this could bring an end to Vita Group's incredible profit growth. In the last five years the retailer has grown its earnings by a whopping level to propel its share price over 922%.
At this point in time it is hard to decide whether Vita Group is a bargain buy or best avoided. Although at 10x FY 2016's earnings its shares look remarkably cheap and in the last five years they have actually traded at an average of just over 11x earnings.
Based on this it isn't as great a bargain as it first appears and could actually be close to fair value.
As a result I wouldn't rush into an investment just yet despite how tempting it is following the sharp drop in its share price. Instead I would suggest waiting until Vita Group reports its half year results in February to see how the business is tracking.
