Royal Mail shares sink as it warns on outlook
Thursday, November 21, 2019
Shares in Royal Mail have tumbled despite the group posting its strongest UK sales at the half-year stage in five years, after it warned on outlook and admitted its transformation plan was behind schedule.
Economic and political uncertainty in the UK has resulted in the group downgrading its expectations for the amount of letter volume decline (excluding elections) from 5%-7% to 7%-9% for the current financial year.
“People are posting fewer letters and receiving more parcels. We have to adapt to that change. The challenging financial outlook in the UK means that now, more than ever before, we need to make the changes required – and accelerate them – to ensure a successful UK business,” stated chief executive Rico Back.
Group sales increased by 5.1% to £5.17bn in the six months to 29 September, but adjusted operating profit fell by 13.2% to £165m “primarily due to a decline in UKPIL (UK parcels, international and letters) profitability”.
UK parcels sales were up 5.6%, while letters sales fell by 1.4%. Addressed letter volumes declined by 5%, and are down by about 50% since the peak of 2004.
Its GLS continental and North America parcels business grew sales by 14.1% to £1.54bn.
Royal Mail shares fell by 16% to 194.10p after the announcement (52-week high: 347.5p, low: 186.8p).
The business is currently embroiled in a high-profile dispute with union the CWU, with Royal Mail going to court to block potential strikes after workers voted in favour of industrial action.
The CWU has now launched an appeal against the injunction.
Back admitted the group’s transformation plan was behind schedule. “We are investing more because of the industrial relations environment, the General Election and Christmas to underpin our quality of service at this key time,” he said.
He warned that revenue and cost headwinds could result in the group’s future UK profits being wiped out, resulting in a break-even performance or at worst a loss, for the 2020/21 financial year.
As part of its ‘Journey 2024’ transformation plan Royal Mail wants to shape-shift so that 70% of sales come from parcels.
In the UK it plans to build three new fully-automated parcel hubs for handling ‘next day’ and larger parcels.
The first, in Warrington, is already in progress and will be able to handle more than 600,000 parcels a day when fully up and running, with go-live scheduled for 2022/23. A site for a second hub in the Midlands has been identified, while options for the third hub location are being assessed.
Royal Mail has also rolled out 1,400 new parcel postboxes for customers sending or returning parcels.
“We want to change from a UK letters company that delivers parcels, into a parcels-led, international company that also delivers letters,” Back stated.