Royal Mail (RMG Stock) share price slides, as profits fall short

The last 12 months have seen the Royal Mail share price halve from the June 2021 peaks of 614p, with the losses accelerating after the company cut its operating profit forecast in January, due to a £70m restructuring charge, when it announced its Q3 numbers.

Now trading near one year lows today’s full year numbers have seen the share price fall further as the business continues to deal with the challenges thrown up by higher costs and lower volumes in its Royal Mail division.

It shouldn’t be a surprise that since the easing of covid restrictions that parcel numbers have fallen given that lockdown restrictions over the last 12 months haven’t been anywhere near as extensive as they were in 2020. There is also the small matter that Covid-19 test kit numbers have also fallen sharply since the end of free testing.

Nonetheless due to the Omicron variant at the end of last year staff absences did cause some problems, which disrupted service levels and raised costs.

Full year results have seen revenues rise by 0.6% to £12.71bn, falling short of expectations of £13bn, while operating profits fell by 5.6% to £577m, due to higher spending on overtime, and other related staff costs.

Royal Mail revenue declined 1.6% to £8.5bn, largely due to the removal of lockdown restrictions changing consumer behaviour, however this was offset by a 4.4% rise in GLS to £4.2bn, which was driven by a recovery in freight and B2B volumes.

Looking ahead the outlook appears challenging with the company locked in discussions with its staff over its latest pay round with the threat of possible strike action. Assuming as successful outcome current adjusted operating profit consensus for Royal Mail is for £303m with downside risk.

The company has said it is looking at making cost savings of £350m within Royal Mail with 700 managerial jobs set to go as part of a reorganisation plan, while it also expects to have to raise prices on stamps as well as parcels to better cope with higher fuel costs and wage demands.

For the GLS division expectations are for high single digit revenue growth and operating profit of about £320m. 

Collectively this would equate to a combined operating profit of £623m for the new fiscal year, albeit with the caveat of downside risk, on the Royal Mail side of the business.