Royal Mail's (LON:RMG) share price has tumbled after the company confirmed the transformational scheme is behind schedule. The company issued several profit warnings in recent years, which promoted the group to embark on a re-organisation plan, which is progressing, but not at the rate management would like. A move to have a more automated parcel business is going well as roughly 26% of the business is conducted in that fashion, which is a nice improvement on the 12% last year.
The firm delivered a 13.2% drop in first-half adjusted operating profit to £165 million. Margin slipped by 70 basis points from 3.9% to 3.2%. The drop in margin suggests the company doesn’t have a handles on its costs, and this comes at a time when the business is facing a ‘challenging financial outlook’.
Group Revenue ticked up by 5.1%. GLS, the delivery service was the breadwinner in terms of revenue as it increased by 14.1%. The firm is adapting to the changing in lifestyle habits as people post fewer letters, and send more parcels, hence why the revamp of the parcel business is crucial to the firm.
In May the stock took a knock when the company revealed a 26% fall in adjusted operating profit before transformation costs to £509 million, which was at the lower end of the company guidance of £500-£530 million. The group took the drastic measure of cutting the annual dividend by 40% in a bid to fund major operational changes. £1.8 billion is needed to fund the investment that should bring about major operational efficiencies. Changes at the parcel unit should mean that 80% of the business is done through automation.
The financial markets are quick to punish underperforming firms, but whenever a group is undergoing a turnaround, traders are be reluctant to get on board, until progress has been made, so the Royal Mail (LON:RMG) share price might remain subdued in light of today’s announcement that the turnaround is behind schedule.
The previously government owned company has a heavily unionised work force, so ordinarily a pivot to automation would be welcomed in the free market, but the group is likely to run into industrial disputes should the rise of automation lead to lower head count.
Another problem Royal Mail (LON:RMG) suffers from its that is must offer uniform services across the entire UK, while other delivery companies can choose to focus on more lucrative regions, or offer different pricing structures, which essentially puts them at a competitive advantage. This is another negative legacy issued of the state-owned days.
The management of the company won at legal battle at the high court to prevent staff from striking on the run up to the busy Christmas period. The union is seeking to appeal the decision, but nonetheless, strike action is something that can hold a share price back.
Royal Mail’s shares have been on a bumpy ride in recent years, and traders are likely to steer clear of them until it improves its industrial relations, and steps up the automation of the parcel business, as that will be key to the company’s long-term survival.
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