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Royal Mail PLC Dips On Warning Of Lower-Than-Expected Parcels Revenue

Royal Mail (LSE: RMG) is currently down just over 1%, following release of an interim management statement for the three months to 29 June 2014, in which the company has warned that revenue from its parcels business is likely to come in lower than expected for the full year. 

Overall group revenue was up 2% for the period, with revenue from the UK parcels, international and letters (UKPIL) business up 1%. The company says that it’s on track to achieve cost savings in UKPIL of around £25m, the benefit of which will be seen in the second half of the year.

royal mailWithin UK parcels, whilst volumes were up 1%, revenue was down 1%. The company says that although revenue in the prior period rose  following the introduction of size-based pricing in April 2013, volumes have experienced a gradual decline, as customers (both retail and SME) have reacted to the change.

In addition, export parcel volumes have been hit a stronger pound, and changes to Amazon’s free delivery threshold, together with that company’s development of its own delivery system, reduced domestic parcel business. However, Royal Mail says it has “a number of initiatives focused on addressing the impact of these issues“, including extended opening hours for receipt of goods from e-tailers, and the introduction of Sunday delivery by Parcelforce Worldwide. 

UK letters saw revenue rise 3% despite a decline of 3% in volume of addressed letters, a consequence, the company says, of price increases and election mailings. However, Royal Mail comments that the 3% decline over the same period last year was better than its anticipated range of a 4–6% annual decline. That said, it reiterated its expectation of a 4–6% decline, but said that it should be at the “better end” of the range for 2014/15.

Royal Mail’s General Logistics Systems (GLS) recorded a 6% increase in both volume and revenue, with an improvement in revenue being seen in the majority of countries in which it operates. The company says that the turnaround of GLS in France is progressing well, but that the situation in Germany remains “challenging” . However, Royal Mail also warned that GLS’s reported results will be adversely affected by the increased strength of the pound.

Commenting on the statement, CEO Moya Greene said:

Given the increasing challenges we are facing in the UK parcels market, our parcels revenue for the year is likely to be lower than we had anticipated. However, through cost control measures and with continued good letters performance we expect to be able to offset the impact on profit such that our overall performance would remain in line with our expectations for the full year. Our parcels revenue will be dependent on our performance in the second half, which includes the Christmas trading period, and on no further weakening in our addressable UK parcels market.

At 460.5p, Royal Mail’s share price is now down 20% on the year so far, versus a FTSE 100 that has risen very slightly (0.3%). But it’s still up almost 40% since it listed last October, compared to a gain of 3.4% by the FTSE 100.

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Jon Wallis has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned.