With Christmas around the corner, this is usually a time of plenty for delivery services. Royal Mail (LSE: RMG) should be benefiting from the expected sending of cards and gifts around the UK. Instead, it saw its share price drop as much as 17% last week after it showed some disappointing half-year results.
Royal Mail warned that its UK business could in fact suffer a potential loss next year, as operating profit for the half-year was down 13%, while basic earnings per share also fell 18%. Net debt meanwhile, skyrocketed to £1.3bn, while shareholders took a hit to dividends – which were reduced from 8p to 7.5p per share.
Though the share price has managed to claw back some ground following the results announcement, the figures perhaps underpin a trend for the firm that has been on the cards for a decade or more – people send fewer letters than they used to.
Knowledge of this has brought about intentions for the Royal Mail to focus more on parcel delivery – in CEO Rico Back’s words: “We are on our journey to becoming a parcels company that sends letters from a letters company that sends parcels”.
However, in this latest update Back confirmed it was behind schedule with this transformation.
Elections, strikes, and online shopping
The upcoming UK elections are also offering some concerns for shareholders – with Jeremy Corbyn’s plans to renationalise Royal Mail if Labour win the election getting headlines. That said, the likelihood of that happening still seems pretty slim.
Recent concerns of industrial action – somewhat of a reminder of the nationalised past – have been weighing heavily on Royal Mail. Planned strikes ahead of the UK election and Christmas time would have caused no end of financial and PR difficulties for Royal Mail, though the company has just won a court injunction to block the action.
This was done on a technical issue regarding “irregularities” in the Communications Workers ballot last month, the company suggesting the trade union had “consciously and deliberately” interfered with the vote.
With Christmas on the horizon, signs are getting worse for Royal Mail rather than better. The holiday season is instead likely to highlight an underlying issue for Royal Mail that can only get worse – people are replacing letters with email, and getting parcel delivery straight from online shopping.
As with may of the older industries, the Internet may be the harbinger of its eventual demise. For Royal Mail, the conversion to a parcel service, particularly if it has a business focus, will be key.
Emails and cheap phone contracts have replaced the need for most people to send letters. Consumers can have cards delivered directly through services such as Moonpig, and have their Christmas gifts delivered directly to their recipients, wrapped, for less money and far less hassle than doing it themselves.
Personally I agree with my fellow Fool Paul Summers – I just can’t see a way in the near future for Royal Mail to deliver for shareholders. It may be making efforts to become a parcel-focused delivery service, but it is hard to see how it could be competitive in that business with things like industrial action and political talk of nationalisation ever dogging its heels.
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Karl has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.