Royal Mail – New Name, Same Old Problems

Weaker retail trends, fewer test kit deliveries and a structural decline in letters meant revenue fell 5.1% to £3.0bn in the first quarter. This reflected an 11.5% decline in Royal Mail PLC (LON:RMG) revenue which more than offset a 7.8% increase at GLS.

With the union refusing to support this year’s efficiency targets, £100m of the planned £350m in cost savings is under pressure. Underlying operating profits are now seen breaking even if Royal Mail can make progress on efficiency improvements that do not require union agreement.

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Moving forward the group will now be called International Distributions Services plc. This won’t change the structure of the business, but reflects an increased focus on the GLS arm. If Royal Mail can’t significantly improve its operation, the board is open to splitting the two sides of the business.

Shares were down 4.8% following the announcement.

Royal Mail’s Focus On GLS

Laura Hoy, Equity Analyst at Hargreaves Lansdown:

“Royal Mail’s doing somewhat of an about-face with a new name to reflect increased focus on GLS, it’s international delivery business. While this part makes up around a third of revenue, it’s responsible for two thirds of operating profit, suggesting this could become somewhat a of a life raft as the group struggles to stay afloat in choppy seas. However, it won’t be enough to weather a Tsunami, in which case the group’s mentioned it’s open to parting ways.

Management’s distinct change in tone this quarter reflects its failure to gain union approval on this year’s cost saving targets. With inflation continuing to balloon and the labour market still tight, unions are unlikely to budge anytime soon. That’s left management with little choice but to grit and bear its massive cost base in the face of ever-declining volumes. Wages are one of Royal Mail’s most crushing costs, so support from the union is essential to delivering on its efficiency ambitions.

With improvements from Royal Mail, the largest part of the business, all-but off the table the group’s pivoting toward GLS. This area of the business has promise, but it remains to be seen whether it will be the silver bullet management is hoping for. With a challenging macro environment stretching far into the future, International Distributions Services—as it’s now called, is in for an uphill battle.

But a split wouldn’t necessarily make things any easier. Royal Mail will continue to struggle as long as it remains at odds with the union. And GLS, though a beacon of hope for the business, will struggle to go it alone. A small fish in a big sea, GLS could find it difficult to compete with deeper-pocketed competitors in the international logistics business. With that in mind, the shift in sentiment and potential separation could be a tactic aimed at inching forward with the union.”

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