Royal Mail PLC (LON:RMG) (OTCMKTS:ROYMY) posted disappointing half-year results and warned that its parcel business is likely to be impacted by heavy competition from rivals, including Amazon.com, Inc. (NASDAQ:AMZN). The latest warning comes amidst Royal Mail posting a small decline in pre-tax profits.
Royal Mail faces competition from rivals
While unveiling its financial statement today, Royal Mail disclosed that its pre-tax profits dropped to £218 million for the six months ending Sept. 28, from £233 million in the same period last year. Its letter business witnessed a 3% drop in volumes, though the fall was not as steep as had been anticipated. The slower decline can be attributed to election pamphleteering, particularly relating to the Scottish Referendum, for which Royal Mail delivered 7 million campaign mailings and over 5 million pool cards.
In the past six months, Royal Mail’s U.K. parcel delivery division witnessed revenues falling by 1%. However, the parcel service company’s international parcel delivery service, GLS, fared well, with revenue up 7%, which boosted the company’s overall revenue by just £5 million, bringing it to slightly above £4.52 billion. Nonetheless, Royal Mail’s first-half results were at the top end of analyst expectations.
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Royal Mail PLC (LON:RMG) (OTCMKTS:ROYMY) is under attack from all sides. The company specifically named TNT (branded as Whistle) as a direct threat to future profits. Also its biggest customer, Amazon.com, Inc. (NASDAQ:AMZN), has set up a rival parcel service, and other retailers are bypassing Royal Mail by encouraging shoppers to pick up their online orders from high street shops. TNT has started delivering letters in the more densely populated U.K. cities. The firm is stuck with the winding country lanes beloved of Postman Pat, but not profit margins, which it is obliged to fulfill under the Universal Service Obligation.
Waking up to realities in private sector
As reported by ValueWalk, last year the British government unloaded its 52% stake in the company to raise £1.72 billion ($2.8 billion). It turned out to be the biggest privatization since the government sold railways in the 1990s. Investors of Royal Mail were anticipating growth in e-commerce. However, if competition for market share in that growth is increasing, it can’t be as positive a driver for Royal Mail’s future earnings as previously anticipated.
However, to combat the competitive pressures in the parcels business, the British postal service operator has been investing heavily in technology and service. While unveiling its results today, Royal Mail PLC (LON:RMG) (OTCMKTS:ROYMY) also announced a maiden interim dividend of 6.7 pence per share. During the last year, Royal Mail’s shares have fallen by over 15%, as against the .2% rise in the FTSE 100.