Royal Mail profit warning sends shares tumbling

Callum Keown
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Royal Mail said its letter volumes are in decline (Source: Getty)

Shares in Royal Mail have crashed after the company posted a warning on profits and costs today.

The UK post delivery company said it expected its adjusted operating profit to be between £500m and £550m for the year, down from £694m the previous year.

Letter volumes were down seven per cent in the first half of the year, mainly due to a decline in marketing mail, while parcel revenue and volume was up six per cent.

Read more: Royal Mail asks people to stop posting empty crisp packets

It also lowered its cost-saving target to £100m from the previous forecast of £230m.

Shares fell 18 per cent following the unexpected announcement on Monday afternoon.

Chief executive Rico Back, who took up the role in September, said:

Trading conditions in the UK are challenging.

Our letter volumes, especially marketing mail, are impacted by ongoing structural decline, business uncertainty and GDPR.

While we now expect addressed letter volume declines outside our forecast range this year, we are maintaining our medium-term guidance.

Our UK productivity and cost performance has been disappointing.

“Against this backdrop, we are lowering our targets for cost avoidance and productivity improvements for 2018-19.

Read more: Royal Mail seals a £213m deal for Canadian parcel firm Dicom

The company's chair, Peter Long, stepped down last month after a shareholder revolt against Back's £2.7m annual salary.

Royal Mail also bought up the Canadian business of parcel delivery firm Dicom for C$360m (£215m) through its international arm General Logistics Systems in September.

The group said the deal, which gives Royal Mail a network of 28 depots and carrier partnerships across Canada, would start bringing in earnings before the end of March 2019.

Helal Miah, analyst at The Share Centre, said Back was "throwing the baby out with the bath water" to begin his tenure with a clean slate, but warned it put Royal Mail at risk of dropping out of the FTSE 100 at the next reshuffle.

"The structural issues have been expected but the implementation of GDPR rules has severely hit marketing mail while business confidence has been lower than expected," Miah added.

"On top of this, the productivity levels across the business have been lower than planned. This is a cause for concern for many investors despite the fact that management have stated that the attractive dividend will be unaffected.

"We would hope that the parcels and GLS business can continue with their rapid growth. A stalling here, caused by perhaps industrial action or competitive pressures, will surely result in further troubles for the group."