Royal Mail’s profit warning has been met with shock by analysts who have warned that the group faces relegation from the FTSE 100 if it cannot tackle its productivity problem.

In a trading update for the half year to 23 September 2018 released yesterday (1 October) the group revealed a 7% fall in addressed letters and productivity gains at just 0.1%, well short of its target of 2-3% growth.

Royal Mail said the 18-month labour dispute that ended in January and subsequent agreement to reduce the working week by one hour a year from 39 to 35 hours (by 2022) had hurt.

The one bright spot in the firm’s trading update was the performance of its parcels business with UK parcel revenue and volume up 6% in the period, and revenue and volume growth for the full year expected to be better than in 2017.

However whilst revenue at GLS, Royal Mail’s international parcels business rose 9% on the previous half year, Royal Mail said that labour market and other cost pressures are “putting margins under pressure”.

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The group warned that it now expected adjusted operating profit before transformation costs to be between £500m to £550m in the year to the end of March 2019, compared to £694m in the previous year.

Royal Mail’s share price fell by 18% before the stock market closed yesterday. Its shares fell another 8% today.

Trouble ahead

Laith Khalaf, analyst at Hargreaves Lansdown, said the group’s share price collapse “makes it a prime candidate for relegation from the FTSE 100”. Royal Mail was reinstated into the FTSE 100 in February this year after settling its pay and pension dispute.

Liberum analyst Gerald Khoo said that the profits warning “was shocking in its scale and timing” adding that the productivity gain of 0.1% left the group’s target of 3% by the end of the financial year “well out of reach”.

Helal Miah, investment research analyst at The Share Centre also described the trading update as “shocking.”

He also warned that the parcels business needed to continue to grow rapidly, adding: “A stalling here, caused by perhaps industrial action or competitive pressures, will surely result in further troubles for the group.”

Neil Wilson, chief market analyst at trading platform Markets described the profits warning as “really horrible”, adding that despite the deal with the unions being hailed as a major breakthrough at the time “it looks like the planned operational and productivity gains are not being delivered to the degree that management had hoped for”.

The challenge

Group chief executive officer Rico Back described UK market conditions as “challenging” adding that letter volumes, particularly marketing mail has been hit by “ongoing structural decline, business uncertainty and GDPR”.

He described UK productivity and cost performance as “disappointing” but said that on the upside the UK parcels business is “performing well, with the group’s focus on customer initiatives, such as tracked parcel services paying off".

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