Royal Mail shares set to rise as it pivots to parcels

• Royal Mail shares jump 25% as revenues rise from parcel deliveries
• The British postal service still expects to report a ‘material loss’ this year
• Royal Mail admits it is ‘failing to adapt’ fast enough in latest trading update

Royal Mail shares skyrocketed 25% on Tuesday, with investors reacting positively to signs its turnaround strategy is beginning to have some success, after the company reported a ‘substantial shift’ in its business from letters to parcel deliveries.

In its latest trading update, the British postal service reported a 34% increase in parcel volumes in its first five months to 30 August, with over 177 parcels delivered, helping revenues jump 33.1% year-on-year.

Royal Mail closed at 218p per share on Tuesday, with the stock down just 6% year-to-date, which is better than the broader market with the FTSE 250 down 20% over the period.

Royal Mail ‘failing to adapt’ despite positive signs

The strong growth in parcel volumes is being driven by B2C and e-commerce, Royal Mail said in its AGM trading statement.

‘Whilst this has driven better than expected revenues, as discussed previously, our legacy in letters has held back operational changes needed to adapt our business to a market that has fewer letters and more parcels,’ the company said.

Royal Mail forecast to report ‘material loss’ this year

Despite positive signs that its turnaround strategy is seeing results, Royal Mail admitted that it is still on track to report a ‘material loss’ this year, as letter deliveries continue to fall and costs of doing business rise due to the coronavirus pandemic.

‘As a result, the mix shift from handling more parcels and fewer letters increased costs in the period by £85 million,’ the company added.

‘In addition, costs related to Covid-19 (elevated absence, social distancing, additional protective equipment and other costs) were £75 million in the first five month.’

Royal Mail looks to overhaul ‘outdated working practices’

In an attempt to streamline its business and reduce costs, Royal Mail said that it is in talks with unions about replacing ‘outdated working practices’, with plans to end workers signing in by hand and sorting parcels manually.

Earlier this year, the company said it plans to cut 2000 management jobs, which could save the company around £130 million.

Thankfully, the British postal service was able to upgrade its guidance for this year, with the company expecting revenue growth of £150 million, up from its earlier forecast in June where it projected a decline of up to £250 million.

The recent share price surge is encouraging news for its management team and their turnaround efforts, but a myriad of challenges remain for the struggling postal service that could derail its recent success.

Royal Mail: key figures

• Parcel volumes up 34% (177 million more parcels) and revenue up 33.1% year on year.
• Addressed letter volumes (ex. elections) down 28% (1.1 billion fewer letters)
• Letter revenue down 21.5%
• Total revenue up £139 million

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