Royal Mail share price down, profit down on increased competition

Royal Mail Plc reported a decreased first-half profit and alerted that Amazon.coms move to create its own delivery network will reduce the parcel market for other carriers.

The British postal service hoped its parcel division will drive future growth, however parcel revenues slid 1%, despite the 2% increase in volumes in the six months ended September 28.

Moya Greene, CEO of Royal Mail, admitted that the company faces severe competition from TNT, Yodel, DPD and the new delivery system from Amazon, its buggest customer accounting for nearly 6% of all sales. As a result Royal Mail reported an operating profit of £279 million, down 21% from last years result of £353 million.

Amazon also removed the free delivery for orders under £10, which drove sales down. Its is believed that the e-commerce retailer already took 3% of the U.K parcel delivery market.

“The parcel business goes through periods like this: too many players introduce too much capacity at the same time” Ms. Greene said. “You’re vying for fewer parcels in the industry overall. It just takes a couple of years for that to wash through.”

DPD, a subsidiary of France’s La Poste, already has a nationwide service that works seven days a week and uses GPS technology to provide one-hour deliveries to its customers.

“You can’t be complacent if you’re the number one player. We have people nipping at our heels” Ms. Greene said.

In an effort to turn the tide in parcel deliveries, Royal Mail launched a Sunday distribution service. The company will also target fast developing areas, including clothing and footwear. Royal Mail started a restructuring program recently, which is already half done, that includes the sale of three former mail centers.

Royal Mail faces “top-line challenges”, said Rishika Savjani, an analysts at Barclays. “Strong cost discipline has supported, and is likely to continue supporting, margin expansion.”

The company said it expects U.K. costs to be unchanged on an underlying basis for the year, while full-year results will highly depend on revenue during the Christmas period. Royal Mail said its restructuring program will annually save around £70 million starting financial 2016, up from what was initially projected.

Royal Mail Plc gained 0.32% on Tuesday and closed at GBX 469.20 in London. On Wednesday the stock fell 8.67% to trade at GBX 428.50 at 14:11 GMT, marking a one-year decrease of 22.00%. The company is valued at 4.69 billion. According to the Financial Times, the 16 analysts offering 12-month price targets for have a median target of GBX 457.50, with a high estimate of GBX 700.00 and a low estimate of GBX 377.00. The median estimate represents a 2.49% decrease from the last price of GBX 469.20.