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FTSE 100: Royal Mail shares sink to bottom after profits decline

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Royal Mail revenues fell 1.6% year on year, with domestic parcel volumes down 7%. Photo: Steve Taylor/SOPA Images/LightRocket via Getty
Royal Mail revenues fell 1.6% year on year, with domestic parcel volumes down 7%. Photo: Steve Taylor/SOPA Images/LightRocket via Getty

Royal Mail (RMG.L) shares sank on Thursday after the company warned of "significant headwinds" as it faces higher wage demands, surging energy and fuel costs.

The London-listed group, which missed its profits forecast, warned it will need to raise prices and cut costs as it grapples with soaring inflation and an "uncertain" outlook for the economy.

The company said it is slashing costs by more than £350m ($433m) to soften the burden over the course of its current financial year. It did not reveal whether its plan will affect jobs at the company.

Royal Mail has already hiked the cost of posting letters by around 7%, and parcel prices by around 4%, these increases took the cost of a first-class stamp to 95p and a second-class stamp to 68p.

In March it had said it would hike the price of postage due to the decline in the number of people sending letters after reporting a 60% drop in the number of letters sent since 2005 and around 20% since the start of the pandemic.

It came as it reported an 8.8% drop in annual pre-tax profits to £662m, explaining that revenues were flat as the easing of pandemic measures reduced demand for parcel deliveries.

Revenues fell 1.6% year on year, with domestic parcel volumes down 7% despite growth in deliveries of COVID test kits.

Underlying operating profits grew 8% to £758m for the year to the end of March.

The FTSE 100 (^FTSE) group was the biggest faller on London's benchmark index, with shares crashing 12.7% to 298.8p in mid-morning trade on Thursday.

Royal Mail also blamed inflation for the hike as Britain’s hard-pressed households are battling the tightest squeeze on their living standards after the annual inflation rate climbed to its highest point since 1982.

UK inflation hit its highest level in 40-years as consumer prices soared 9% in April driven by a 54% surge in energy bills, higher fuel and food costs as the cost of living crisis deteriorates.

Motor fuel prices have also soared to record highs, driving inflation higher after the Ukraine crisis lifted oil prices. Petrol jumped 28.9%, electricity 53.3% and gas 95.5%, according to the ONS.

Read more: M&S warns Rishi Sunak online sales tax will punish high street

Bosses said the company was at a "crossroads" in its overhaul as parcel delivery becomes increasingly important.

Non-executive chairman Keith Williams said that the financial tailwinds of the coronavirus pandemic "are now dissipating" and that the group was steering itself for a drop in economic growth and higher inflation that could pose challenges for its delivery business in both the UK and internationally.

"We are at a crossroads with the transformation of Royal Mail,” he said. “We need to adapt our business to a post-pandemic world and whilst we are making progress in some areas, more needs to be done in others."

The group is also facing pressure from unions and workers after it failed to agree a pay deal with the Communication Workers Union (CWU), which is opposing measures Royal Mail wants to implement as part of its transformation programme towards a parcel-focused business.

The union said it was seeking a "no strings attached pay rise" for workers on the grounds the group could afford it after posting adjusted operating profits of £758m for the year to 27 March.

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