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Royal Mail shares: bulging sack of profits but costs rise

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Royal Mail has opened a bulging sack of profits for the year, showing its success in capitalising on the e-commerce boom. Adjusted operating profits surged to £702 million, up 116%.

This postman has rung twice, not just with a sharp increase in parcel volumes at Royal Mail, but also with its international business GLS, which is enjoying runaway success.

But keeping up with the demand for online shopping has come with a significant cost. Delivering parcels is a more expensive business, than light letters. Turning sorting offices and routes into Covid safe environments also wasn’t cheap. Operating costs rose by 9.2%.

The prospect of continued higher costs and uncertainty ahead as the economy reopens, has weighed on the company in early trading, with shares down around 1%.

Keeping a lid on costs going forward will be a challenge. There’s the pay deal agreed with unions which will take a £130 million bite out of profits over the next year. But smoother industrial relations will also put it into a much more stable position for future growth.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown commented “After years of under investment, the group is planning to significantly loosen the purse strings with capital expenditure for the coming year forecast to be well above £400 million. Whether that will be enough to help put the domestic operations on track to emulate the success of its international business isn’t clear. Royal Mail is targeting 12% annual revenue growth over the next five years for GLS with only modest capital expenditure.”

Although parcels were king for Royal Mail during the pandemic, there appears to be a small shift in what gets sent as the country eases out of lockdown, with parcel volumes down 2%.

“There also appears to have been a has been a mini rebound in its letter business.  Addressed letter volumes were up 25% in the first month of 2021-2022. But this could simply signify a rebound in direct marketing campaigns as the economy opens up. The iconic red post box is still no match for the speed of email or social media and overall the volumes of letters remains significantly lower than before the pandemic.” added Streeter’.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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