The Royal Mail (LSE: RMG) share price has seen a bloodbath this year. Its shares are down 45% on a year-to-date (YTD) basis. That being said, its upcoming earnings results could serve as a catalyst to turn its downward momentum around.
Seeing red
Once a pandemic darling, the tailwinds that brought the Royal Mail share price close to its all-time high have now dissipated. As such, the group saw a tremendous slowdown in revenue growth in the past year. A 0.6% increase in total revenue wasn’t enough to please investors as operating profit, basic earnings per share (EPS), and free cash flow, all saw declines.
| Reported Measures | FY22 | FY21 | Change |
|---|---|---|---|
| Revenue | £12.71bn | £12.64bn | 0.6% |
| Operating Profit | £577m | £611m | -5.6% |
| Profit Before Tax | £662m | £726m | -8.8% |
| Basic EPS | 61.7p | 62.0p | -0.5% |
| Free Cash Flow | £557m | £827m | -48.5% |
Additionally, management mentioned an uncertain outlook for the year ahead. The board cited wage inflation, sharp increases in energy and fuel costs, low GDP growth, and the downturn in consumer spending to create significant headwinds for the year ahead. To make matters worse, the FTSE 250 firm is still in dispute with its workers over its latest pay round, with threats of strike action.
Royal rebound on the cards?
Taking all those factors into account, analysts have revised their FY23 earnings for the firm downwards. Expected EPS now stands at 44.8p, with revenue for the year at £12.69bn. But if Royal Mail can provide a positive trading update tomorrow with upbeat guidance, a potential rebound could be on the cards.
Admittedly, stalling retail sales data in the past quarter doesn’t bode well for Royal Mail shares. However, there are glimmers of hope that the firm may not be as badly affected as initially thought. A recent report by the Office for National Statistics provided a couple of positive takeaways.
Generally, the public is buying less food, putting off delayable spending and is less like to spend money going out. However, spending on hobbies and home improvements has gone up, with people sticking with online shopping. Shopping and spending habits may be ‘incredibly positive’ for the consumer. Online purchases have been consistently above pre-pandemic levels since October 2020.
Source: Office for National Statistics
To complement this, the latest results from packaging company DS Smith were encouraging too. Revenues were up 21% on an annual basis, with management attributing the improvement to higher demand for cardboard boxes, like those Royal Mail often delivers. Even though DS Smith’s results may not have a direct correlation, it does show that packages are still in high demand. And I’d assume that Royal Mail would benefit to some extent from delivering such parcels.
Can it deliver?
Taking everything into consideration, would I still buy Royal Mail shares before its earnings results? Well, despite the potential swing of the pendulum in its share price, there are still a couple of caveats I can’t look past.
For one, labour strikes are still very much a possibility despite unions suspending strikes for the time being. Talks could come to an unwanted conclusion, and would massively impact the company’s business operations. Moreover, with inflation getting higher, it’s becoming more likely that consumer discretionary spending continues to decrease. And while the group’s GLS division has been boasting consistent and steady growth, I’m doubtful that this can pull the entire company’s weight for the long term. Therefore, I won’t be buying Royal Mail shares until we see a more certain economic landscape.
