IDS (LON: IDS) share price has had a rough start of the year as concerns about the company’s growth and profitability remain. The stock, which peaked at 290.7p in December, has retreated to 245p, underperforming the FTSE 100 and FTSE 250 indices, which are a bit positive for the year.

IDS, which is made up of Royal Mail and GLS, had a relatively good year in 2023 after the company solved its employee issue which was putting it on the verge of bankruptcy. After crashing to a low of 173.40p in November 2022, the stock jumped by almost 67% to 290.7p in December. 

Still, the company faces significant challenges, which explains why the stock has pulled back sharply in the past few days. The biggest concern is on how to grow its market share, revenue, and move back to profitability. These are issues that are keeping the management up at night and have no easy way out.

On market share, Royal Mail is competing with some well-funded companies in the UK and other countries. Amazon, which has unlimited resources, is one of those firms. Other companies that are gaining market share in the parcel delivery business are Parcel2Go, Yodel, and Hermes.

Further, the company is seeing a sharp decline of letter volume. This is a major issue that has no solution since most people have stopped sending social and official letters and the downtrend will continue. 

The most recent half-year results painted the picture of a bruised company. IDS total revenue rose slightly to £5.86 billion while its operating loss jumped by 54% to £243 million. By segment, Royal Mail revenue dropped by 2.9% to £3.5 billion while GLS jumped by 5.9%.

These results show that, as has happened in the past, Royal Mail is being subsidized by the more profitable GLS. In the past, the management has considered splitting the two but conceded that it would be a difficult task.

In addition to IDS slow revenue growth, it also has a profitability challenge, especially now that inflation is still high. Higher inflation leads to more delivery and staff costs. As a result, the company considered implementing 10k layoffs in 2022 and it is unclear whether these ones have happened.

Royal Mail is also seeking for regulator input as the management implements its turnaround. Like other similar companies, Royal Mail is mandated by law to deliver letters and parcels throughout the country, six days a week. This includes some highly unprofitable regions. In a statement, the CEO said:

“We also need the regulator and the Government to do their bit. It’s simply not sustainable to maintain a network built for 20 billion letters when we’re now only delivering seven billion. The UK is not immune to the trends that we see across the world.”

IDS chart by TradingView

Regular readers know that I have been a bit bearish on Royal Mail stock price as you can read here and here. The stock has now retreated below the key support at 277.3p, the highest swing on July 23rd last year. It has also retreated below the 50-day and 25-day Exponential Moving Averages (EMA).

The Relative Strength Index (RSI) is approaching the oversold level at 30. Similarly, the MACD and the histogram have moved below the neutral level. Therefore, the outlook for the stock is bearish, with the next key point to watch being at 235p, the lowest point in December. A break below that level will see it retreat to 200p.

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