UPS forecasts softer peak shipping season

October 24, 2024

UPS on Thursday reported positive revenue and profit growth in the third quarter, turning the corner on nearly two years of subpar performance. But the company also cautioned that macroeconomic conditions and more in-store shopping could dampen peak season shipping activity.

Full-year revenue guidance of $91 billion was down slightly, mostly related to the disposal of Coyote Logistics. The forecast suggests UPS (NYSE: UPS) doesn’t expect a surge of shipping activity during the current quarter, especially with management flagging a slowdown in U.S. online sales and lower-than-expected global manufacturing activity.

“Recently, shippers have tempered their volume expectations,” CEO Carol Tome said on a conference call with analysts. More than 100 of UPS’s top customers, who represent 60% of network volume and 85% of the peak surge, have tightened their forecasts for the holiday season.

Estimated electronic and mail-order sales in the fourth quarter are expected to increase about 3%, down from 5% previously, the UPS chief said.

“Part of this, we believe, is influenced by the tight, compressed peak period. There are only 17 shipping days between Thanksgiving and Christmas Eve. And what forecasters and some of our customers are saying is, because of the [short] shipping season, many customers will go into a store to complete their holiday purchases.

“The consumer actually is in pretty good shape. It will still be a good peak … but just not as dynamic as people thought at the beginning of the year,” said Tome.

The parcel logistics giant said higher revenue – up 5.6% year over year to $22.2 billion – combined with productivity initiatives produced a $2 billion operating profit, up 22.8% on an adjusted basis. Despite choppy macroeconomic conditions, UPS was able to increase revenue and profit margin by improving revenue quality and holding the line on costs.

Results beat analysts’ estimates, including adjusted earnings per share of $1.76 versus a consensus of $1.57. UPS in September completed the sale of freight brokerage Coyote Logistics to RXO for $1 billion, which resulted in a $152 million after-tax profit gain.

Strong domestic volumes

UPS said a 6.5% increase in domestic parcel volume, partially offset by a 2% decline in yield, pushed up domestic revenues by nearly 6% to $14.5 billion. Consolidated pre-tax operating profit was up nearly 47%. It was the second consecutive quarter of average daily volume growth for the segment and the highest year-over year-growth rate since the first quarter of 2021. Management said revenue per piece improved sequentially in the third quarter due to upward base-rate adjustments on less-profitable B2B shipments from sources such as Shein and Temu in China.

Domestic air volume fell 6.9% in the third quarter, all of it attributed to the glide down in business with Amazon – UPS’s largest customer. Amazon in recent years has shifted transportation from UPS and other carriers as it builds out its own logistics infrastructure. Tome said the reduction in Amazon air shipments is based on Amazon trading down from air to less expensive ground transportation and moving some volume to its own air cargo network.

UPS has completed the closure of 45 sort operations so far this year, including nine full buildings. Consolidation contributed to an 8% improvement in pieces per workforce hour, said CFO Brian Dykes.

“While 8% might not seem like a big number, that translated into an efficiency gain of 11 million hours” and overall production improvements offset 50% of the union wage increase from last year’s labor contract, he said. The express delivery provider is moving 5% more volume through automated facilities and making sure legacy sort centers are hitting performance targets.

Costs will also improve as the high wage inflation at the start of the contract normalizes.

International air capacity

Revenues in the international package segment increased 3% to $4.4 billion, bolstered by higher yields as volumes flattened out. Margins of 18% drove pre-tax profit up 17%. UPS added over 200 flights connecting the Asia-Pacific region to Europe and the United States to meet peak holiday shipping demand, a significant increase compared to the same period last year. UPS recently said it also added a new flight connection at Sharjah International Airport in the United Arab Emirates, enabling packages from China and South Korea to be delivered in as few as two business days to markets such as Nigeria, Pakistan, Saudi Arabia and South Africa.

Global air cargo volume is up 12% for the first three quarters compared to 2023 and is expected to stay elevated in the final three months, according to freight data providers.

In September, UPS also expanded residential Saturday delivery to the eight largest markets in Europe without an additional charge.

UPS’s supply chain business improved revenues by 8%, primarily from growth in air and ocean forwarding and the onboarding of the U.S. Postal Service as a customer. UPS took over the Postal Service’s entire domestic air cargo contract on Oct. 1, but began to operate some routes over the summer to make sure the network was ready for the peak season. The migration of traffic from incumbent FedEx didn’t kick into gear until September. Management said fourth-quarter performance will be much better because daytime utilization of aircraft and trucks will be much higher with all the U.S. Postal Service volume now in the UPS system.

“Now that the volume is all in, the fourth quarter is going to look a lot different than the third quarter from a performance perspective,” Tome said.

With the Coyote and Postal Service moves “we eliminated a highly volatile truckload brokerage business and added air cargo volume that is predictable and margin positive,” said Tome.

UPS executed on its strategy of becoming the top provider of complex healthcare logistics services by announcing last month plans to acquire Germany-based Frigo-Trans, expanding its ability to provide integrated cold and frozen supply chain services for pharmaceutical customers in Europe. Frigo-Trans has a large network of temperature-controlled warehousing and trucking, as well as freight forwarding capabilities. The transaction is expected to close in the first quarter. In the third quarter, UPS generated $2.5 billion in consolidated healthcare revenue.

UPS shares were up 5% to $138.30 in late afternoon trading.

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