UPS exceeded analysts’ expectations in the first quarter of the 2018 fiscal year despite plenty of industry headwinds, announced the company during an earnings call on April 26.
What we learned:
- UPS collected $17.1 billion in revenue in the first quarter of 2018, about 10 percent higher than Q1 2017 and about 4 percent higher than Wall Street had predicted.
- UPS’s profit hit $1.3 billion in the first quarter, up from $1.2 billion the prior year. Domestic segment profits declined, which company executives chalked up to expanded Saturday delivery and bad winter weather. The growth of international and freight segments was enough to offset poor domestic performance.
- UPS’s earnings per share were $1.55 in the first quarter, up from $1.33 the previous year, on par with analysts’ expectations.
On the earnings call, executives detailed their first-quarter challenges, namely severe winter weather conditions and expanded Saturday deliveries.
UPS’s first-quarter performance suggests demand is strong, but also that the company’s internal review is necessary with an eye toward company-wide transformation.
Industry Challenges Remain Serious
There are a number of fundamental challenges facing the shipping industry today including increasing transportation costs, decreasing labor availability, increasing demand and the entries of new competitors into the market.
UPS was not exempt from these in the U.S. during the first quarter. Operating profit in the domestic segment dropped 6 percent year over year.
The company attributed some of that up to severe winter weather that slowed operating profits by about $85 million. But leaders also mentioned ongoing pension costs, investments in network improvements and UPS’s decision to widely expand Saturday delivery last year.
“Higher costs continue to pressure earnings,” Helane Becker, a Cowen & Co analyst, wrote in a research note, as quoted by Reuters. “In general, the company struggles with capacity issues during the peak season (the weeks leading up to Christmas), and could have issues achieving their EPS target unless their performance improves.”
In other words, UPS’s residential deliveries are still too expensive. Revenue per parcel delivered rose only 2.6 percent year over year. To effectively grow profits, the company needs to reduce the cost of delivering to households as volumes increase.
And, yes, volumes are increasing: UPS reported a 4.6 percent increase in parcel volume that drove a 7.2 percent jump in revenue across U.S. deliveries.
Additionally, Becker pointed out that UPS is stretched thin during the holiday season. Typically, the weeks between Thanksgiving and Christmas are when shippers’ profits shoot skyward — between holiday surcharges, blackout dates on late-delivery refunds and hugely increased volumes, companies that perform well during holidays tend to please investors.
Analysts will be watching to see if UPS (and its competitors) successfully expand capacity this winter.
UPS Investing in Itself
Company executives also used the April 26 earnings call to detail an internal operations review that has been underway since its last quarterly report.
UPS says this review will produce a “transformation plan,” aimed at responding to key changes in the delivery market: residential deliveries now outnumber commercial ones, procurement costs are rising and Amazon is making a play for market share in the shipping industry.
“The pace of change of business is accelerating so quickly,” Chief Executive David Abney said during the call, as reported in MarketWatch. “We feel like we had to respond with a sense of urgency.”
Already, UPS is in the first of a three-year capital investment spree. The company plans to spend as much as $7 billion to expand its network this year. Abney later told MarketWatch that the “transformation plan” will explore emerging markets and deeper integration of technology in to the company’s operations.
The ongoing review, led by former Walmart executive Scott Price, has only produced a few minor changes so far like voluntary early retirement for certain management employees. That, Price said on the call, is “just the beginning” of “a very extensive program.”
For the rest of the year, UPS said it expects earnings per share of between $7.03 to $7.37.
How Shipping-Based Companies Can Keep Up
As changing consumer shopping habits, new warehouse technologies and non-traditional competition continue to put pressure on parcel carriers, they’ll need to streamline their operations and increase efficiencies.
For companies that rely on carriers, that’s likely a good thing. Greater in-house efficiency at UPS and FedEx could mean new, better or cheaper delivery services. And more competition means they’ll have to work harder than ever to retain shippers as clients.
It’s a dynamic, exciting time to be working in and around the parcel shipping industry. Make sure your company is taking advantage of all these industry shakeups, either by pressing your carrier for better rates or by exploring new-to-market options.
If you need a trusted partner, consider Reveel. Our consultants help company executives review their existing contracts, spot inefficiencies, and prepare for renegotiation, and we routinely help them save 15 to 20 percent on shipping. Reach out today to see how we can help your business.