United Parcel Service Inc.’s (NYSE:UPS) parcel deliveries fell more than expected in the second quarter, sending shares tumbling even as higher prices helped boost sales and profits. The company reiterated its full-year guidance.
Average daily package volume fell 4% in the United States and more than 13% for its international business, UPS said in a statement Tuesday. Shopping habits shift towards spending on services and consumers are tightening their belts amid a global wave of inflation.
CEO Carol Tome’s strategy has been to break away from UPS’s tendency to chase volume at all costs. Since taking office in June 2020, the courier has focused on more profitable clients, such as healthcare and small businesses. Courier margins have been helped by higher prices and limits on discounts traditionally given to large customers.
“We expected volume levels to decline from last year. They did, but more than we planned,” Tome said in a conference call with analysts. “Despite the decline in volume, we continue to win in the most attractive parts of the market.”
UPS is adjusting to lower package deliveries
After struggling to keep up with increased demand at the height of the pandemic, UPS is adjusting to a slowdown in package deliveries. People are now spending less on goods delivered to their homes and more on services, like going to concerts and eating at restaurants. On Monday, giant retailer Walmart Inc. reflected a change in consumer behavior by slashing its profit outlook, saying shoppers are focusing on low-margin essentials.
Amazon.com Inc. (NASDAQ:AMZN) is one of the large customers for whom the courier limits the volume of packages. Revenue and volume from the e-commerce giant, UPS’s biggest customer, is down and will account for less than 11% of total revenue by the end of this year. Amazon accounted for 11.7% of total UPS revenue in 2021 and 13.3% in 2020.
Revenue and profit beat estimates
Atlanta-based UPS said that adjusted earnings were $3.29 per share in the second quarter, down from $3.06 a year earlier. Analysts had predicted US$3.15 per share. Sales were US$24.8 billion, just slightly above the average estimate of US$24.6 billion. The increase in revenue and profit was aided by an 11.9% increase in revenue per piece to overcome lower volumes.
“While the external environment is ever-changing, our better not bigger strategic framework has fundamentally improved nearly every aspect of our business, enabling greater agility and strong financial performance,” Carol Tome said.
The courier’s adjusted operating profit margin was 14.4%, down from 14% a year earlier. Margins were boosted by increased revenue per package, driven by both price increases and a shift to higher value packages. Revenue per package jumped nearly 12% in the United States and nearly 15% for international trade.
“Increasing its share buyback by 50 percent to US$3 billion provides us with some confidence about the sustainability of some of these initiatives and long-term profitability of the company through the economic cycle,” said Lee Klaskow, an analyst for Bloomberg Intelligence
UPS maintains its full-year guidance
From now on, the company expects full-year consolidated revenue of approximately $102 billion, in line with consensus, and a consolidated adjusted operating margin of roughly $13.7%. Elsewhere, UPS is increasing the number of targeted stock buybacks for 2022, raising the target to $3 billion for the year.
Despite the overall positive results, reaffirmed guidance, and upbeat comments, UPS fell by more than 3% shortly after Tuesday’s market open. Declining volumes and reliance on price increases to push back past earnings expectations appeared to dampen market confidence in the report.
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