UPS Earnings Preview: E-Commerce Sales To Drive Revenue And Operating Expense But Temper Yields
United Parcel Service (NYSE:UPS) is set to announce its third quarter 2014 earnings results on October 24 2014. We anticipate that the growing e-commerce industry will drive UPS’ third quarter revenue and package volume. A decline in revenue per package will remain a concern for the quarter. In the past few quarters, revenue per package has been declining due to the shift in customer preference towards more economical means of shipping packages and growth in e-commerce packages. In anticipation of a high volume of e-commerce packages during the upcoming holiday season, the company has decided to invest in its network in order to not repeat the fiasco witnessed during Christmas 2013. This should have some impact on the third quarter operating costs.
In the second quarter, UPS posted 5.6% year-on-year growth in revenue, to reach $14.27 billion. UPS’ net profits declined 57.6%, to reach $454 million, due to recognition of a charge related to the transferring of post retirement liabilities of certain employees to defined contribution plans. [1] Excluding this impact, UPS’ net profits increased 4.5% driving 7% growth in earnings per share, which reached $1.2.
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UPS’ U.S. domestic package revenue volume likely to grow on e-commerce sales
E-commerce sales directly impact UPS’ package volume and revenue since many online retailers, such as Amazon (NASDAQ:AMZN), employ UPS’ services in order to offer their customers timely and economical delivery of products. Therefore, growth in the e-commerce industry bodes well for UPS. In 2013, U.S. e-commerce sales grew 17%, increasing its contribution to overall retail sales from 5.2% to 5.8%. [2] This is because, not only is online shopping more convenient, but has also become more accessible due to the increase in smartphones and tablets and higher internet penetration. Many brick-and-mortar retailers have rolled out online shopping portals to cater to the growing online retail shopping customer base. Deals and discounts on online shopping also encourage customers to purchase via websites rather than traditional stores.
In 2013, UPS’s U.S. domestic package volume grew 3.7% on account of a 17% growth in the U.S. e-commerce sales. [3] E-commerce sales grew 15.7% year-on-year in the second quarter and are expected to grow close to 12% in 2014. [4] This could help increase UPS’ U.S. domestic packages, which will have a positive impact on third quarter revenues.
Preparations for holiday season volume will increase operating expense and temper earnings
Similar to the previous year, UPS expects to see high package volume driven by e-commerce sales during the holiday season. However, this year UPS intends to be more prepared to handle the overwhelming number of packages. UPS had therefore decided to take up certain measures that will set it back by $175 million. Due to the high operating expense forecast, the company’s management lowered its earnings per share guidance from $5.05-$5.30 to $4.9-$5.0, representing a 7-9% increase over 2013. [5]
In anticipation of the high package volume during this year’s holiday season, UPS has decided to add 50 new sorting facilities in existing hubs that will help increase its capacity by 5%. [6] Last year, in order to prepare for the holiday season, UPS had hired around 55,000 seasonal employees. [7] Despite hiring an additional 30,000 before Christmas, UPS faced a lot of difficulties handling the overwhelming number of packages during the holidays. The bad weather conditions also added to UPS’s problems. However, for this year’s holiday season, UPS has decided to hire 90,000–95,000 seasonal employees. [8] Traditionally, operations have been limited on Black Friday, however this year the company will operate for the full day. UPS has also accelerated the rollout of its route optimization software, ORION, which will help reduce delivery times and costs during the peak season. It expects to have around 45% of its drivers using ORION by the holiday season. These preparations should add to UPS’s operating costs for the third and fourth quarters.
Revenue per package may continue to decline due to unfavorable package mix
Lately there has been a shift in customer preference towards economical means of shipping packages, even if it means waiting a few extra days for their shipments to get delivered. The move towards cheaper shipping options has also been driven by growth in e-commerce. E-retailers prefer to keep their shipping costs to a minimum and pass on any cost savings to their customers.
Though e-commerce packages have helped boost UPS’ U.S. Domestic Package volumes, they have negatively impacted yields. In the second quarter 2014, the 60% increase in UPS SurePost volumes, which is a low yield service, led to an unfavorable product mix which resulted in a 2.0% decline in average yield for UPS’ U.S. Domestic Package segment. [1] UPS’s revenue per package was stagnant in 2012 and declined 0.6% in 2013 for the same reason. [3] We expect to see a similar decline in revenue per package in the third quarter 2014.
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- UPS Q2 2014 Financials, www.ups.com [↩] [↩]
- U.S. Census Bureau Quarterly E-commerce Report, www.census.gov [↩]
- UPS Quarterly Historical Income and Operating Data, January 30 2014, www.ups.com [↩] [↩]
- Global B2C Ecommerce Sales to Hit $1.5 Trillion This Year Driven by Growth in Emerging Markets, February 3 2014, www.emarketer.com [↩]
- UPS Q2 2014 News Release, July 29 2014, www.ups.com [↩]
- United Parcel Service’s (UPS) CEO Scott Davis on Q2 2014 Results – Earnings Call Transcript, July 29 2014, www.seekingalpha.com [↩]
- UPS Holiday Pick-Ups To Exceed 34 Million Packages On Peak Day, October 25, 2013, www.ups.com [↩]
- UPS Begins Hiring for 2014 Holiday Season, September 16, 2014, www.ups.com [↩]