UPS saw an uptick in U.S. volume for the first time since the fourth quarter of 2021 in a sign that freight demand may finally be on the upswing. But the logistics giant cut its revenue guidance and operating margin target for the full year, sending the company’s stock down more than 13 percent in trading on Tuesday.
The Atlanta-based company generated consolidated revenues of $21.8 billion in its second quarter, a 1.1 percent decrease from the year-ago period on net income to $1.4 billion. The profits fell by a much wider margin, as UPS reported a 32 percent drop from $2.1 billion the same time last year. Earnings totaled $1.79 per share.
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The figures came in below Wall Street estimates of $22.2 billion and earnings per share of $1.99.
Pressures remain at the business as U.S. customers traded down in the UPS offerings they selected, opting for less profitable transportation options. As a result, average daily volume was down 7.8 percent by air, while this number increased 2.3 percent by ground. SurePost, the company’s economy service for low-value, residential shipments, saw average daily volume grow 25 percent.
UPS CEO Carol Tomé indicated that e-commerce purchases have driven much of the overall volume growth, with some new clients bringing in volume that was “certainly more than we anticipated, flowing into our network.”
“There were two new e-commerce customers that came into our network, and you can imagine who they are,” said Tomé in the call. “These are new e commerce shippers in the United States whose volume has been explosive, we are working through the relationships as we speak.”
Tomé did not reveal which companies were the e-commerce customers that have been escalating volume, but it could be speculated that they are Shein and Temu. A recent analyst note by Wells Fargo predicted that Temu and Shein were accounting for “substantial global small package volume growth” into the U.S.
In total, domestic operations revenue declined 1.9 percent. The international segment saw a 1 percent decline in revenue, which UPS attributes to a 2.9 percent decrease in average daily volume.
The company also is still enduring compressed margins from labor costs due to the Teamsters contract signed last year, in which 46 percent of the total cost increase came in the first year. The pressures from this deal should ease up for the remainder of the year, as this was the last full quarter of the high wage growth rate associated with the first year of the new contract.
For 2024, UPS now says consolidated revenue is expected to be approximately $93 billion, down from a potential maximum of $94.5 billion. Additionally, the company now projects consolidated adjusted operating margin to be approximately 9.4 percent, instead of the prior 10 percent to 10.6 percent range.
UPS acquires Mexico-based logistics firm
The earnings report shrouded a significant acquisition for UPS, with the company acquiring Mexico-based logistics and shipping company Estafeta. The deal embeds the American logistics giant further into Mexico as nearshoring gains steam and more Mexican businesses seek access to the U.S. consumer.
“The nearshoring phenomenon is real and burgeoning,” said Dr. Tom Goldsby, professor and Haslam Chair of Logistics at the University of Tennessee. “Granted, the vast majority of shipments between these two countries remains business-to-business bulk volumes, so the opportunities for small package growth pale in comparison to the truckload and full-pallet shipments that the nearshoring trend affords.”
Estafeta, which has been a delivery partner of UPS since 2020, has a network that covers 95 percent of the population in Mexico with 145 facilities, moving about 325,000 shipments per day. The company also has six airplanes that fly domestically in Mexico and to Miami. The firm offers parcel and courier, freight forwarding and warehousing services.
Kate Gutmann, executive vice president and president international, healthcare and supply chain solutions said in the call that under UPS, Estafeta will be a “billion-dollar plus” business. According to Gutmann, the company’s supply chain cross-border business is already up double digits from the year prior.
UPS did not disclose the financial terms of the deal. Gutmann said that the company raised additional debt capital of $1.2 billion in the second quarter, hinting that a portion of that total was allocated to the acquisition.
“The acquisition follows a pattern of buying not only existing capabilities, but also the supply chain relationships that Estafeta has established over nearly half a century of doing business in its home market,” Goldsby said. “Even companies the size and scale of UPS are realizing that acquiring an entity possessing these resources is easier and more economical than building and competing for them.”
UPS’ acquisition comes just days after less-than-truckload (LTL) company XPO expanded its services in the country with the launch of Mexico+ to further accelerate delivery times. The service expands existing border-crossing points from two to seven facilities, and increasing the Mexican terminals operated by partners from 14 to 52 facilities.
Mexico+ will use proprietary technology to track shipments from origin to destination across Mexico, the U.S. and Canada.
