UPS Profit Tops Estimates on Pricing, E-Commerce Strength

(Bloomberg) -- United Parcel Service Inc. rode higher prices and strong delivery demand driven by e-commerce to post profit that topped analysts’ expectations.  

UPS and rival FedEx Corp. have been grappling with hefty volume since the pandemic hit last year. Both have aggressively raised prices to offset the expense of handling more residential deliveries, which have grown faster than more-profitable commercial packages. 

The price increases and shift to higher-profit deliveries drove a 13% gain for UPS’s overall revenue per package, offsetting a 2% drop in average volume. 

“We used to think that every package was the same. We don’t think that anymore,” Chief Executive Officer Carol Tome said in a conference call with analysts Tuesday. “We’re controlling the volume that comes into our network because we’re laser focused on revenue quality.”

UPS shares rose 6.7% to $217.56 as of 10:11 a.m. in New York -- after earlier rising 8% to a record high. The stock has gained 21% this year through Monday, just shy of a 22% increase for the Standard & Poor’s 500 index.

‘Better, Not Bigger’

The courier has focused on raising profit margins under Tome, who took over as CEO last year. Tome laid out a strategy of “better, not bigger” to rein in UPS’s past tendency to gobble up all the volume it could no matter how well it paid. She also sold the lower-margin freight business in April for $800 million and announced in September an agreement to purchase Roadie, a same-day delivery startup. 

Packages from UPS’s largest customers have trended downward as the company controls the volume that comes into the network, Tome said. That includes Amazon.com Inc., UPS’s largest customer. Tome said Amazon deliveries as a percentage of total volume trended similarly to 2019 during the first nine months of this year.

Adjusted earnings hit $2.71 a share in the third quarter, up from $2.28 a year earlier, the Atlanta-based courier said Tuesday in a statement. Analysts had predicted $2.54. Revenue rose 9.2% to $23.2 billion in the third quarter, while analysts had expected $22.6 billion.

“UPS has been growing its high-margin businesses like health care, pharmaceutical and medical devices while lessening its dependence on the lower margin B2C business,” said Cowen Inc. analyst Helane Becker in a note to clients, referring to the business-to-consumer segment. 

Union Workforce

The company has weathered a labor shortage better than its key competitor because, unlike FedEx, it has a union workforce and pays the highest wages in the industry. Compensation and benefits rose only 0.6% in the quarter from a year ago. 

“I feel really good about our ability to manage through the labor cost inflation that many companies are dealing with today,” Tome told analysts. 

Still, UPS’s costs for purchased transportation climbed 18% as the courier turned more to outside companies to move packages. Fuel costs jumped 54% on rising gasoline prices. 

The company on Tuesday raised its operating margin outlook to 13% for 2021 from an earlier target of 12.7%. It also increased capital spending plans for the year to $4.2 billion from $4 billion. 

©2021 Bloomberg L.P.