UPS’s Net Profits Decline Due To Overwhelming Holiday Season Deliveries

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To cater to higher-than-expected package volumes during the holiday season, United Parcel Service (NYSE:UPS) incurred higher operational costs, which led to an 8.5% decline in its fourth quarter 2013 net profits compared to the previous year’s adjusted figures. [1] The adjustment excludes the impact of a non-cash charge reported in order to adjust pensions to reflect current market price. UPS’s fourth quarter revenue grew a moderate 2.8% to reach $15 billion, driven by growth in its U.S. domestic and international package segments, which more than offset declines in the supply chain & freight segment.

The decline in net profits impacted UPS’s earnings per share, which fell 5.35% to $1.25 in the fourth quarter. For the full year 2013, earnings per share grew less than a percent. [1] UPS announced its guidance for earnings per share of 2014 to be within the range of $5.05 to $5.30, which represents growth of 11% to 16%.

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UPS’s Domestic Package Costs Offset Volume Growth

In the fourth quarter, costs for UPS’s U.S. domestic package segment grew 7.3% driven by the unprecedented surge of package volumes in December, which led to the  hiring of more than 30,000 temporary employees and an increase in purchased transport. [1] Increased costs more than offset the 5.6% growth in volume, leading to a decline of 13% in the segment’s profits.

Revenue per package declined due to lower fuel surcharges and an increase in demand of UPS’s low-margin services. UPS’s SurePost service, a cost sensitive delivery solution, grew more than 30% as shippers continued to choose lower costs over faster deliveries.

In 2014, UPS expects its U.S. domestic average daily volumes to grow 3%- 4%. [2] However, revenue per package may face headwinds due to customer preference of low-margin services like SurePost.

Export Shipments Drive Volume Growth For UPS’s International Package Segment

UPS’s international export shipments grew 9.5% in the fourth quarter driven by growth in trade routes between Asia and Europe. Overall volume growth of 8.8% boosted international package revenues by 5.3%. [1] However, currency fluctuations negatively impacted the segment’s profits, which could have grown by low double digits instead of 7.6%.

Similar to UPS’s U.S. domestic package segment, the international package segment faced declines in revenue per package due to customer shift towards non-premium low cost services.

Looking ahead, UPS expects the positive growth momentum in the international segment to continue and forecasts volume growth of 4%-6% in 2014. [2]

Supply Chain & Freight Revenue Declines

UPS’s revenue from its supply chain & freight segment declined 5.8% primarily due to declines in its forwarding business. [2] Growth in the logistics and freight segments partially offset declines from the forwarding business. Logistics revenue grew driven by healthcare and retail shipments. The increase in tonnage and pricing improvement boosted revenue for freight and less than truck load (LTL) by 2.3%. ((Q4 2013 United Parcel Service Earnings Release, January 30 2014, www.ups.com)) In 2014, UPS expects mid-single digits growth in revenue and low-teen digit growth in profits from the supply chain and freight segment. [2]

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Notes:
  1. Q4 2013 United Parcel Service Earnings Release, January 30 2014, www.ups.com [] [] [] []
  2. United Parcel Service’s CEO Discusses Q4 2013 Results – Earnings Call Transcript, January 30 2014, www.seekingalpha.com [] [] [] []
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