United Parcel Service (NYSE:UPS) is set to announce its first quarter 2013 earnings results on April 24 2014. We expect that the shift in customer preference towards more economical means of shipping packages will continue to negatively impact revenue per package for the company. However, continued growth in e-commerce sales and international trade will drive up package volume and should help boost revenue.
In the fourth quarter 2013, UPS’s revenue grew a moderate 2.8% to reach $15 billion, driven by growth in its U.S. domestic and international package segments. However, higher operational costs led to an 8.5% decline in net profits compared to the previous year’s figures. Operational costs increased during the quarter due to overwhelming holiday season package volumes which forced the company to employ higher resources. The company hired more than 30,000 temporary employees and increased purchased transport to cater to the high volumes. The decline in net profits impacted UPS’s earnings per share, which fell 5.35% to $1.25 in the fourth quarter.  During the fourth quarter earnings meet, UPS announced its guidance for earnings per share of 2014 to be within the range of $5.05 to $5.30, representing growth of 11% to 16%.
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Growth In E-Commerce And International Trade Will Help Boost Package Volume
The key trends impacting UPS’s volumes are growth in e-commerce sales and international trade. Online shopping is not only convenient, but has also become more accessible due to the increase in smartphones and tablets. 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 the U.S., e-commerce sales grew 17% from 2012 to 2013,  driving 3.7% growth in UPS’s U.S. domestic shipments volumes.  The trend is expected to continue in 2014 as well, with e-commerce sales in the U.S. growing close to 12%.  This trend should help drive UPS’s U.S. domestic packages in the first quarter 2014.
International trade has been increasing with recovery in the global economy. Increase in international trade bodes well for UPS since it means more international package volumes. The World Trade organization forecasts 4.7% growth in world trade in 2014.  We believe that UPS’s international package volume will grow in the first quarter 2014 given the increase in international trade and UPS’s focus on expanding global presence. UPS invested in expanding its international package handling capacity with two new distribution facilities in Chengdu and Shanghai which will help cater to shippers who want to deliver to China.  UPS also announced the acquisition of two small Costa Rica based logistics companies to expand its presence in Latin America. 
Shift Towards Economical Services Will Impact Revenue Per Package
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. For UPS, this leads to a cannibalization effect wherein package volumes of time-efficient-yet-pricy services decline and volumes for economical services increase. Volume for UPS SurePost, a low cost service which leverages the resources of the U.S. Postal service, increased more than 30% in the fourth quarter 2013 as shippers continued to choose lower costs over faster deliveries.  From an overall volume perspective, there is no impact for UPS. However, the trend has been putting pressure on UPS’s revenue per package.
Economical shipments options command lower revenue per package compared to time efficient services. An increase in volume of such economical services leads to a decline in overall revenue per package. After growing 4.2% and 5.7% in 2010 and 2011 respectively, UPS’s revenue per package was stagnant in 2012 and declined 0.6% in 2013.  In the first quarter 2014, we expect to see UPS’s revenue per package tempered by the continued shift towards low cost services.
- Q4 2013 United Parcel Service Earnings Release, January 30 2014, 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 [↩]
- Modest trade growth anticipated for 2014 and 2015 following two year slump, April 14 2014, www.wto.org [↩]
- UPS Expands Logistics Reach to Meet Emerging Demand in China, August 13 2013, www.ups.com [↩]
- UPS to Purchase Two Costa Rican Companies Boosts Customer Access to Global Markets, September 4 2013, www.ups.com [↩]
- United Parcel Service’s CEO Discusses Q4 2013 Results – Earnings Call Transcript, January 30 2014, www.seekingalpha.com [↩]