High Operating Costs Driven By Weather Disruptions Offset Revenue Growth Leading to Decline In UPS’s Earnings
United Parcel Service’s (NYSE:UPS) first quarter 2014 revenue grew 2.6% compared to the previous year’s adjusted results to reach $13.7 billion. [1] Previous year’s adjusted results exclude the impact of penalties related to UPS’s attempt at acquiring TNT Express, an international courier delivery services company based in the Netherlands. [2] UPS’s revenue growth was driven by an increase in package volumes at its U.S. domestic package and international package segments. However, severe weather conditions drove up operating costs, leading to a decline in UPS’s net profits.
The decline in net profits impacted earnings per share, which fell 5.7% to $0.99 in the first quarter. Similar to the previous quarters, the company’s revenue per package declined due to an increase in non-premium services’ volumes. Due to the challenging conditions in the first quarter operating environment, UPS expects its 2014 earnings per share to be at the lower end of its guidance range of $5.05 to $5.30. [3]
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Growth in Domestic And International Package Volume Help Boost Revenue
Growth in e-commerce has been driving UPS’s U.S. domestic package volumes. In the first quarter of 2014, U.S. domestic average daily package volume increased 4.2% driven by growth in UPS SurePost and UPS Second Day Air services. UPS SurePost volume grew more than 50%. [3] Revenue for the segment increased 2.6% to reach $8.5 billion, partially tempered by a decline in revenue per package.
International package revenue increased 5% to reach $3.1 billion driven by a 7.9% growth in average daily package volumes. International exports grew 7.7%, primarily due to 15% growth in intra-European exports. [2] In order to cater to the growing demand for transborder shipments in Europe, UPS recently completed a $200 million investment in its Cologne, Germany air hub. This investment has helped in expanding the capacity of the facility by 70%.
Weather Related Disruptions Negatively Impact U.S. Domestic Profits And Company Earnings
High costs incurred due to severe winter weather had a significant impact on UPS’s U.S. domestic package profits. Weather disruptions forced UPS to shut down its operations along many points of its network in the U.S. for 34 days, more than half of the 63 operating days in the first quarter. [3] Labor hours increased 5.4% and overtime increased 20%, driving up compensation expenses. Snow removal costs and utility expenses also increased. The segments’ operating profit declined 2.1% on account of the higher costs. [1]
UPS’s net earnings declined 9% compared to previous year’s adjusted results due to the higher weather related expenses for its U.S. domestic package segment. It also had to suffer loss of revenue and an increase in refunds due to its inability to fulfill deliveries during the harsh weather.
Revenue Per Package Declines Due To Unfavorable Product Mix
The declining trend for revenue per package seems to have continued in the first quarter of 2014. UPS’s revenue per package declined 1.4% year-over- year on account of an unfavorable product mix. [1] Volume of non-premium services was higher compared to premium services due to a shift in customer’s preference towards low-cost services. Customers are willing to wait a few extra days in order to save on shipment costs.
An increase in e-commerce sales has been driving growth in volume for UPS SurePost, a low-cost service which leverages the resources of the U.S. Postal service. Due to its low cost, e-commerce retailers prefer the UPS SurePost service since it enables them to pass on the low cost benefits to their customers. Increases in UPS SurePost volumes led to a 1.5% decline in revenue per package for UPS’s U.S. domestic package segment. [2] Similarly, revenue per package for UPS’s international package segment declined 2.1% due to a 13% increase in non-premium export services.
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Notes:
- UPS First Quarter 2014 Results, April 24 2014, www.ups.com [↩] [↩] [↩]
- UPS First Quarter 2014 Press Release, April 24 2014, www.ups.com [↩] [↩] [↩]
- United Parcel Service’s CEO Discusses Q1 2014 Results – Earnings Call Transcript, April 24 2014, www.seekingalpha.com [↩] [↩] [↩]