UPS Earnings Preview: Declining Revenue Per Package May Temper E-commerce Driven Growth

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United Parcel Service

United Parcel Service (NYSE:UPS) is set to announce its second quarter 2014 earnings results on July 29 2014. We expect that growing e-commerce sales will help boost UPS’ second quarter revenue and package volume. However, revenue per package will be a point of concern since, in the past few quarters, it has been declining due to the shift in customer preference towards more economical means of shipping packages.

In the first quarter 2014, UPS’ revenue grew 2.6% to reach $13.7 billion driven by an increase in package volumes at its U.S. domestic package and international package segments. [1] Additionally, the company’s revenue per package declined due to an increase in non-premium services’ volumes which includes UPS SurePost.

Severe weather conditions drove up operating costs, leading to a decline in UPS’ net profits. The decline impacted earnings per share, which fell 5.7% to $0.99 in the first quarter. Due to the challenging conditions in the first quarter, UPS expects its 2014 earnings per share to be at the lower end of its guidance range of $5.05 to $5.30. [2]

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Growing e-commerce sales will help drive UPS’ revenue

The e-commerce industry in the U.S has been booming. In 2013, e-commerce sales grew 17%, increasing its contribution to overall retail sales from 5.2% to 5.8%. [3] This is because, not only is online shopping more convenient, but has also become more accessible due to the increase in smartphones and tablets and higher internet penetration. 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.

E-commerce sales directly impact UPS’ package volume and revenue since many online retailers, such as Amazon (NASDAQ:AMZN), employ UPS’ services in order to offer their customers timely and economical delivery of products. In 2013, UPS’s U.S. domestic package volume grew 3.7% on account of 17% growth in the U.S. e-commerce sales. [4] E-commerce sales grew 15% year-on-year in the first quarter and are expected to grow close to 12% in 2014. [5] Growth in e-commerce sales will help increase UPS’ U.S. domestic packages, which will have a positive impact on second quarter revenues.

Revenue per package may continue to decline due to unfavorable package mix

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. The move towards cheaper shipping options has also been driven by growth in e-commerce. E-retailers prefer to keep their shipping costs to a minimum and pass on any cost savings to their customers.

The increase in demand for economical delivery options helped boost volume of UPS’ SurePost service by 50% in the first quarter of 2014. However, revenue per package declined 1.4% year-over- year because of the unfavorable package mix. [1] UPS’s revenue per package was stagnant in 2012 and declined 0.6% in 2013 for the same reason. [4] We expect to see a similar decline in revenue per package in the second quarter 2014.

UPS has taken up steps to improve its revenue per package by expanding its premium services. It recently announced the expansion of its UPS Next Day Air Early AM service. [6] The UPS Next Day Air Early AM is a service wherein packages are delivered the next day by 8 am and also operates on Saturdays. UPS charges a premium rate for this service, and such premium services may help improve UPS’ depressed revenue per package. We will closely monitor the company’s revenue per package to analyze the impact of the expansion of UPS’ Next Day Air Early AM service.

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Notes:
  1. UPS First Quarter 2014 Results, April 24 2014, www.ups.com [] []
  2. United Parcel Service’s CEO Discusses Q1 2014 Results – Earnings Call Transcript, April 24 2014, www.seekingalpha.com []
  3. U.S. Census Bureau Quarterly E-commerce Report, www.census.gov []
  4. UPS Quarterly Historical Income and Operating Data, January 30 2014, www.ups.com [] []
  5. Global B2C Ecommerce Sales to Hit $1.5 Trillion This Year Driven by Growth in Emerging Markets, February 3 2014, www.emarketer.com []
  6. UPS Expands Delivery Coverage for Earliest Morning Service, May 22 2014, www.ups.com []