UPS Earnings Preview: Dimensional Weight Pricing To Complement E-Commerce Package Growth

United Parcel Service (NYSE:UPS) is set to announce its first quarter earnings results on Tuesday, April 28. The company is coming off a weak fourth quarter, wherein its diluted earnings declined 60.8%, to reach $0.49. ^[1] UPS’ poor performance came as a result of higher than expected operating expenses incurred in order to cater to the growing volumes of e-commerce packages.

For its first quarter results, we anticipate that the growing e-commerce industry will continue to drive UPS’ package volumes. We also expect to see an increase in UPS’ domestic revenue per package as a result of its new pricing mechanisms, which were implemented in the first quarter. The change in pricing mechanisms should also have a positive impact on the company’s operating margins. The decline in fuel prices will also contribute to operating margin growth by reducing UPS’ fuel bill.

For 2015, UPS expects its earnings per share to increase 6-12%, to $5.05-5.30, with its total shipments per day rising 3-4%. UPS’ top line will likely continue to grow 5-6% on e-commerce volumes.

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Growing E-Commerce Sales Will Help Drive Revenue

The e-commerce industry in the U.S has been booming. In 2014, e-commerce sales grew 15.4%, increasing its contribution to overall retail sales from 5.8% to 6.5%. ^[2] This is because online shopping has become not only more convenient, but also more accessible due to the increase in smartphones and tablets and higher broadband 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 2014, UPS’s U.S. domestic package volume grew 6.4% on account of 15.4% growth in the U.S. e-commerce sales. ^[3] E-commerce sales in the U.S. are expected to grow around 14% in 2015. ^[4] This will help increase UPS’ U.S. domestic packages, which will have a positive impact on first quarter revenues.

Dimensional Weight Pricing To Boost E-Commerce Package Revenues

In June of 2014, UPS announced that starting in December, dimensional weight would be used to calculate the billable price of all ground packages in the U.S. and standard packages to Canada. ^[5] The change in pricing mechanism was aimed at generating higher revenues from lightweight packages that occupy a large space in UPS trucks. When charged simply on the basis of their weight, these products would generate revenues which did not justify the space they occupied. In order to charge a fair value for its most important asset, the space in its trucks, and also more efficiently cover operating costs, UPS decided to move to a dimensional weight based pricing.

Dimensional weight can be calculated by multiplying the length, breadth and height of the package, and then dividing by 166. The change in pricing mechanism could result in a 30-50% increase in revenue per package for bulky-yet-light products ordered online such as toilet paper rolls, towels, shoes, diapers and purses. This should considerably increase UPS’ first quarter revenue per package.

UPS’ revised rates, which were effective from December 29, 2014, will also help boost the company’s top line and revenue per package. On an average, UPS increased package and air freight rates by 4.9% ^[6]

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1. UPS’s 2014 Q4 Financials, February 3, 2015, www.ups.com [↩]
2. U.S. Census Bureau Quarterly E-commerce Report, www.census.gov [↩]
3. UPS Quarterly Historical Income and Operating Data, February 3, 2015, www.ups.com [↩]
4. Retail Sales Worldwide Will Top $22 Trillion This Year, December 2014, www.emarketer.com [↩]
5. UPS Announces Dimensional Weight Changes, June 17 2014, www.ups.com [↩]
6. UPS 2015 Rate Change Information, www.ups.com [↩]