UPS Q4 Earnings Review: Higher Expenses, Weak Future Outlook Impact Stock Price
Logistics giant UPS (NYSE:UPS) announced mixed fiscal Q4 and full year earnings on Tuesday, January 31st. The company’s revenue grew by 5.5% year-on-year (y-o-y) to around $16.9 billion for the quarter but missed market expectations by $80 million. The total revenue for the fiscal year was reported at $60.9 billion, an increase of 4% over the previous year. Despite revenue growth across all segments, the average revenue per piece declined a moderate 1% in the last quarter. The company’s adjusted net earnings of $1.63 per share were up year-on-year but missed expectations, largely due to higher operating expenses. For the full year, the company reported EPS of $5.75, an increase of 6% year-on-year.
UPS also announced full year 2017 EPS guidance in the range of $5.80 to $6.10, which was lower than market expectations of $6.17 per share. The disappointing guidance, coupled with lower-than-expected earnings, resulted in the company’s stock dipping almost 7% after the announcement.
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Segment Performance
The U.S. Domestic Package segment, UPS’s main revenue contributor, continues to benefit from the growth in the e-commerce sector. For the quarter ending December 31st, the segment’s revenue increased 6% over the prior year quarter to $10.9 billion, primarily aided by a 5% increase in average daily package volume. However, the increase in low-cost shipments negatively impacted the average revenue per piece, which declined a moderate 0.3% over the prior year period. Furthermore, it contributed to pressure on the company’s operating margin, which declined from 12.5% in Q4 2015 to -5.2% in Q4 2016.
Within the segment, U.S. Ground showed growth of 7% over the prior year quarter and reported revenues of $7.8 billion. Next Day Air and Deferred reported revenues of $1.8 billion and $1.3 billion, respectively, aided by a 5% surge in shipments for both the divisions.
The International Package segment’s revenues grew a marginal 5% to $3.3 billion for the quarter, aided by a 7% rise in average daily package volume. Despite the uptick in revenues, the segment’s operating profit declined 51% over the prior year quarter to $281 million, primarily due to higher operating expenses. For the quarter, the segment’s operating margins declined 10 percentage points over the same period last year to 8.4%. On adjusted basis, the segment’s operating profit rose 13% over the prior year quarter to $2.5 billion.
During the year, UPS made a number of investments in order to cater to the increasing e-commerce demand. This included expansion of existing facilities in the U.S. and Europe. Higher capital spending, along with lower net cash from operations, resulted in a 30% decline in the company’s free cash flow.
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