UPS Beats Profit Estimates But Concerns Of E-Commerce Margin Squeeze Push Down Shares

Profit expectations for the latest completed quarter were beaten by United Parcel Service Inc.

But despite this, shares of the company dropped by 5.7 per cent because investors were apparently worried about a margin squeeze because of the increased e-commerce deliveries being undertaken by the company due to the increased demand during the novel coronavirus pandemic.

UPS, the largest delivery company of the world, reported its quarterly results at a time when an early start to a holiday shipping rush is being experienced by UPS, FedEx Corp and other major package carriers which analysts believe will cause a stress to the networks of the companies that are already operating close to their capacity.

There was a 13.8 per cent jump in one of the key UPS domestic segment – the average daily volume for the third quarter as the company got filled with residential deliveries for a wide range of goods from snacks to exercise equipment as people were forced to stay back in their home amid the pandemic.

However, there was an 8.8 per cent drop during the third quarter in the company’s reported operating profit for its domestic package unit as the company delivered more packages to destinations that were far lung and ere less profitable – which were mostly residential addresses. An increase in investments in the expansion of operations and speeding up of its service also strained the operating profits of the company.

“Continued compression in domestic margins means that the debate over whether UPS has “fixed” e-commerce remains open,” Bernstein analyst David Vernon said in a client note.

In a bid to save its earnings from a drop in lucrative shipments to businesses, prices were raised and costs were slashed by the Atlanta-based UPS.

During the latest quarter, productivity was below expectations, said Chief Executive Officer Carol Tomé, who added that there was also a higher employee turnover at the company because of the pandemic and other factors.

For the quarter, the company reported an 11.8 per cent rise in its net income to come in at $1.96 billion, or $2.24 per share.

The company also beat analysts’ average estimate of $1.90 per share, according to Refinitiv data by reporting earnings of $2.28 per share, excluding items.

There was a 15.9 per cent growth in revenues which came in at $21.24 billion.

Another 100,000 workers for the winter holiday season would be hired by it, UPS had said last month. Retailers have begun holiday season deliveries more than a month ahead of time in order to avoid overwhelming the delivery network.

Shares in UPS fell $9.76 to $161.08 in early trading.

(Adapted from SMNews.com)

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