United Parcel Service missed Wall Street estimates for second-quarter earnings and lowered its 2024 operating margin target on Tuesday, after its customers shifted to slower, lower-profit delivery services.
Shares of the world's biggest package delivery firm, seen as a bellwether for the global economy, tumbled 12% in early trading and pulled shares of rival FedEx down 2%.
UPS customers are "balancing the need for speed with cost," price" CEO Carol Tome said on the earnings call.
They are shifting from premium air services to less expensive ground service and from ground to even more economical SurePost services, where UPS picks up packages and hands them off to the U.S. Postal Service for final delivery, Tome said.
Demand for high-margin doorstep package delivery has been lackluster since the end of home-bound consumers' early pandemic e-commerce binge in late 2021. UPS, FedEx and other home delivery providers have responded by slashing jobs, parking planes and rooting out other expenses to get costs in line with revenue.
UPS on Tuesday said adjusted profit was $1.79 per share for the quarter, below analysts' estimates of $1.99, according to LSEG data. The Atlanta-based company also lowered its full-year adjusted operating margin forecast to 9.4%, from a range of 10.0% to 10.6%.
While a modest miss on estimates was anticipated, "the magnitude of the 2Q miss, coupled with the large downward revision to the full-year adjusted operating margin guide, will surprise even the biggest bears," Jonathan Chappell, equity analyst at Evercore ISI, said in a note to clients.
UPS also said revenue would be $93 billion, versus its prior range of $92.0 billion to $94.5 billion.
The company recently slashed about 11,500 jobs to save around $1 billion.
"We have shown that we can drive costs out and we can continue to do that," Tome said.
The company also struck a deal in June to sell its volatile truckload brokerage business, Coyote Logistics, for about $1 billion to RXO. That will free up money to restart share buy backs, which will total $500 million this year, executives said.
UPS expects cost pressures to ease in the second half of the year. UPS at the end of this month will finish absorbing 56% of the cost of its five-year labor contract with the Teamsters.
It also will replace FedEx as the primary expedited air service provider for the U.S. Postal Service (USPS) in October. UPS expects the five-year contract to be profitable in its first year.
