UPS Inc. (NYSE:UPS) said Tuesday that it plans to expand its weekend ground residential delivery operations, a strategy designed to build greater traffic density across its daily delivery network and to close the weekend delivery gap with archrival FedEx Corp. (NYSE:FDX).
UPS CEO Carol Tomé told analysts following the release of the company’s first-quarter results that by October it will reach 90% of the U.S. population with its Saturday ground deliveries to residences. Currently, that number stands at a little higher than 75%.
In addition, UPS will expand its Sunday delivery network through its existing alliance with the U.S. Postal Service, Tomé said, without providing details. UPS’ ground residential network is virtually invisible on Sundays, although the Postal Service delivers some Sunday volume for UPS through the SurePost alliance between the two entities.
Traditionally, UPS leveraged the Postal Service’s universal delivery network to offer inexpensive, last-mile deliveries on behalf of its retail customers. However, about 41% of SurePost volumes now move in UPS’ network rather than through the Postal Service, Tomé said. As more of those parcels fill the network, UPS benefits both from greater density and enhanced fluidity.
UPS has lagged behind FedEx’s internally controlled seven-day-a-week ground residential network for parcels scheduled for pickup during the back half of the traditional workweek. Because of its broad weekend coverage, FedEx can generally deliver those packages over the weekend, whereas UPS deliveries would need to be held until the following Monday or Tuesday, depending on the transit times.
Tomé punted on the specifics of much of UPS’ strategy until the company’s June 9 investor day. Efforts to continue to increase parcel density are expected to be discussed during the meeting, she said. One macro tailwind is the revival of business-to-business (B2B) traffic, which was hit very hard by the COVID-19 pandemic. Domestic B2B activity was flat in the first quarter but was up 8% in March, the company said, adding the outlook for the segment looks promising.
B2B deliveries are considered high-density because they typically involve drivers handling more packages per stop.
Due to the pandemic, parcel volume in 2020 exceeded capacity for the first time since 1997, when a 15-day Teamsters union strike against UPS shut down its ground-delivery network. The company expects the imbalance to persist for the foreseeable future. At the same time, analysts and investors should expect revenue to grow faster than volume in the near term as the company improves its revenue quality efforts and volumes level off from the breakneck pace of 2020, Tomé said. Domestic revenue per package rose by 10.2%, the company’s fastest rate of growth in 19 years.
As Tomé and CFO Brian Newman were talking to analysts Tuesday morning, UPS shares were soaring on the company’s report of spectacular first-quarter results. UPS shares closed up more than 10% to $193.71 a share. Adjusting for items such as a significant reduction in pension liability and expenses, UPS reported earnings per share of $2.77, an adjusted 147% gain from the year-earlier period, and well above the $1.72 to $1.73 per share median forecasts by analysts. Revenue rose 27% to $22.9 billion, as demand rose across its three main product lines.
The U.S. domestic package segment posted a 22.3% revenue gain to slightly more than $14 billion. International package revenue rose 36.2% to $4.6 billion. UPS’ supply chain and freight segment, which includes the rest of the company’s business, rose to $4.2 billion, a 34.3% gain.
Total operating profits rose 158% to $2.8 billion. Operating margins in what has traditionally been the weakest quarter of the year hit the high single digits for domestic package and supply chain and freight, and rose 23.6% for the international segment, UPS said. The record international profit gains were fueled by strong export growth from all regions, in particular out of Asia and Europe, the company said. UPS also reported big gains in its health care vertical and in the small to midsize (SMB) customer segment. SMB average daily volumes grew by 35.6%, outpacing volume growth from UPS’ large enterprise accounts for the third consecutive quarter.
Even the pension gods smiled on UPS during the first quarter. The company reported a $2.5 billion after-tax, mark-to-market pension benefit as a result of the American Rescue Plan Act of 2021, which included landmark pension reform that protected plans funded by multiple employers typically from the same industry from going insolvent through 2021.
The act relieved the company of liabilities related to the Teamsters union’s Central States Pension Fund, which was heading toward insolvency later this decade unless pension reform was enacted. UPS exited the Central States plan in 2007 at a cost of more than $6 billion and shifted employees into its own plan.
The law also required the company to “remeasure” its plan at current discount rates, which have increased since the prior measurement date, the company said. The overall result reduced UPS’ pension liability by $6.4 billion, the company said.
Analysts couldn’t be happier with the results. Amit Mehrotra of Deutsche Bank, who upgraded UPS’ shares to buy in March 2020 just as the shares were starting a powerful run toward more than doubling, hiked his 12-month price target to $260 per share from $185. Mehrotra said the sunny scenario in which effective execution meets cost opportunity is “coming into view.” Bascome Majors of Susquehanna Financial Group said the strong momentum should carry into the second quarter and Tome’s first investors day event since taking over as CEO last June. Tom Wadewitz of UBS called the results “impressive” across the board and much stronger than the optimistic estimates heading in to the day.
Wadewitz singled out the domestic parcel segment, where operating income was 105% above his estimates.