United Parcel Service (UPS), the world’s largest parcel delivery company, is set to cut 12,000 jobs and explore strategic alternatives for Coyote, its truckload freight brokerage business, following a disappointing fiscal year and a below-estimate full-year revenue forecast. The announcement led to a 6.3% drop in UPS shares during early trading.
Challenging Year and Cost-Cutting Measures
UPS is targeting a reduction of $1 billion in costs as it aims to rebound from what CEO Carol Tome described as a “difficult and disappointing” year. The company faced declines in volume, revenue, and operating profit across all its business segments. The cost-cutting measures and job cuts are part of UPS’s strategy to navigate challenges and streamline operations.
Full-Year Revenue Forecast Below Estimates
During a conference call with analysts, CEO Carol Tome outlined UPS’s cautious outlook, indicating that business conditions are not expected to improve until the second half of 2024. The company forecasted full-year revenue in the range of $92 billion to $94.5 billion, falling below analysts’ estimates of $95.57 billion, according to LSEG data.
Squeeze on Profits
Higher labor costs resulting from a new contract with the Teamsters union and a decline in average daily volume have contributed to the squeeze on UPS’s profitability. Chief Financial Officer Brian Newman stated that the company anticipates reporting its lowest consolidated operating margin of the year in the first quarter.
The challenges are reflected in United Parcel Service’s expectation of weak average daily volume in the first half of the year, with a potential recovery in the latter half. However, growth prospects remain constrained, particularly in the U.S. small package market, excluding Amazon, which is expected to grow by less than 1%.
Labor Talks Impact and Business Recovery
Despite the challenges, United Parcel Service noted that it has successfully regained business lost to rivals like FedEx during last summer’s labor talks. Sixty percent of that business has returned, according to CEO Carol Tome. However, the overall landscape remains challenging as customers shift towards ground-based delivery, a less lucrative option compared to air-based services, impacting both UPS and FedEx.
Revenue Decline in Q4
For the fourth quarter, United Parcel Service reported a 6.9% decline in revenue from its air-based international segment, citing significant softness in Europe. Additionally, the truck-based U.S. business experienced a 7.3% revenue decline. Overall, UPS reported quarterly revenue of $24.9 billion, down from $27 billion the previous year and falling below analysts’ estimates of $25.43 billion.
Adjusted profit for the quarter dropped to $2.47 per share from $3.62 a year earlier. While this represents a decline, it slightly exceeded analysts’ estimates of $2.46 per share.
Strategic Review for Coyote
In response to the challenging business environment, United Parcel Service is initiating a strategic review of Coyote, its truckload freight brokerage business. This move aligns with the company’s broader efforts to assess and optimize its portfolio, ensuring a more efficient and effective business structure.
Future Outlook and Challenges
United Parcel Service’s challenges underscore its status as a bellwether for the global economy. The company’s cautious outlook reflects broader concerns about economic conditions, with expectations of improvement only in the latter part of 2024.
As UPS navigates a landscape of labor costs, volume fluctuations, and evolving customer preferences, the strategic decisions, including job cuts and the Coyote review, demonstrate a commitment to resilience and adaptability in an ever-changing business environment. The impact of these measures, coupled with external factors, will shape UPS’s trajectory in the coming quarters and provide insights into the broader economic landscape.
