UPS (UPS, Financial) saw its stock drop by 13% after missing earnings expectations, its first miss since Q1 2020. Revenue fell 1.1% year-over-year to $21.82 billion, slightly below analyst predictions. Although FY24 revenue guidance is in line with previous estimates at $93 billion, the main concern is the significant reduction in its FY24 operating margin outlook to 9.4% from 10.0-10.6%.
- Q2 marked a turning point with US average daily volume (ADV) increasing by 0.7% year-over-year, the first positive volume growth since Q4 2021. Sequentially, ADV grew by 390 basis points. Growth was led by B2C with volume up 4.8% year-over-year, making up 58.5% of total volume, largely driven by new e-commerce customers. B2B ADV fell by 4.6%.
- However, customers traded down to lower-cost services, shifting from air to ground and from ground to SurePost. SurePost ADV grew 25% year-over-year due to new shippers, product trade downs, and easier comparisons. This trade down hurt margins, contributing to the large EPS miss. Additionally, high labor costs from the new Teamsters contract impacted margins year-over-year.
- Looking ahead, UPS expects a weaker mix of lower-margin services to make up a larger part of total sales, leading to the lower FY24 operating margin guidance. US ADV in the second half is expected to grow by mid-single digits, but product mix is anticipated to continue pressuring revenue per piece. Despite these challenges, UPS aims to exit the year with a US operating margin of 10%.
- In other news, UPS announced its acquisition of Estafeta, a Mexican express delivery company. UPS highlighted Mexico's growing role in global trade and the need for reliable access to the US market for Mexican SMB and manufacturing sectors. This acquisition aims to enhance UPS's global market access for customers in Mexico.
Overall, UPS's report was a disappointment for investors. The large EPS miss was unexpected, especially since FedEx (FDX, Financial) had reported a strong EPS beat for Q4 (May) and traded sharply higher. This explains why UPS did not join in FDX's rally last month, as investors were cautious about UPS's Q2 report. It appears that customers trading down is impacting UPS's margins.
