UPS rides the ecommerce boom and price increases to a surge in profits

Brahm Buck

On an operating basis, United Parcel Service Inc. (UPS) had a stellar fourth quarter, benefiting greatly from increased shipping volume, including a surge in ecommerce orders, during the coronavirus pandemic. Revenue in its fourth quarter, which ended Dec. 31, 2020, was about $24.90 billion, up 21.0% from the $20.57 billion […]

On an operating basis, United Parcel Service Inc. (UPS) had a stellar fourth quarter, benefiting greatly from increased shipping volume, including a surge in ecommerce orders, during the coronavirus pandemic.

Revenue in its fourth quarter, which ended Dec. 31, 2020, was about $24.90 billion, up 21.0% from the $20.57 billion in Q4 2019.

UPS reported a $3.26 billion Q4 net loss, compared with a $106 million loss for the same period in 2019. But that was due to a $5.6 billion in charges, including a $4.9 billion non-cash pension adjustment charge, related to the pending sale of its UPS Freight unit and other items.

On an adjusted basis, excluding such one-time charges, net income was $2.33 billion, or 26.4% above the $1.84 billion adjusted net income same period last year. 2019’s Q4, like 2020’s, included one-time charges.

For the year ended Dec. 31, revenue was $84.63 billion, up 14.2% from $74.09 billion in 2019. On a non-adjusted basis, net income was $1.43 billion, down 67.9% from $4.44 billion a year earlier. The year’s adjusted net income ended Dec. 31 (not including one-time charges) was $7.17 billion, up 9.5% from $6.54 billion a year earlier.

In a Feb. 2 conference call with analysts, recently named CEO Carol Tomé said the pandemic created uncertainty and declined to offer revenue or earnings guidance for 2021. But she added that the carrier doesn’t expect to see ecommerce sales decline this year.

“While we are optimistic about the future, we don’t know the pace of the vaccine rollout or the impact that a continuing pandemic will have on the global economy,” Tomé said. “On the other hand, we don’t think ecommerce sales as a percentage of retail sales will decline, which means continued supply and demand imbalances.”

In response to an analyst’s question during the call, Tomé said UPS’s large retailer clients hope to get stores open soon, but no one thinks demand for ecommerce will change once that happens. “We are in a new normal. Even my relatives, who are older, are shopping online. Before, they would never do that,” she said.

Tomé became CEO June 1, 2020, succeeding David Abney. She previously was chief financial officer at Home Depot Inc. (No.5 in the 2020 Digital Commerce 360 Top 1000) and served on the UPS board for 15 years.

UPS’ digital operations grow 

Tomé also said the carrier is making progress on its “better not bigger” strategic plan, including improvements to its online presence.

“From a customer-first perspective, speed and enabling capabilities are very important. Our goal is to provide the best digital experience powered by our smart global logistics network and we’re targeting our solutions to high-yielding sectors like [small and medium-sized businesses], among others,” she said.

She said UPS now has more than 700,000 accounts for its Digital Access Program (DAP) and revenue from DAP grew more than 360% in 2020. She added that UPS expects DAP revenue to reach $1 billion in 2021.

DAP, launched in 2019, is a series of strategic alliances and agreements intended to integrate UPS services more closely with ecommerce platforms and retailers. For example, it includes a deal with Stamps.com, which provides ecommerce shipping software, to offer discounted shipping rates to Stamps.com customers. DAP also includes collaborations with ecommerce vendors that specialize in demand generation, order management, web store hosting, shipping and returns.

A smooth Q4

The Atlanta-based carrier had one of its smoothest peak seasons last year despite soaring volume. UPS flexed its pricing power by adding fees on its largest retail customers while sometimes throttling back service for customers whose volume exceeded agreed-upon levels. That helped UPS increase revenue per ground package by 7.8% as it handled more residential deliveries, which are typically less profitable than commercial shipments.

In the domestic division, which makes up about two-thirds of sales, UPS had warned of fourth-quarter headwinds such as increased spending to speed up the network and more hiring for peak season. While adjusted profit margins in the operation softened slightly to 8.8%, that was enough to beat Citigroup Inc.’s estimate of 7.2%.

“Collectively, we believe these results are a strong launching point for profit growth in 2021,” Citigroup analyst Christian Wetherbee told Bloomberg News.

Jack Atkins, an analyst with financial services from Stephens Inc., was also upbeat about how UPS ended the year.

“We believe these results will go a long way to re-energizing investors about the potential for meaningful profit improvement at UPS over the next several years under the leadership of its new CEO,” Atkins said in a note to clients.

Paring investment

Tomé last week made her first big move to slim down UPS and focus on its core package business, reaching an agreement to sell the company’s freight unit. She extended that theme with the earnings release, saying UPS will cut capital expenditures to $4 billion this year from $5.4 billion in 2020. The company spent more than $6 billion a year in 2018 and 2019 to increase automation and capacity.

She also said the company won’t buy back shares this year and instead will pay down $2.5 billion of long-term debt when it comes due.

For the quarter ended Dec. 31. UPS reported:

  • Revenue of $24.90 billion, up 21.0% from the $20.57 billion in Q4 2019.
  • A net loss of $3.3 billion, compared with a $106 million net loss in Q4 2019.
  • Adjusted net income of $2.33 billion, or 26.4% above the $1.84 billion adjusted net income from the same period last year.
  • An adjusted operating profit of $2.87 billion, up 25.9% from $2.28 billion in Q4  2019.

For the year ended Dec. 31, UPS reported: 

  • $84.63 billion, up 14.2% from $74.09 billion in 2019.
  • Net income on a non-adjusted basis of $1.43 billion, down 67.9% from $4.44 billion a year earlier.
  • Adjusted net income of $7.17 billion, up 9.5% from  $6.54 billion a year earlier.
  • Adjusted operating profit was $8.72 billion, up 7.0% from $8.15 billion in 2019.

Percentage changes may not align exactly with dollar figures due to rounding.

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