United Parcel Service expects fatter holiday profits on slightly slimmer volume

By Nandan Mandayam and Lisa Baertlein

Oct 27 (Reuters) - ‌United Parcel Service's focus ​on more ​lucrative business means it can make more money delivering slightly fewer packages during its critical peak holiday season and every year going forward, CEO Carol Tome said on Tuesday.

Shares of the world's largest parcel delivery firm ‌closed almost 6% higher after UPS raised its annual revenue and profit forecasts on better-than-expected third-quarter earnings ⁠after cutting doorstep deliveries of millions of unprofitable packages for Amazon.com, its largest customer.

Atlanta-based UPS expects total average daily volume to be down 1.3% in the fourth ‌quarter as it becomes more selective in ‌which packages it delivers. At the same time, executives forecast a roughly 3% rise in revenue in the company's domestic operation, its largest, and an estimated 7% increase in international revenue.

"We're dispelling the old belief that all packages were created ​equal and that volume solves all problems," Tome told Reuters.

A widening gap between the cost per parcel and revenue per parcel will improve company margins, executives said.

For example, UPS' reduction in unprofitable deliveries — and the resulting volume reduction — in the fourth ⁠quarter means UPS can spend less on labor as well as truck and plane leases to handle the holiday package surge, Chief Financial Officer Brian Dykes said.

Tome said the ​outlook for the holiday season, referred to as the Super Bowl for delivery firms and retailers, is strong as US consumers continue spending despite pressures from rising inflation and prices at the ​pump.

SLIMMER OPERATION SETS STAGE FOR GROWTH

UPS has shuttered facilities and shed thousands ‌of jobs after scaling back deliveries for Amazon. UPS said it completed the Amazon delivery reductions in the second quarter.

Rival FedEx, which reports results on Wednesday, has deployed a similar strategy. Both companies ⁠have been under pressure from investors to show meaningful results.

Tome also said data center construction is a significant opportunity as it touches every part of UPS, which can fly in critical components such as microprocessors, arrange ocean shipments of equipment, store goods and make final deliveries.

For the third quarter, ⁠UPS posted adjusted profit of $1.69 per share, lower than $1.74 per share a year ago but above analysts' average estimate of $1.63.

Third-quarter adjusted operating margin in UPS' domestic ​unit, which generates about 65% of company revenue, rose to 7% from 6.4% a year earlier.

The smaller but more profitable international package division also reported a higher adjusted operating margin of 14.9% for the third quarter, compared with 14.8% last year.

Jefferies analysts said third-quarter earnings showcased a "quarter of ‌strong execution," while Evercore ISI analyst Jonathan Chappell wrote in a note that the results give "some confidence in durability."

UPS also said it was on track to meet its target of $3 billion in cost savings ‌this year. It has saved $1.8 billion through September.

The company now expects 2026 adjusted profit of around $7.28 per share, compared with the $7.22 it had forecast ⁠in July. Analysts expect the company to report a ‌profit of $7.19 per share, according to data ​compiled by LSEG.

UPS expects annual revenue of $92.6 billion, compared with its previous projection of $91.2 billion and above analysts' estimate of $91.73 billion.

(Reporting by Lisa Baertlein and Nandan Mandayam; Editing by Leroy Leo, Chizu Nomiyama, Rod Nickel ‌and Nick Zieminski)

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