United Parcel Service (UPS) has revised its 2023 revenue forecast downwards for the second consecutive quarter due to a continued softening in delivery demand in the lead-up to the crucial holiday season.
As a result, UPS shares experienced a 5% drop, marking their lowest point in nearly three years.
The world’s largest package delivery company is grappling with a profit squeeze while simultaneously striving to recapture business lost during the turbulent U.S. labor negotiations that occurred earlier in the year.
This challenge is exacerbated by the higher costs associated with the recently established five-year deal, which covers 340,000 Teamsters-represented workers in the United States.
CEO Carol Tome acknowledged the difficulties faced in the third quarter during a conference call, stating, “We expected conditions in the third quarter to be challenging, and they were.”
The upcoming year-end holiday season is traditionally the peak period for package delivery firms.
Notably, UPS serves major retail clients such as Amazon, Walmart, and Macy’s, all of which are preparing for what some analysts predict could be the slowest U.S. holiday sales season since 2018.
The retail sector experienced the most significant decline in package volume during the third quarter, and all industry sectors saw a decrease in activity, according to UPS executives.
The company now anticipates that U.S. package volume will decline by a low- to mid-single-digit percentage by December, a departure from its previous forecast of flat year-over-year volume.
Jefferies analyst Stephanie Moore characterized the outlook as weak, attributing it to broader market forces rather than unique challenges specific to UPS. FedEx, a key rival, also saw its shares drop by 4% during midday trading.
As an indicator of the U.S. economy’s health, UPS has lowered its full-year revenue projection to a range of $91.3 billion to $92.3 billion, down from the previous estimate of approximately $93 billion.
The company has also revised its annual adjusted operating margin projection to a range of 10.8% to 11.3%, down from 11.8%.
Part of the margin pressure stems from customers shifting from more lucrative air-based services to less profitable ground-based delivery options. Amazon, a major UPS customer, is leading this trend.
With the e-commerce delivery market becoming more competitive, UPS and its competitors are resorting to discounts and incentives to maintain and gain market share, potentially further impacting sector profits.
UPS reported that labor negotiation-related package diversions persisted into the third quarter, with the total now standing at 1.5 million average daily packages, up from 1.2 million previously.
To date, the company has recouped 600,000 of those packages, with Amazon accounting for half of the regained business.