United Parcel Service (UPS), the world’s largest package delivery firm, missed Wall Street estimates for second-quarter earnings and reduced its 2024 operating margin target on Tuesday.
This came after two new e-commerce customers overwhelmed its network with slower, less profitable delivery services.
UPS shares dropped 12.5% in early trading, impacting rival FedEx, whose shares fell by 2%. UPS did not disclose the names of the new customers but described them as well-known shippers with “explosive” volume, which aligns with the profiles of Shein and Temu, companies known for selling low-cost goods from Chinese factories.
According to U.S. shoppers and delivery tracking software providers, UPS handles services for these companies.
During the quarter, demand from these new customers was unexpectedly high.
“Their demand was much higher than we had anticipated,” CEO Carol Tome explained during a conference call with analysts.
This surge led to a shift from premium air services to cheaper ground services, and even more economical SurePost services, where UPS picks up packages and hands them off to the U.S. Postal Service for final delivery.
Demand for high-margin doorstep package delivery has been weak since late 2021, after the initial pandemic-driven e-commerce boom ended.
In response, UPS, FedEx, and other delivery providers have been cutting jobs, grounding planes, and reducing other expenses to align costs with revenue.
For the second quarter, UPS reported an adjusted profit of $1.79 per share, below analysts’ expectations of $1.99.
The company also lowered its full-year adjusted operating margin forecast to 9.4%, down from the previous range of 10.0% to 10.6%.
“The magnitude of the 2Q miss, coupled with the large downward revision to the full-year adjusted operating margin guide, will surprise even the biggest bears,” said Jonathan Chappell, equity analyst at Evercore ISI, in a note to clients.
UPS now expects revenue to be $93 billion, compared to its prior range of $92.0 billion to $94.5 billion. Recently, the company cut about 11,500 jobs to save around $1 billion.
“We have shown that we can drive costs out and we can continue to do that,” Tome stated.
In June, UPS agreed to sell its truckload brokerage business, Coyote Logistics, for approximately $1 billion to RXO, freeing up funds to restart share buybacks, totaling $500 million this year.
UPS anticipates cost pressures to ease in the second half of the year.
By the end of the month, UPS will have absorbed 56% of the cost of its five-year labor contract with the Teamsters and will replace FedEx as the primary expedited air service provider for the U.S. Postal Service in October.
UPS expects this five-year contract to be profitable in its first year.