The results were better than expected, and UPS shares jumped 15% in midday trading. In April, UPS executives thought that online shopping would slow down after the early days of the pandemic. “Instead, we saw just the opposite," said new CEO Carol Tomé. Consumer online spending surged as stores closed, people sheltered at home, and the government sent them checks, she said on a call with analysts.
The company's volume jumped 23% to more than 21 million packages a day, and revenue climbed more than 13%. But while stay-at-home orders and other restrictions to slow the spread of the new coronavirus have meant more business for the delivery companies, it has also strained their networks and threatened to drive up costs.
Deliveries to homes are less lucrative — UPS' U.S. revenue per piece fell 5% in the second quarter — and they are more costly because drivers must cover more distance between drop-offs. UPS and rival FedEx Corp. have responded by imposing the kind of surcharges more commonly associated with Christmas to cover their increased spending. They have raised prices on bulky shipments and on retailers whose volumes have risen sharply during the pandemic.
Tomé hinted that UPS could raise prices further on big retailers — most of them are even more dependent on online orders now because many consumers are afraid to go back inside stores. “While retailers may squawk at price increases that come their way, large retailers have a way to spread that across (many items they sell) and nobody knows,” Tomé said.
Tomé, 63, is a former chief financial officer at Home Depot and longtime UPS board member who became CEO on June 1. In her first earnings call with investors, she hinted at changes at the 113-year-old company.
She suggested that in the past UPS chased volume instead of profits and “over-engineered” things by, for example, offering too many services that complicated the company's operations and confused customers.
Five times Tomé said that under her leadership, UPS would be “better, not bigger.” Tomé said that after a surge in cargo shipments from Asia, UPS could have bought more Boeing 747 freighters at good prices because Boeing will stop building the planes in 2022. But the jumbo jets would mostly be useful only when UPS needs excess airfreight capacity, “so we passed on that investment that in the past we might have made,” she said.
But UPS will spend $750 million this year on shortening the time that packages are in transit. The second-quarter profit at the Atlanta-based company was up 5% from year-ago earnings of $1.69 billion.
Adjusted for non-recurring costs, UPS said earnings came to $2.13 per share. That more than doubled the $1.04 per share average forecast among analysts surveyed by Zacks Investment Research. Revenue rose more than 13%, to $20.46 billion, easily beating the $17.34 billion average forecast from the Zacks survey.
Helane Becker, an analyst at financial-services firm Cowen, predicted UPS will do well in the third quarter, but she said UPS will be challenged to handle rising e-commerce volume during the peak shipping season before Christmas.
“The solution may be increased surcharges to limit volumes during peak, which again would be positive as UPS looks to improve margins of residential delivery,” Becker wrote in a note to clients. “Another solution would be to limit the amount of low margin volume it accepts.”
David Koenig can be reached at www.twitter.com/airlinewriter