UPS sees Q1 earnings decline, cites volume declines and macroeconomic conditions

First quarter 2023 earnings issued today by Atlanta-based global transportation and logistics services UPS provider saw across-the-board declines.

Quarterly revenue—at $22.9 billion—was off 6% annually, and adjusted earnings per share—at $2.20—fell 27.9%, for the same period. Consolidated quarterly operating profit came in at $2.5 billion, which was off 22.8% annually on an adjusted basis.

“I want to thank all UPSers for delivering industry-leading service to our customers,” said Carol Tomé, UPS chief executive officer, in a statement. “In the first quarter, deceleration in U.S. retail sales resulted in lower volume than we anticipated, and we faced ongoing demand weakness in Asia. In response, we focused on controlling what we could control and delivered first-quarter consolidated operating profit and operating margin in line with our base case targets. Given current macro conditions, we expect volume to remain under pressure. We will remain focused on driving productivity while investing in efficiency and growth initiatives, enabling us to come out of this demand cycle even stronger.”

Individual segment results for UPS in Q1 2023:

• U.S. domestic package revenue decreased 0.9%, to $14.987 billion, and average daily package volume was down 5.4% annually, to 18.672 million, with UPS attributing the revenue decline to the 5.4% decrease in average daily volume, which was offset by a 4.8% increase in revenue per piece, to $12.54;
• International Package revenue, at $4.543 billion—was down 6.8% annually, with average daily volume down 6.2%, to 3.317 million, and total average revenue per package up 0.1%, to $20.47, with UPS pointing to a reduction in average daily volume due to lower domestic volume and softness in China trade lanes; and
• Supply Chain Solutions revenue—at $3.395 billion—fell 22.5% annually, with Forwarding revenue down 41.5%, to $1.803 billion, and Logistics revenue—at $1.410 billion—up 12.7%, with UPS noting that revenue fell due to market rate and volume declines in forwarding that were partially offset by growth in its healthcare business

“2023 is proving to be an interesting year,” said Tomé on the company’s earnings call today. “In the U.S., relative to our base plan, volume was higher than we expected in January, close to our plan in February, and then moved significantly lower than our plan in March. As retail sales contracted, we saw a shift in consumer spending. For example, food as a percentage of household budgets reached 9% in the first quarter compared to 7% a couple of years ago. U.S. discretionary sales are lagging grocery and consumable sales, and disposable income is shifting away from goods to services. Outside of the U.S. export activity out of Asia remained weak, which negatively impacted revenue in both International and Supply Chain solutions.”

The CEO said the company’s response has been to focus on controlling what it can control and remain disciplined on price, increase penetration in the most attractive parts of the market, manage its network with agility, drive productivity and stay on strategy.

Teamsters contract update: Addressing UPS’s labor contract negotiations with the Teamsters, Tomé explained that negotiations on a new contract are underway, noting that good progress has been made on many of its local supplemental agreements.

“Together, we have set up five subcommittees at their national bargaining tables to take on key areas of the contract, which enables us to move faster,” she said. “We are aligned on several key issues like solving the staffing needs for weekend deliveries ways to mitigate the summer heat in our package delivery vehicles. While we expect to hear a great deal of noise during the negotiations, I remain confident that a win-win-win contract is very achievable and that UPS and the Teamsters will reach agreement by the end of July.”

UPS CFO Brian Newman said on the earnings call that in the first quarter the macroeconomic environment was challenging both from a commercial and consumer perspective.

“The growth rate for U.S. manufacturing production fell throughout the quarter and was down 0.9% in March year-over-year,” he said. “On the consumer side, the U.S. economy growth on services spending is continuing to outpace the growth rate on good spending…with consumers spending more on essential items like groceries, which tend to be purchased in the store. These factors caused a five-point drop in consumer sentiment, from February to March, and contributed to the reduction in our volume levels.”

Outside the U.S., Newman said exports out of Asia remained weak, while Europe narrowly avoided a winter recession.

Newman said UPS expected average daily first quarter volume to decline between 3%-to-4%, with average daily quarterly volume seeing a 5.4% annual decline, due to March volume coming in lower than expected.

“We saw lower volume across all industry sectors, with the largest declines from retail and high-tech,” he said. “B2C average daily volume declined 5.5% compared to last year, and B2B average daily volume fell 5.4%. A bright spot in B2B for the quarter was returns, which was up 6.8% year-over-year. In the first quarter, B2B represented 42.7% of our volume, which was unchanged from a year ago. Additionally, the shift in product mix from air to ground that we saw in the fourth quarter of 2022 continued in the first quarter, as customers made cost tradeoffs and took advantage of the speed improvements we made in our ground network and further leveraged our SurePost product. Compared to the first quarter of last year, total air average daily volume was down 16.7%, ground declined 3%, and within ground, SurePost grew 1.8%.”

2023 outlook: When UPS provided its range of financial targets for 2023, it said these targets were based on the macroeconomic forecast at that time. And it added that over the course of the first quarter, the global volume environment “deteriorated due to challenging macro conditions and changes in consumer behavior,” leading it to now expect full-year revenue and adjusted operating margin to be at the low end of its previous range, with its targets at: consolidated revenue of around $97.0 billion; consolidated operating margin of around 12.8%; and capital expenditures of approximately $5.3 billion.

Rick Watson, Founder and CEO of New York-based RMW Commerce Consulting, explained that the company’s 2023 outlook serves as proof that conservative planning is the only choice in this market, adding that it is not good for two segments, e-commerce and supply chain. What’s more, he noted that being a volume business, declining volumes provide less operating leverage to clear the fixed costs of running the business—meaning a loss of operating margin just by watching volume decline.

“UPS is in the mode of ‘let’s not dismantle what we have’—similar to Target’s current approach,” he said. “Both companies are not going to make any rash actions in the face of economic softness. FedEx is taking a different approach because it has been slow to transform. UPS is still a profitable business and its approach is solid; the company can afford to wait it out. That doesn't describe many other companies that took too much free money in the last few years. ‘Control what you can control’ is a good motto, as long as things don't stay like this indefinitely; otherwise, we will see something closer to what FedEx is doing: closing facilities, consolidating routes, and laying off workers.”

Jerry Hempstead, president of Orlando-based Hempstead Consulting, was blunt in assessing UPS's first quarter results, saying it was not prerry and there is much to be concerned about. 

Ansd he added that UPS was very diplomatic about the Teamster negotiations and much was said to allay shipper fears.

“But UPS admits some of the shipment declines are due to FUD (Fear, Uncertainty, and Doubt), and that’s a consequence of the bellicose rhetoric emanating from the Brotherhood,” he said. “Every single service category except SurePost ( the low cost hybrid postal product) was down and in some categories the decline was alarming. Next-day air was down almost 11%. Deferred was off by 24.5%. It takes my breath away, but they have been scrambling to take costs out and raising prices so the effect is dampened on the P&L. But my experience says they need to turn on the heat and focus on shifting market share and back off on the revenue quality rhetoric.”