UPS Inc. (NYSE:UPS) CEO Carol B Tomé said Wednesday that the company is considering the launch of same-day delivery initiatives, and might go outside the UPS driver network to implement them.
Such a service would plug a hole in the Atlanta-based transport and logistics company’s portfolio. UPS has never offered a same-day delivery service. Pilots are underway to test the initiative, Tomé said during UPS’ investor & analyst day. She did not elaborate.
“We don’t have this all the way figured out, but we have a team of people looking at it,” Tomé said about the same-day delivery concept. “There’s an opportunity there that’s very different [from what] we’ve done in the past.”
Outsourcing a same-day delivery service is unlikely to sit well with UPS’ drivers, all of whom are members of the Teamsters union. The Teamsters have long chafed at management’s initiatives that don’t involve UPS drivers transporting parcels. For example, the union has long demanded that UPS end a long-standing alliance with the U.S. Postal Service, where letter carriers deliver UPS customers’ parcels from local post offices to residences, and turn over that business to the company’s drivers.
A growing number of parcels moving under the service, known inside UPS as SurePost, are now being redirected to routes run by company drivers. By merging SurePost traffic with existing, close-by UPS routes, the company said it can offer a more cost-effective service internally rather than tendering the parcels to the Postal Service.
The disclosure of the same-day delivery initiatives came at the end of the highly anticipated three-hour event, which was designed to paint a sweeping picture of where the company would be by 2023. Instead, investors focused on what might be seen as a conservative three-year profit forecast for the company’s U.S. package-delivery business, and sent UPS’ shares falling by 4.15% to $201.06. Shares had dropped to $197 during the session. Shares of rival FedEx Corp. (NYSE:FDX) dropped more than 3.1%.
During the Q&A session, which consumed roughly half of Wednesday’s virtual event, analysts kept returning to UPS’ forecasts of 2023 operating margins of 10.5% to 12% for the largest of UPS’ three divisions. The margin forecast was not very far from the 10.4% first-quarter operating margin that some analysts had modeled. About half of the projected three-year gains will be front-loaded into 2021 as UPS reaps the benefits of having a full year of higher rates and delivery surcharges, the latter of which is a byproduct of the COVID-19 pandemic, as well as an increase in SMB business, Tomé said.
Tomé and CFO Brian Newman spent more time than they probably wanted explaining the rationale behind the forecast. The initial range, according to Tomé, was based on 2021 estimates made last year that, based on the first quarter’s activity, were vastly understated. UPS’ first-quarter SMB business “took off” on a trajectory that surprised company executives, Tomé said.
UPS’ performance in the high-margin SMB segment will set the tone for its 2023 domestic margin position, Tomé said. Based on UPS’ projections of SMB share, the range should tilt toward the upper end of the current range and might go higher, she said.
“We prefer to put a range out and then exceed it,” Tomé said. She added, “We’re not going to disappoint.”
Newman said the U.S. package profit forecast is a “mile marker” and not a “destination,” suggesting the numbers could be adjusted upward if UPS continues to gain share among SMBs.
Tomé, who was The Home Depot Inc.’s (NYSE:HD) CFO for 18 years and has spent most of her career in finance, is known for her cautious guidance to analysts and investors. In a post-event note, Amit Mehrotra of Deutsche Bank said UPS’ projections of 4% annual revenue gains in 2022 and 2023 are “way too low” in light of the top-line opportunities ahead of it. Mehrotra called UPS’ outlook “very conservative” and said shares present a compelling value at current levels given UPS’ “structural earnings power.”
All of this means a different U.S. market by 2023, with the pace of SMB penetration accelerating and that of big enterprise shippers, traditionally the lower-margin customers, declining. Many big UPS shippers have already been hit with sizable rate hikes and costly delivery surcharges, and an increasing number are looking at the network of regional parcel delivery carriers as possible alternatives.
The international package division is expected to be the star of the next three years, with operating margins rising 21.7% by 2023. UPS said it expects to capitalize on the anticipated surge in cross-border e-commerce, as well as growth in certain economies that the company has not come close to fully penetrating.
UPS said it will continue to benefit from the ongoing dearth of bellyhold cargo lift on passenger flights as international travel curbs are gradually lifted. Scott Price, who heads UPS’ international division, said belly cargo lift out of Asia will not be restored to pre-COVID 19 levels until 2023.
Price said UPS expects to retain much of the business gained during the pandemic even after belly lift opens up because business will have grown accustomed to a superior level of cargo services.
UPS’ Supply Chain and Freight division, which includes all of its nonpackage operations, will post flat revenue through 2023 as gains in freight brokerage, freight forwarding and health care logistics will be offset by the loss of $3.1 billion in annual revenue from UPS Freight, which was sold to Canadian carrier TFI International Inc. (NYSE:TFII) earlier this year.