Domestic package growth fuels UPS results
Robust growth in e-commerce retail boosts the company's US business.
United Parcel Service (UPS) reported adjusted diluted earnings per share (EPS) of $1.04 for the first quarter, up 4% year over year. As expected, the company's results were boosted by continuing strong growth in its domestic package delivery business, led by robust growth in e-commerce retail. In contrast, its international business continued to remain sluggish amid uncertain macroeconomic environment globally.
Generating more than $1.4 billion in free cash flow during the first quarter, UPS reaffirmed its full year guidance for adjusted diluted EPS to be in the range of $4.80 to $5.06.
The UPS Domestic Package division revenues at $8.27 billion grew 3.4% year over year, while operating profit grew more than 9%, led by 70 basis points margin improvement. Revenue growth was primarily driven by higher volumes as revenue per piece was up marginally by 0.4%. U.S. domestic daily package volume increased 4.4%, led by almost 5% growth in UPS Ground daily volume. Next Day Air and Deferred daily package volumes also grew for the quarter, however, at much slower rates than UPS Ground.
Going forward, we expect the division to continue to see volume growth driven by the e-commerce boom. However, a customer shift towards premium offerings like UPS My Choice and UPS Returns will be the key to improve yields and in turn, profitability. UPS recently expanded the My Choice product to its SurePost deliveries. UPS SurePost leverages U.S. Postal Service's extensive ground delivery system to provide economic, non-urgent small package delivery services to residential addresses throughout the U.S. Increased flexibility by allowing My Choice members to upgrade UPS SurePost package to UPS Ground for an additional fee not only creates product differentiation, but it also helps the company improve its profitability. Similarly increased adoption of the UPS Returns product that allows businesses to simplify the customer return process and build better customer relationships will also help UPS to grow in a more profitable manner.
UPS' International package division revenues were flat at $2.98 billion, while adjusted operating profit reduced by more than 4% to $391 million as margins contracted by 70 basis points. Daily export volume increased 3.8% year over year to 2.4 million packages, driven by Asia (up 8%) and Europe (up 3%). However, revenues remained flat due to lower export yield, down 2.5% on a currency neutral basis. Increasing use of ocean services for heavier, low value per pound packages and the use of non-premium (deferred) air cargo services drove lower revenues per package for the company.
Going forward, we expect the division to continue to remain under pressure through 2013, as there are no clear signs of a faster recovery in the global economy. However, UPS' growing global footprint will help boost its earnings by tapping fast-growing e-commerce retail and export markets around the world.
During the quarter, UPS launched Access Point in Europe, that is similar to its My Choice product in the U.S., to improve its position in the European e-commerce retail market. Most recently, UPS also completed the acquisition of its partner's stake in an Express Delivery joint venture in Vietnam, to tap growing exports from the emerging market.
Trefis currently has an $85 price estimate for UPS, which is in line with the current market price and will be updated shortly based on the company's latest earnings release.
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The solid report comes a month after the retailer closed all of its Canadian operations.
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