UPS beats profit expectations but shares sink on e-commerce margin squeeze

United Parcel Service Inc's quarterly profit beat expectations on Wednesday, but shares sank 5.5% as investors fretted over a margin squeeze from pandemic-fueled e-commerce deliveries.

The results from the world's largest delivery firm arrived as UPS, FedEx Corp and other major package carriers get an early start to a holiday shipping rush that is certain to stress networks already running at near capacity.

“While we expect this holiday season to have its challenges, we are ready to deliver a successful peak,” Chief Executive Officer Carol Tomé said on a conference call with analysts.

Third-quarter average daily volume jumped 13.8% in the key domestic segment at UPS, which has been inundated with residential deliveries ranging from exercise equipment to snacks.

Domestic package operating profit fell 8.8% on an increase in deliveries to far-flung - and less profitable - residential addresses and investments to expand and speed up service. The pandemic helped drive higher turnover, which dented productivity during the quarter.

“Continued compression in domestic margins means that the debate over whether UPS has ‘fixed’ e-commerce remains open,” Bernstein analyst David Vernon said in a note.

Atlanta-based UPS has raised prices and slashed costs in a bid to shelter earnings from a drop in lucrative shipments to businesses.

The company plans to hire more than 100,000 workers for the winter holiday season. U.S. retailers started Christmas promotions more than a month early to avoid overwhelming the delivery network. UPS and its rivals are limiting the number of packages they accept from some customers.

Third-quarter net income at UPS increased 11.8% to $1.96 billion, or $2.24 per share.

Excluding items, UPS earned $2.28 per share, beating analysts’ average estimate of $1.90 per share, according to Refinitiv data.
Revenue jumped 15.9% to $21.24 billion.

Shares in UPS were down $9.45 at $161.39 in morning trading.