UPS cuts forecast again after new labor deal shreds profit

United Parcel Service Inc. cut its annual profit target on a spike in costs from a new union labor contract and weaker package demand.

Adjusted earnings came to $1.57 a share, down 47% from a year ago, UPS said Thursday in a statement. Analysts had expected $1.52 after slashing the estimate by about 40 cents due to the impact of a new labor agreement that took effect Aug. 1. Sales dropped about 13% to $21.1 billion.

“While unfavorable macro-economic conditions negatively impacted global demand in the quarter, our US labor contract was fully ratified in early September and volume that diverted during our labor negotiations is starting to return to our network,” Chief Executive Officer Carol Tomé said in the statement. 

The Atlanta-based company reduced its 2023 forecast again to an adjusted operating profit margin of 10.8% to 11.3% and sales of $91.3 million and $92.3 million. This follows Tomé’s move in August to trim the company’s 2023 outlook to an operating margin of 11.8% and also lower its annual sales goal. 

Shares fell as much as 7.9% in premarket trading in New York. The stock had declined about 15% this year, through Wednesday’s close.

The cost of UPS’ new labor contract with the Teamsters is front-loaded with 46% coming in the first year, crimping the company’s profit margins. The contentious summer talks, which were resolved only days before a strike was scheduled, also drove some customers to switch to competitors, reducing daily volume by 1.2 million packages. 

UPS has pledged to recover that lost volume even as demand wanes for package delivery in the wake of the pandemic-era e-commerce binge. 

To help shore up profits, UPS is focusing on health-care and small-business deliveries that typically fetch higher prices. UPS in September agreed to acquire MNX Global Logistics, a health-care delivery service, and has announced a general rate increase of 5.9% for next year. 

The courier also has pledged to cut 2,500 management jobs and lean on automation to boost worker efficiency. 

The adjusted operating profit margin plunged to 7.7% from 13% a year earlier. 

Sales at the US domestic unit, which makes up almost two-thirds of revenue, fell 11% on a similar decrease in volumes. Revenue per package rose 2%, indicating that UPS wasn’t discounting as it seeks to regain lost US volume.

The international unit also saw sales drop 11% and revenue per package fell 1.4%. Sales at the Supply Chain Solutions, the unit that offers brokerage, customs and other cargo services, plummeted 21% amid a freight recession.