UPS Battling Back from Volumes Loss; Announces Acquisition of Reverse Logistics Specialist

UPS on Thursday announced a 12.8% decline in consolidated revenues for Q3 2023 over the year-ago period and provided some additional information on its acquisition of Happy Returns, announced on Wednesday, during its earnings call.

On Wednesday, Big Brown announced it would acquire Happy Returns, a reverse logistics specialist, from payments provider PayPal. PayPal acquired the company in May 2021 for an undisclosed amount. UPS also did not disclose its purchase price.

“We know that returns have long frustrated shoppers and retailers looking for quick and easy solutions,” UPS CEO Carol B. Tomé said in a statement announcing the purchase. “By combining Happy Returns’ easy digital experience and established drop-off points with UPS’s small package network and footprint of close to 5,200 The UPS Store locations, box-free, label-free returns will soon be available at more than 12,000 convenient locations in the U.S.”

Happy Returns coordinates returns of online purchases through both physical locations and carrier pickups. Its Return Bar locations allow customers to return items without boxes or packaging labels to physical locations.

The company said this option can save merchants up to 40% on return shipping. The National Retail Federation said that holiday returns alone cost retailers over $100 billion in 2020, and total returns account for over $400 billion in lost sales for retailers. In 2021, 20% of online sales were returned, NRF said.

The average return costs retailers about 66% of the original purchase price.

Happy Returns offers a full stack of returns solutions, powered by software and fully scaled reverse logistics operations that facilitate frictionless returns. In a few simple steps, users can access a returns portal, make a box-free return at the most convenient location and have their item shipped, sorted and returned to the merchant.

Prior to its acquisition by PayPal, Happy Returns had raised $25 million across five funding rounds according to Crunchbase data.

In September, UPS acquired MNX Global Logistics, which offers global time-critical logistics. In 2021, the company acquired Roadie, a last-mile same-day delivery provider.

For Q3, UPS said revenue declined to $21.1 billion and GAAP net income was down 56% to $1.12 billion, or $1.31 per share, from last year. Adjusted EPS was $1.57. Its third-quarter profit was $1.13 billion.

“While unfavorable macro-economic conditions negatively impacted global demand in the quarter, our U.S. labor contract was fully ratified in early September and volume that diverted during our labor negotiations is starting to return to our network. I want to thank all UPSers for their hard work and efforts during this challenging time and for once again providing industry-leading service to our customers,” Tomé said. “Looking ahead, we are well-prepared for the peak holiday season.”

Individual segment results for UPS in Q3 2023

• U.S. domestic package revenue decreased 11.1%, to $13.66 billion, and average daily package volume was down 11.5% annually, to 17.286 million, with average daily volume partially offset by a 2.0% increase in revenue per piece, to $12.54;

• International package revenue, at $4.267 billion, was down 11.1% annually, with average daily volume down 6.6%, to 3.139 million, and total average revenue per package, at $20.78, down 1.4%, with UPS attributing the decrease in average daily volume and revenue decrease to continued softness on Asia and Europe trade lanes; and

• Supply Chain Solutions revenue, at $3.134 billion, fell 21.4%, with the revenue decline attributed to market rate and volume declines in forwarding, which was partially offset by growth in its healthcare segment, with Forwarding revenue off 38.6%, to $1.327, and Logistics revenue up 9.8%, to $1.43 billion

On its earnings call earlier this morning, Tomé said that UPS expected conditions in the third quarter to be challenging, noting that the global macro environment remained weak with some countries in recession, which pressured international and freight forwarding volume.

Since the UPS-Teamsters contract was ratified in late August, she explained UPS has been gaining volume momentum, as it exited the last week of September with U.S. average daily volume (ADV) down 7.4%, which she described as a “marked improvement” from the rest of the quarter. And she added that UPS salespeople have delivered record results, stemming from the combination of win-back and new customers.

“To date, we have won back roughly 600,000 ADV of diverted volume, and we are working to win back all diverted volume by the end of the year,” she noted. “Looking at our sales pipeline, we are pulling through new customers that value our superior on-time performance and want to come to UPS prior to the busy peak holiday season.

Economic impact

UPS CFO Brian Newman said on the call that the macro environment in the third quarter was challenging, with the weakness UPS saw in the second quarter continuing into the third quarter, especially in Asia and Europe. And he added that real exports and industrial production moved lower, due to falling demand and global consumer conditions not significantly changing.

“In the U.S., we faced tough conditions due to several factors,” he said. “To begin, the volume diversion we experienced in the second quarter continued into the third quarter, which led to more volume diversions than we anticipated. Next, some customers that diverted waited until our Teamster contract was fully ratified…before returning volume to our network. And lastly, we incurred higher labor costs associated with the new contract and added headcount earlier than normal to ramp up for peak so we can ensure we maintain our industry-leading service levels.”

Prior to the ratification of the Teamsters contract, Newman said that August represented the low watermark, when average daily volume was down 15.2% annually. Post-ratification, UPS exited the third quarter at half that rate and is continuing to see its week-over-week volume levels improve, despite a challenging retail backdrop, he added. And in the U.S. third quarter average daily volume was down 11.5%, with Newman saying UPS estimates the impact of volume diversion reducing total volume by approximately 1.5 million packages per day.

Pricing and outlook

Despite lower third quarter volumes, Newman said UPS remained disciplined on revenue quality, or pricing, as revenue per piece saw a 2% annual gain.

Citing a slowing in the global demand environment, coupled with macroeconomic conditions remaining challenging, Newman said UPS has lowered its full-year guidance and provided a range to reflect that uncertainty in the market, with the company now expecting consolidated revenue to be between $91.3 to $92.3 billion and consolidated operating margin to be between 10.8% to 11.3%.
Logistics Management Editor Jeff Berman contributed to this report

SC
MR