Key insights
- UPS is shifting away from low-margin e-commerce deliveries, particularly with Amazon, to focus on higher-value segments like healthcare and B2B. This transition involves consolidating logistics centers and investing in automation. While this strategic shift aims for improved profitability and a more durable growth profile, the near-term impact is a reduction in volume and potential margin pressure, leading to a slightly bearish outlook for the stock.
While international shipper United Parcel Service (UPS) topped first quarter earnings and revenue estimates, its domestic package margins in the US may have fallen just shy. UPS stock is falling on Tuesday as the company affirms its full-year guidance.
UPS CFO Brian Dykes sits down with Julie Hyman to describe the freight operator's transformation as it draws down the size of its partnership with Amazon (AMZN). That includes the consolidation of logistics centers.
For those who haven't been following the story as closely, you know, that migration away from Amazon, again, the growth in the in the healthcare business. What does UPS look like on the other side of this? Like how if if somebody just came to the company cold, how would you describe it um after you all make these changes?
Well, it's going to look very different than it did three years ago. I would say three years ago, we were very focused on e-commerce, uh residential delivery, um lower value goods and what we've done over the course of the last five quarters is really refocus the US business on segments of the market where we can drive higher returns, higher rev for peace, higher returns on capital. What that's meant though is we needed to right size the capacity and the infrastructure with the new volume level, right?
And we're we're almost down the path of completing that progress, uh and then that'll put us into the the back half of the year. We've also been investing in automation, right? Uh deploying automation our buildings, making it less uh uh less labor dependent, and also make it more agile so we can provide a better service level and experience for our customers.
So as we come out of this, UPS is going to be more focused on higher value segments of the market, like health care, like B2B shipments, like SM uh SMB enablement that allows us to have a a better return on the capital that we invest, and also a better growth profile, more durable growth profile that will provide long-term shareholder returns.
Brian, the the part of the transformation has entailed um cutting some folks and also consolidating some of um your logistics centers. We're looking at video of of one of them right now. Um, once we get past the the the middle of this year, do you expect that to be that work to be largely complete as well?
We do. You know, in the first quarter we closed uh 23 buildings, that brings us to about 120 overall that we've closed to this program. We announced another 27. and but what's this allowed us to do is to right size the capacity with the volume level that we're going to have at the end. Um we've also been investing in automation in the buildings that that will that will um still be there going forward. That will make it more efficient. um and we'll be able to grow in those buildings more scalably than what we had in the in the old network.
So we're almost through this glide down process. We're looking forward to getting back to to growth and and I think it's going to be a a more efficient network, provide better service levels for our customers and give them a better experience overall.