UPS reports strong quarterly earnings but will investments pay off for Q4?

A record third quarter for UPS as total shipments increased 6.9% to 1.1bn packages – the most ever in a non-peak quarter. Total revenue increased 5.7% to $14.3bn and operating profit increased 8.3% for the quarter with all three major segments reporting good results.

Indeed, US Domestic revenue increased 5.3% to $8.7bn while the International group noted a 5.5% increase to $3.2bn and the Supply Chain and Freight segment reported a 7.4% rise to $2.4bn.

Even though volumes increased at a record level, the US Domestic group’s revenue per package declined 1.5%. The company attributed a 50% jump in UPS SurePost volume for this decline however, total cost per package decrease by 1.9% which resulted in a 7.8% increase in operating profit to $1.3bn. It’s interesting to see the big jump in SurePost volume. During its recent quarterly earnings report, FedEx noted its SmartPost, similar to SurePost, reported a decline attributing the decline to a customer loss.

While e-commerce continues to play a major role, B2B shipments appear to be making a return, up 3.4% for the quarter.

Meanwhile, average daily export shipments jumped by 9.4%, the result of strong growth out of Asia and Europe, up 16% and 14% respectively. Volume from Asia to both the US and Europe benefited somewhat from high-tech product launches at the end of the quarter.

Good volumes continued for UPS Freight with LTL shipments up 4.7% and Forwarding benefitting from higher air freight tonnage thanks to the government and high-tech sectors. However, Forwarding operating profit was down due to rates out of Asia. Rounding off the Supply Chain and Freight segment, Distribution noted increased demand from retail and health care while improving its operating profits with growth offsetting investments in acquisitions, technology and new facilities.

For the fourth quarter, UPS expects US average daily volume to increase between 5% and 6% and operating profit to increase 11% to 13%. It is expected that the International segment will see a slower quarter as a result of a number of large wins in late 2013 with average daily volume and total revenue to grow between 3% and 4%. Finally, for the Supply Chain and Freight group, mid to high single-digit revenue and operating profit growth is expected.

While the company expects a profitable quarter, will it really be ready for the upcoming holiday season? It seems to think so as the company highlighted enhancements it has made to its network by expanding new and temporary facilities across the US as well as investing in the development of about 30 new technology solutions to improve package visibility, volume forecasting and customer communications. But will it be enough to allow the company to react and respond quickly to any sudden change that may occur? The retail industry has changed and with free shipping becoming a norm, pick-up and delivery points expanding and more and more consumers waiting to the last minute to shop, will consumers be forgiving of any potential mishaps this year?