United Parcel Service is deepening its ties with its biggest customer Amazon which means that even though its stock price has already risen more than 75% since the last March, it has still the potential to go much higher.
Amazon paid USPS $11.3 billion last year for shipping services, making up 13.3% of all revenue for the year, UPS Chief Executive Carol Tome said on Tuesday. That was up from 11.6% compared to last year. No other customer contributes more than 10% to UPS’s top line.
UPS reported a 21% jump in fourth-quarter sales to $24.9 billion, a record for the company. Operating profit rose 26%, helped by added shipping fees and steps to curb volume during the peak season. UPS shares rose more than 4% as results topped expectations.
The growing exposure to Amazon comes as Ms. Tome, who became CEO last June, has embraced a philosophy of “better, not bigger” at the delivery giant. In doing so, she is focusing on squeezing more profit out of UPS’s businesses and facilities and scrutinizing areas of lower returns. Business, and perhaps customers, that don’t make the cut may be jettisoned.
In an interview, Ms. Tome said large customers like Amazon and others are crucial to providing the shipping volume needed to fill, and pay for, its vast delivery network. “With a network business, with so much capital invested in your fixed assets, we really do need volume,” she said.
Smaller shippers, meanwhile, are important for improving profits since those customers don’t get the volume discounts of larger shippers. UPS said volume rose more than 28% for small- and medium sized customers in the fourth-quarter, compared with 4% for the largest shippers in its portfolio. Combined with additional surcharges, UPS’s revenue per item shipped rose 7.8% in the quarter, the highest increase in more than a decade.
“We also look to lean into a customer base that values the end-to-end experience and is willing to spend more,” Ms. Tome said.
Amazon, UPS’s biggest customer, is expected to report more than $100 billion in quarterly sales for the first time when it discloses results after markets close Tuesday.
UPS took action to ensure its delivery network wouldn’t buckle under the stress of the holiday season with new strategies that included holding its customers to agreed-upon shipping limits during the season. The restrictions led to some retailers like Gap Inc. and Nike Inc. seeing their pickups paused for a few days in December as UPS processed record volume from those and other merchants.
Such steps help avoid extra expenses for overtime and other measures needed to clear bottlenecks. “We reduced what we referred to as chaos costs,” Ms. Tome said on Tuesday’s earnings call.
UPS said the moves were necessary, and they helped the company post on-time delivery levels better than FedEx Corp. and the U.S. Postal Service throughout the holiday season.
UPS announced it had adjusted profit of $2.66 a share. Analysts were looking for UPS to post per-share earnings of $2.14 on $22.87 billion in revenue.
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