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UPS, Delivering Amazon’s Surge, Posts Record Revenue

As United Parcel Service Inc. UPS -1.70% targets smaller customers to help boost profits, it is also getting in deeper with the biggest customer of them all. Inc. paid the company $11.3 billion last year for shipping services, making up 13.3% of all revenue for the year, UPS UPS -1.71% Chief Executive Carol Tomé said Tuesday. That was up from 11.6% of all revenue in 2019. 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. Tomé, 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. Tomé 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. Tomé 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. andNike 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. Tomé 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.

FedEx reported a 29% surge in shipping volumes in its Ground unit during the quarter that ended Nov. 30. Like UPS, FedEx has also raised prices and added fees to help manage the spike in e-commerce packages. The Postal Service, meanwhile, struggled to make on-time deliveries.

One of Ms. Tomé’s first major changes was a recent decision to sell the Freight business toTFI International Inc. for $800 million, which exits UPS from a competitive business with low margins.

UPS booked a $545 million after-tax charge on the Freight sale and a $4.9 billion noncash charge on its pension plan to reflect low interest rates. Those moves resulted in a net loss for the quarter of $3.26 billion, compared with a profit of $659 million a year ago.

Excluding those items, UPS said 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, according to FactSet.

UPS declined to provide earnings guidance for the coming year due to uncertainty from the global pandemic. It did say it plans to spend about $4 billion on capital expenditures and grow its dividend, and it had no plans for share buybacks.

On e-commerce, Ms. Tomé said the company is banking that those trends will continue in 2021. “We don’t think e-commerce, as a percentage of retail sales, will decline,” she said, “which means continued supply and demand imbalances.”

This article originally appeared on Wall Street Journal

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