1 unfavorable trend that explains the 27% decline in UPS inventory

It was hard United Parcel Service (NYSE:UPS) and its shareholders recently. The stock is down 27% since the start of 2023. The main reason for this is the impact of declining delivery volumes in its core US parcel market. Here’s what happened and why investors should keep a close eye on things when considering a position in the stock today.

The volume decreases

The volume declines are particularly problematic as they came after exceptional growth due to the lockdown periods. This growth encouraged package delivery companies to expand their offerings, resulting in significant excess capacity in 2023 as supply increased and a slowing economy led to a decline in demand.

As the chart below shows, the sharp decline in volumes in 2023 ultimately led to a decline in average sales per unit. Since the first quarter of 2023, year-over-year sales have declined in every quarter.

Data source: UPS Presentations. Chart by author.

The bull and bear debate over UPS

However, the chart also shows a slight increase in year-over-year volume growth in the second quarter, and management expects this growth to increase throughout the year.

For UPS bulls, this is a turning point in the company’s prospects as volume growth will lead to a decline in the industry’s excess capacity, creating a better pricing environment.

On the other hand, UPS points out that UPS only increased its shipment volumes in the second quarter because it took on lower-margin shipments (note the decline in the average sales per unit chart). This is something that UPS’s “Better, Not Bigger” concept implies would not be the case.

Additionally, the company lowered its full-year profit and margin expectations in its second-quarter earnings release. That doesn’t look good. Management only unveiled its three-year plans in March and reiterated full-year guidance at the time, which it would then lower in July.

Image source: Getty Images.

What’s next for UPS?

The cut in full-year earnings expectations so soon after Investor Day is a clear sign of near-term pressure on U.S. earnings. Nevertheless, delivery quantities are improving, which can’t be a bad thing. Therefore, the stock is attractive to investors who can tolerate the potential for short-term bad news.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends United Parcel Service. The Motley Fool has a disclosure policy.