Thursday was the worst day ever for United Parcel Service Inc.’s stock after the package delivery behemoth revealed a deal that would reduce its business with its biggest client, Amazon.com Inc., by more than half.
Wall Street was rocked by the news, even though UPS (UPS) clarified that the action was a part of its strategy to concentrate on more lucrative deliveries rather than just growing volume.
In a call with analysts, CEO Carol Tomé stated, “Amazon is our largest customer, but it’s not our most profitable customer,” according to a transcript from AlphaSense. “Its margin is very dilutive to the U.S. domestic business.”
It didn’t help that the delivery behemoth also resumed its pattern of quarterly revenue misses and warned that 2025 revenue would decline, while Wall Street was projecting growth. This is especially problematic given that Amazon (AMZN) accounted for 11.8% of UPS’s total revenue for the year, or about $10.7 billion.
In lunchtime trading, UPS’s shares fell 17%, putting it on pace to surpass the 12.1% selloff that set a record on July 23, 2024. It was trading at its lowest levels since June 2020 and was by far the largest decliner in the S&P 500 index SPX.
Shares of UPS rival FedEx Corp. (FDX) were down 3.6% in recent trading, while Amazon’s stock fell 0.9%.
According to UPS, it and Amazon have reached a preliminary agreement to reduce volume by over 50% by the second half of 2026.
Tomé stated that it was time to review the nearly three-decade-old partnership with Amazon because the contract was up for renewal this year. “Because if we take no action, it will likely result in diminishing returns,” she stated.
According to her, the volume of Amazon deliveries is supported by numerous assets and resources. According to Tomé, when that volume decreases, so does the need to sustain those resources, which results in lower costs and higher margins, or profitability per package.
According to her, the action tackles two major issues the business is now dealing with. The first is the “slow-growth market” nature of the U.S. small-package market, which results in lower margins; the second is the mounting apprehension regarding the extent to which UPS’s volume and income are concentrated with a single customer.
In essence, the corporation wants to concentrate more on deliveries with more complicated transit requirements, like its healthcare sector, because those pay more. This is because moving smaller products over shorter distances is becoming less and less profitable.
Through cost-cutting measures, such as the permanent closure of 11 facilities in 2024, which is anticipated to save the firm $1 billion, the corporation hopes to offset volume decreases.
Furthermore, the connection with Amazon is not the only one that is evolving.
Additionally, the business said that it had brought all of its UPS SurePost products in-house as of January 1. In the past, UPS had outsourced some of the last-mile delivery of that service to the USPS.
Tomé pointed out that USPS was altering its business strategy, which would impact service by lengthening delivery times and driving up expenses.
“The value proposition of an increased cost as well as deteriorating service, well, that didn’t work for us,” Tomé stated.
According to Jonathan Chappell, an analyst at Evercore ISI, there were still drawbacks despite the fourth-quarter results’ strong beat on operating margins and profits for the domestic package sector.
“Even though the SurePost insourcing agreement was well known, though not clear on impact, the agreement with [Amazon] to reduce volumes by more than 50% in 18 months is a surprise and acceleration of the glide down of this business that has long represented a tail risk,” Chappell stated in a client note.
While the actions should improve operations and profitability in the long run, Edward Jones analyst Faisal Hersi stated that “we see a near-term headwind on package volume and profitability in the domestic package business.”
Additionally, UPS publishes its report for the fourth quarter.
UPS reported fourth-quarter revenue of $25.3 billion, 1.5% higher than the FactSet expectation of $25.41 billion, compared to the same period last year. After a run of eight consecutive quarterly misses was momentarily broken by the results of the previous quarter, that resumed the pattern of misses.
The business anticipates $89 billion in revenue for 2025, which is less than the $91.1 billion it made in 2024. According to the current FactSet consensus, revenue was expected to increase to $95 billion in 2025.
UPS’s U.S. domestic revenue for the fourth quarter increased 2.2% to $17.31 billion, exceeding the FactSet expectation of $17.22 billion.
While supply-chain-solutions revenue fell 9.1% to $3.07 billion, below projections of $3.36 billion, international revenue climbed 6.9% to $4.92 billion, exceeding expectations of $4.79 billion.
From $1.61 billion, or $1.87 per share, to $1.72 billion, or $2.01 per share, net income increased.
When nonrecurring charges, including a $506 million pension expense, are removed, adjusted profits per share increased 11% to $2.75, exceeding the FactSet estimate of $2.53.
Over the last 12 months, UPS’s stock has already lost 23.5% of its value, compared to FedEx’s 8.8% rise and the S&P 500 index SPX’s 23% gain.
