UPS drops as heir apparent’s sudden exit rattles Wall Street

B747-8 freighter courtesy of UPS Airlines

(Bloomberg) — United Parcel Service Inc. fell as the sudden retirement of Chief Operating Officer Jim Barber stoked leadership uncertainty midway through the company’s pricey revamp to handle surging e-commerce.

Barber, 59, who helped lead growth in Europe and Asia during his 35 years with UPS, will retire at the end of December, UPS said in a statement Tuesday. The departure left CEO David Abney, 64, without a clear heir apparent.

“Barber retiring came as a surprise to us given the strides the company has made operationally over the past few years,” said Lee Klaskow, an analyst at Bloomberg Intelligence. “UPS has a history of promoting its COO to CEO and he was considered by most the likely successor to Abney. That being said, UPS has a deep bench and we don’t think it will derail its transformation.”

The COO’s exit overshadowed UPS’ robust financial performance in the third quarter as Abney’s plan to push down the cost of residential deliveries showed new signs of success. Operating profit climbed to 12% of sales, up 1.5 percentage points on an adjusted basis, while per-package delivery costs fell in the U.S. UPS also eased concerns about overspending by paring its investment plans by about $500 million this year and the same amount next year.

The shares fell 2.1% to $116.08 at 11:08 a.m. in New York after sliding as much as 5.7% for the biggest intraday decline in six months. UPS climbed almost 22% this year through Monday, slightly ahead of a 20% gain for a Standard & Poor’s index of U.S. industrial companies. FedEx slid 5.8% during the period.

Abney emphasized that Atlanta-based UPS still has a strong pool of skilled managers to guide the overhaul.

“It’s really natural progression,” Abney said in an interview. “You’re going to have key leaders who are going to retire and it’s going to open up the door. We’ve got a very deep bench and I believe that it just opens up opportunities.”

FedEx has also been grappling with sudden leadership changes over the last year, with the departures of Chief Operating Officer David Bronczek in February and longtime executive David Cunningham in December.

UPS also hinted at a potential drag from economic weakness, which prompted FedEx to slash its profit forecast last month. While UPS reiterated its earnings outlook, it said the prediction “assumes no further deterioration regarding global trade uncertainty or U.S. industrial weakness.”

‘New Language’

That phrase represented “new language” in the report, Ben Hartford, an analyst with Robert W. Baird & Co.

In a conference call with analysts, Abney said “trade uncertainty continues to create macroeconomic challenges.”

The CEO is still trying to coax shares back to the peak of $134.09 reached in early 2018. Investors punished the stock when he announced the price tag of his transformation plan – about $20 billion over three years – in February last year.

The plan is starting to bear fruit, with two straight quarters of improved financial performance. Savings from more automated sorting centers and new fuel-efficient planes began to kick in more strongly during the third quarter, and domestic unit costs fell 2.5% on an adjusted basis.

“We’re finding we’re able to build the projects under budget,’’ Abney said. “We’re getting the same effect on our investments, but we’re not spending as much money. It’s a pretty good deal.’’

Amazon Impact

UPS is also getting more business from a shift to one-day shipping led by Inc., which has increased demand for next-day air service. Amazon is leaning more on UPS after FedEx didn’t renew U.S. delivery contracts with the online retailer.

Squeezing more profit out of e-commerce remains a challenge, however.

“We believe a significant amount of the e-commerce volume is relatively low margin business picked up from a competitor,” Helane Becker, an analyst at Cowen & Co., said in a note to clients. While U.S. consumer demand remains strong, “our concern remains more on the higher-margin B2B segment which typically follows industrial production,” she said, referring to business-to-business parcels.

UPS’ adjusted earnings rose to $2.07 a share in the third quarter, slightly ahead of the $2.06 average of analyst estimates compiled by Bloomberg. Sales climbed 5% to $18.3 billion, just shy of analyst expectations. The courier reaffirmed its full-year earnings outlook of $7.45 to $7.75 a share.

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