UPS Looks to Cut Costs to Mitigate Demand Woes: What's the Road Ahead?

It is no secret that United Parcel Service’s UPS bottom line is being hurt by high costs, mainly on the labor front. High labor costs, in addition to softness concerning parcel volumes, are hurting the company’s operations.  

Geopolitical uncertainty and high inflation continue to hurt consumer sentiment and growth expectations. The weak demand scenario due to the economic slowdown has led to a decline in the volume of packages shipped. Faced with these headwinds, the company is focusing on cutting costs. As part of this exercise, UPS is offering buyouts to delivery drivers for the first time in its 117-year history. UPS’ full-time drivers are eligible for this offer.  

The company reportedly aims to trim its workforce by 20,000 this year, representing approximately 4% of the global workforce and shut 73 facilities to streamline operations and lower labor costs. Notably, expenses on compensation and benefits increased 2.1% year over year in 2024. The same is expected to decrease 2.6% in 2025 from 2024 levels, as per our model.

Apart from the tariff-induced economic uncertainties, UPS’ decision to reduce business with its largest customer, Amazon AMZN, contributed to the decision to trim the workforce. UPS’ management has reached an agreement in principle with Amazon to lower the latter’s volume by more than 50% by June 2026. According to Carol Tome, UPS’ chief executive officer, Amazon was not its most profitable customer.

UPS’ rival FedEx FDX is also cutting costs to combat the weak demand scenario. FedEx reportedly will lay off more than 480 employees as it reshuffles operations through the Network 2.0 initiative. In the second quarter of 2023, FedEx announced DRIVE, a comprehensive program to improve its long-term profitability. The DRIVE program resulted in $1.8 billion in permanent savings in fiscal 2024. The program resulted in further $2.2 billion cost savings in fiscal 2025.

These cost reduction initiatives include reducing flight frequencies, parking aircraft and cutting staff. For fiscal 2026, management expects to achieve $1 billion of transformation-related savings, which includes DRIVE and Network2.0.

UPS’ Price Performance, Valuation & Estimates

Shares of UPS have declined in excess of 24% in a year, underperforming its industry.

From a valuation standpoint, UPS trades at a 12-month forward price-to-earnings ratio of 13.91X, making it expensive compared with industrial levels. 

The Zacks Consensus Estimate for UPS’ 2025 and 2026 earnings has been revised downward over the past 30 days.

UPS’ Zacks Rank

UPS currently carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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