By Abhinav Parmar and Lisa Baertlein
July 28 (Reuters) - United Parcel Service lifted annual revenue and profit forecasts above Wall Street estimates on Tuesday as it returned to growth on strong domestic demand after it completed a plan to deliver millions fewer packages for Amazon.com.
UPS shares dropped nearly 5%, however, on investor skepticism about the outlook.
The world's largest parcel delivery company, widely viewed as a barometer of global economic activity due to its exposure to a broad range
of industries, has been revamping its business by closing facilities and cutting jobs as it seeks to streamline operations and generate $3 billion in cost savings by 2026.
UPS expects to generate revenue of $91.2 billion in 2026, up from its previous forecast of $89.7 billion. It expects full-year adjusted earnings of $7.22 per share as it focuses on replacing low-margin deliveries for Amazon with more profitable deliveries that include shipments between businesses and deliveries of temperature-controlled medicines.
The company had previously called its Amazon deliveries "extraordinarily dilutive" to margins. During the quarter, Amazon generated 9% of total revenue, down about 100 basis points from a year ago, off the peak of more than 13%.
UPS forecast flat revenue for the current quarter, but said more profitable international air shipments would drive business in its critical year-end holiday quarter. Executives said business on its most profitable China-to-U.S. trade lane had returned to volume growth following the U.S. elimination last year of the duty-free status on imports of low-value goods, including those from popular China-linked sellers like Shein and Temu.
"We're very excited that we're going to be expanding margin in both Q3 and Q4 in our domestic business," said CEO Carol Tome, referring to the company's largest operation.
ANALYST DOUBTS
But some analysts were skeptical as U.S. tariffs weigh on trade and consumers battle inflation that is draining discretionary spending.
Stephens analyst Bascome Majors said on the company's earnings call that UPS' expected "consolidated operating profit in the second half versus first half is a bit more than you've done in recent years," signaling a bigger-than-usual acceleration.
"The first-half-of-the-year performance gives us a lot of confidence in the momentum that we're seeing," Chief Financial Officer Brian Dykes said on the call. "That's going to help us deliver the second half of the year."
UPS shares dropped 4.8% to $107.53. Rival FedEx fell 0.5%.
UPS' U.S. domestic adjusted operating margin was 8% in the second quarter, while its international segment reported a margin of 12.4%, highlighting significantly higher profitability in the company's smaller overseas business.
"If margin upside continues at U.S. Domestic, investors may gain confidence that the cost realignment associated with the now-completed Amazon glide-down is tracking ahead of plan, which will be viewed positively," said Evercore ISI analyst Jonathan Chappell.
Atlanta-based UPS reported adjusted profit per share of $1.76 for the quarter ended June 30.
Analysts on average expected the company to report adjusted profit of $1.66 per share, according to data compiled by LSEG.
It reported second-quarter consolidated revenue of $22.83 billion, compared with analysts' estimate of $21.81 billion.
UPS benefited from fuel surcharges that insulated margins from higher energy costs, while stronger package volumes helped drive higher yields and support quarterly performance.
The company has previously warned that sustained fuel-price inflation could weaken consumer spending in the U.S., reducing demand for shipments across its network.
(Reporting by Lisa Baertlein in Los Angeles and Abhinav Parmar in Bengaluru; Editing by Pooja Desai, Emelia Sithole-Matarise, Rod Nickel)
