Can Shipping Companies Survive the Web?

Stephanie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When the Internet first went mainstream, it seemed the post office would thrive. Online shopping would generate enough packages to make up for consumers who would now be communicating via the web.

Nearly two decades later, the impact of the Internet is still being felt. The United States Postal Service (USPS) regularly reports giant-size shortfalls, including almost $16 billion in losses last year. The world is quick to blame competition from private sector providers like UPS (NYSE: UPS) and FedEx (NYSE: FDX), claiming that most of its business is flowing to them.

But not so fast. Recent earnings reports suggest that online shopping may not be enough to keep shipping companies on top. The poor performance is an indicator that the industrial sector is weak, as well as the fact that consumers are slow to spend freely due to the economy.

Lowering Expectations

UPS lowered expectations for the rest of 2013 based on reduced second-quarter earnings. The company is set to announce those results in a call later this month, and in preparation reduced its earnings to $1.13 per share.

In its first-quarter report, UPS reported that income had increased from $970 million to $1.04 billion year-over-year, while revenue had gone from $13.14 billion to $13.43 billion. This period included a fruitful holiday season,with overall package volume increasing 4.4%.

Customers keep it local

One thing UPS has over competitor FedEx is its focus on domestic shipping. FedEx has a more international base, doing business all over the globe. When residential and business customers cut costs, the high price of shipping an item overseas may trigger them to try and keep it local.

To help customers save, many businesses are offering in-store pickup of items ordered online. Wal-Mart (NYSE: WMT) recently launched a program that allowed customers to order items on the site and pick them up at in-store lockers without waiting in line to pay. The locker system was designed to compete with Amazon, who cut a deal with Staples and 7-Eleven to allow online ordering with in-store pickup.

To further compete with Amazon, Wal-Mart recently implemented a plan to offer local same-day delivery of items purchased on its website. Wal-Mart To Go would utilize UPS and provide a big boost to the shipping company's bottom line.

For Wal-Mart the innovation can't come soon enough. Wal-Mart's recent quarterly revenue of $114.2 billion was only 1% above last year's revenue for the same period. Same-store sales were down for the first time since 2011, dropping 1.4%, and store visits were down 1.8%. If Wal-Mart can break into markets that don't already offer delivery, the move could give it a leg up on both Amazon and local grocery stores.

The outlook for Wal-Mart is positive, though, with analysts expecting EPS to rise slightly over the remainder of 2013. While improvements won't be dramatic, home delivery of groceries and other essentials could be just what it takes to help the stock excel.

The outsider

As Wal-Mart plots to lure customers away from Amazon, FedEx blamed its recent dismal earnings on the economy. To combat this, the company announced major restructuring efforts, which will temporarily impact earnings. It also admitted the effects of this restructuring won't bear fruit until next year, which should help prepare investors for a disappointing 2013.

FedEx is looking into a shift toward ocean freight. Daily volume for the company's ground freight increased 10%, making up for a 2% reduction in its international priority business. FedEx's revenue was up 3.6% to $11.4 billion. FedEx is still the top air cargo shipping company by revenue, but air freight is more expensive, so this sector suffers during tough economic times.

Foolish final thoughts

Between FedEx and UPS, UPS is the big winner. Wal-Mart's recent delivery initiatives are interesting and may potentially help sales. FedEx would be wise to seek out more local business, perhaps forging a partnership with a major retailer to boost its top-line. 

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.

 


Stephanie Faris has no position in any stocks mentioned. The Motley Fool recommends FedEx and United Parcel Service. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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