United Parcel Service (UPS) fell short of Wall Street's second-quarter earnings expectations, as the company faced challenges from weak small-package demand and higher labor costs under its Teamsters labor contract. UPS, known as a proxy for the global economy, saw its shares drop by 8% in premarket trading, while rival FedEx also experienced a 2% decline.

With the end of the pandemic-induced surge in e-commerce demand in late 2021, UPS and other home delivery providers have been diligently cutting costs. However, the demand for doorstep delivery has remained lackluster, leading to further difficulties for the company. According to LSEG data, UPS reported an adjusted profit of $1.79 per share for the quarter, falling short of analysts' estimates of $1.99.

The world's largest package delivery firm by market capitalization also downgraded its full-year adjusted operating margin forecast from a range of 10.0% to 10.6% to 9.4%. The extent of the second-quarter miss and the substantial downward revision to the full-year adjusted operating margin guide surprised industry experts.

To improve margins, UPS has been implementing cost-saving measures, including a plan announced in January to cut 12,000 jobs in order to save $1 billion. Additionally, in June, the company reached an agreement to sell its volatile truckload brokerage business, Coyote Logistics, for approximately $1 billion to RXO.

UPS expects cost pressures to ease in the second half of the year as the majority of labor costs associated with the new five-year Teamsters contract are absorbed by the second quarter. Despite the disappointing results, UPS received a boost as it secured a new contract to replace FedEx as the primary expedited air service provider for the U.S. Postal Service (USPS) starting in October. The five-year contract is expected to be profitable for UPS in its first year.

For the second quarter, UPS reported revenue of $21.8 billion, slightly below analysts' estimates of $22.18 billion. The company anticipates a turnaround in the second half of the year, driven by cost reductions and an uptick in package demand.

While UPS faces near-term challenges, analysts believe the company's strategic measures and the new USPS contract could position them for a more favorable future.