XPO Logistics Looks Set to Ride the E-Commerce Wave

E-commerce stocks have been among the biggest winners this year as the pandemic has made in-store shopping less appealing.

Shares of direct online sellers and e-commerce marketplaces have boomed, and now a new group seems poised to join the party. Package shipping companies, whose shares mostly struggled in the early days of the pandemic, are now taking off, and the sector looks set to have its best holiday season ever. Now, XPO Logistics (XPO -2.78%) appears to be among the winners in the holiday rush.

Image source: XPO Logistics.

A rising tide

XPO, which provides services like freight brokerage, less-than-truckload, and last mile delivery of heavy goods like appliances and furniture, said earlier this week plans to add 15,000 employees for the holidays, a record for the season, growing its workforce by approximately 15%. That's a sharp jump from historical levels between 6,000 and 8,000 seasonal hires as the company added each year from 2017 to 2019. In another sign of the company's growth expectations, it said it expected 40% of those seasonal hires to move into permanent positions after the holidays.

Industry heavyweights are also experiencing a spike in demand. According to The Wall Street Journal, FedEx and UPS, the nation's two largest shipping companies, have begun telling customers they're running out of capacity for the holiday season. Demand in the industry is expected to exceed capacity by more than 7 million packages per day, based on estimates from ShipMatrix, more than double the difference from last year. The research firm expects shipping demand of 86.3 million parcels per day in the peak season, between Thanksgiving and Christmas, compared to capacity for 79.1 million a year ago.

Shifting gears

Like much of the logistics industry, XPO got hit hard by the early months of the pandemic. With shutdowns across North America and Europe for much of the quarter, second-quarter revenue fell 17.5% to $3.5 billion, and the company finished the quarter with a per-share loss of $1.45 compared to a profit of $1.19 per share in the quarter a year ago.

However, management noted that it did see some strength in areas like e-commerce, especially toward the end of the quarter. CEO Brad Jacobs said: "E-commerce continues to be our strongest tailwind, benefiting contract logistics and last mile." Its North American last mile segment delivered 3% revenue growth and a net revenue margin, or the percentage sales after direct transportation and services expenses, of 37%.

XPO has not yet reported third-quarter earnings, but looking ahead to that report and the rest of the year, there are a number of reasons to expect the business to pick up momentum. Many of the company's top customers have seen business boom in the pandemic, including Amazon, Home Depot, IKEA, and consumer staples giant Nestle. The logistics conglomerate is the largest provider in North America for last-mile delivery of heavy goods like furniture and appliances, giving it exposure to a sector that has surged during the crisis. XPO also benefits from an industry-leading network of 85 last-mile warehouses around the U.S. -- within 125 miles of 90% of the population.

Meanwhile, the company has seen strong adoption of the XPO Connect digital freight platform that it launched in 2018, and that now underpins its freight brokerage business. Downloads of the Drive XPO mobile app have doubled over the last year to 200,000, and registered carriers using the platform are up 63% to 65,000 since the beginning of the year. Both numbers show strong adoption for a technology the company sees as a differentiator and a source of competitive advantage.

What's next

In its earnings report at the end of July, management issued modest guidance for the third quarter, calling for adjusted EBITDA of $350 million, down from $438 million in the quarter the year before. Analysts expect earnings per share to be down substantially from $1.18 to $0.40 and see revenue falling 7% year over year. However, the spike in seasonal hiring and the supply constraints among shippers like FedEx and UPS bode well for the company in the fourth quarter.

Meanwhile, rumors are swirling that XPO could again look to sell off parts of its business after Bloomberg reported earlier this month that the company was exploring the sale of its European supply chain division, which could fetch between $4 billion and $4.5 billion, or about a third of the company's enterprise value.

Any of those factors could lift the stock higher, especially considering the surges that Fedex and UPS have experienced this year. Expect to learn more when XPO reports third-quarter earnings after hours on Nov. 5.