What happened
United Parcel Service (UPS 0.03%) outlined the financial impact of its new labor deal, and investors are a little spooked by the added expense. Shares of UPS fell as much as 3% after the company detailed its new agreement with the Teamsters union.
So what
All eyes were on UPS this summer as the company scrambled to avoid a strike that would have severely disrupted operations. UPS and the Teamsters did eventually reach a deal ahead of the deadline, but it came at a steep price to the company.
On Tuesday, UPS updated investors on the exact cost of the new arrangement. The company said that wages and benefits would increase by an average of 3.3% annually over the five-year deal, with a significant portion of those gains coming in year one.
Wages will jump by about 10% in the first year of the contract, which took effect Aug. 1, and the company said it would absorb nearly half of the total cost in year one. The costs include not just wage hikes, but adjustments to pension and health benefits and new paid holidays as well.
"We are happy with the outcome given the current inflation levels compared to historical trends and the present labor environment," Chief Financial Officer Brian Newman said on the call with investors.
The deal will add about $500 million in costs to UPS in the second half of this calendar year.
Now what
Wall Street reacted by adjusting estimates for UPS. At least three banks lowered their price targets, with Citi analyst Christian Wetherbee noting that the company effectively guided for third-quarter earnings to come in about 25% below consensus.
Investors already knew the contract was costly for UPS, and as Newman notes the alternative -- a strike -- would likely have been more costly. But the agreement comes at a difficult time for transportation and logistics companies, with the industry facing concerns about an economic slowdown and increasing competition from former customers like Amazon.
UPS remains an important part of the global economy, and the company should be well positioned to grow as the economy improves. But the combination of macro impact and the front-loaded nature of the new deal will create headwinds for now, and investors are reacting to those concerns today.