As the end-of-year holiday season approaches, retail sales are once again forecast to spike. The National Retail Federation expects winter holiday spending to climb between 2.5% and 3.5% relative to 2023, for a total of as much as $989 billion in total spending for November and December. Driven by overall strength in consumer spending trends, the NRF predicts total retail sales for 2024 to be as high as 3.5% over 2023 levels.

With the flurry of holiday shopping comes an increased need for customers to make shipments around the country. Leading courier and shipping service providers like United Parcel Service Inc. (NYSE: UPS) and FedEx Corp. (NYSE: FDX) stand to benefit from a surge in holiday gift shipments. These companies also have international presences and a variety of business services as well, helping to diversify and strengthen revenue streams. They also face many of the same challenges, including fuel price volatility, trade policies and regulations, and supply chain hurdles.

UPS: Tough Volumes and Costs, But Reason for Optimism

Shares of UPS have faltered since achieving highs of more than $225 in 2022. The current stock price of around $135 reflects a one-year decline of nearly 14%. This multi-year drop may be due to increased expenses following the highly-publicized contract negotiations with the Teamsters last year. UPS has also lowered its guidance in recent quarters as it faces increased competition from FedEx and other rivals amid declining margins.

Still, UPS investors have some reasons to be optimistic, including the approach of a full year of earnings reports since the added costs of the Teamsters contract, which should see earnings improve. Although delivery volumes have been improving—in the U.S., though not internationally—lowered volumes overall in recent quarters have prompted the company to reduce its workforce by 12,000, which should also help reduce costs.

The company is also pivoting to focus more on specialized logistics services like healthcare which may go a long way to maintaining margins even during times when overall volumes are low. And UPS still maintains a strong cash position and balance sheet that should help to keep its impressive 4.82% dividend yield and 17% 3-year annualized dividend growth afloat into the future.

Finally, UPS has introduced new ways of automating its processing, including the AI-powered UPS Velocity facility, which may also help to reduce overall expenses. This may be one reason why Zacks recently boosted its Q3 EPS estimates to $1.69 from $1.67 and why analysts see an average price target representing about 12% upside potential.

FDX: Challenging Environment Contrasted With Restructuring and Share Buybacks

FedEx's earnings report schedule puts it slightly ahead of UPS, although the results are not favorable. The most recent report from September saw year-over-year declines to both the top and bottom lines due to reduced demand for priority services. The company also revised its revenue growth and EPS estimates for fiscal 2025 downward.

On the other hand, the company has successfully navigated a major operational overhaul that has combined its Ground and Services businesses into a single entity. This has significant potential to make operations more efficient overall and reduce long-term expenses. The company is also in the midst of implementing a cost-savings program known as DRIVE that is expected to yield permanent savings of $2.2 billion.

FedEx also recently completed a $1-billion share repurchase program, and the company has additional buybacks planned for the remainder of the fiscal year. It's clear that management is looking to bolster shareholder value and signal its optimistic view of the business over a longer period. However, analyst downgrades have hampered investor sentiment; while Zacks boosted its UPS EPS estimates, it recently downgraded its FedEx EPS estimate to $4.10 from $4.56. However, FedEx still enjoys a Moderate Buy rating and a price target representing nearly 16% upside potential.

Stock Buybacks or Service Pivot? Deciding Between UPS and FedEx

For long-term optimists, FedEx's 7.4% share decline this month could represent an opportunity to buy the dip. Both UPS and FedEx experience external challenges, and the two companies are responding in different ways. Whether investors feel a pivot toward higher-margin services or a large-scale restructuring coupled with stock buybacks is a better way to navigate this environment may impact their decision to target one stock or the other.