Yellow Corp.: Things Will Probably Get Worse Before They Get Better (NASDAQ:YELL)

Yellow Corporation (NASDAQ:YELL), which provides less-than-truckload (LTL) shipments and supply chain solutions to various industries, is coming off an extremely weak quarterly performance, with many of the numbers down, and LTL tonnage per workday plummeting well over 20 percent per month during the quarter, and shipments in the fourth quarter of 2022 falling by 23 percent.

While there was a slight uptick in January 2023, it wasn’t enough to signal the fourth quarter performance was an outlier. In fact, on the earnings call management alluded to there being an economic downturn that was having an impact on demand.

The problem for YELL is that its peers had nowhere near the decline in tonnage and shipments it had, which points to the probability it is losing some business to competitors where it can’t compete on price.

While management stated it didn’t see the type of pricing from competitors that would put pressure on the company, it seems that it still lost business based upon the company not being able to take on some business that would have been unprofitable for it.

In other words, it may not have been cutthroat pricing that resulted in lost business, but pricing that was enough for its competitors to win business without taking a big hit on their bottom line.

In this article we’ll look at the recent numbers from the fourth quarter, how the company views the competitive landscape, and why it’s probably going to take time before it regains momentum as 2023 goes on.

Some of the numbers

Operating revenue in the fourth quarter of 2022 was $1.2 billion, compared to 1.3 billion in the fourth quarter of 2021, down (8.3) percent. Revenue for full year 2022 was $5.24 billion, compared to $5.12 billion in revenue for full year 2021.

Operating income in the reporting period was $40.3 million, compared to $55.8 million in the fourth quarter of 2021, down (27.7) percent year-over-year. Operating income for full year 2022 was $197.8 million, compared to operating income for full year 2021 of $103.6 million.

Adjusted EBITDA for the fourth quarter of 2022 was $54.6 million, compared to adjusted EBITDA of $115.5 million in the fourth quarter of 2021. Adjusted EBITDA for full year 2022 was $343.1 million, compared to adjusted EBITDA of $306 million for full year 2021.

Cash and cash equivalents at the end of the fourth quarter of 2022 was $235.1 million, compared to cash and cash equivalents of $310.7 million for full year 2021. The company held long-term debt of $1.47 billion at the end of the reporting period, with outstanding debt of $1.575 billion.

Less-than-truckload (LTL) tonnage per workday (in thousands) was 27.12 in the fourth quarter, compared to 36.20 in the same quarter of 2021, down (27.1) percent.

Sequentially, on a year-to-year basis, LTL tonnage per day was down (23.9) percent for October 2022, down (24.8) percent for November 2022, and down (27.1) percent for December 2022. In the next section of the article, we’ll dig a little deeper on the decline in daily tonnage.

LTL shipments per workday (in thousands) in the reporting period were 49.05, compared to 63.66 in the fourth quarter of 2021, down (23.0) percent.

While the numbers for full year 2022 showed improvement year-over-year, the plunge in performance during the fourth quarter of 2022 was significant; that’s why the market has been punishing the stock since its earnings release.

How the company views tonnage and shipment declines

When asked about the decline in tonnage and shipments in the earnings call, management commented on several things associated with the decline. The major one was in regard to its loss of business in its retail segment.

Retail started to see a significant decline near the end of the third quarter of 2022, and during the fourth quarter of 2022. On the retail side of the business, most of its customers are “very large shippers,” according to the company, and with the majority of the loss of business being retail, it has a strong impact on the performance of the company over the last several months, and it appears that is probably going to continue going forward.

The company said there was also some loss of business in industrial tonnage and shipments, but not at the level of losses in retail. Again, the point being made is retail, overall, includes larger shippers, which means when that business is lost it’s of a larger magnitude.

As for the reason behind the decline in business, management said if business isn’t “operating and adding to the profitability of” the company, it’s better to pull back and only accept business that improves its performance.

Even though that makes sense, the implication is the company is losing business to competitors that are able to make money at prices YELL can’t.

What has yet to be clearly determined is whether or not YELL is facing declining demand because of competitive forces rather than market forces. If the former, it means it could be in a lot of trouble if it can’t compete at price levels its competitors can.

Conclusion

There’s no other way to look at it than to acknowledge YELL had a terrible quarter, and it appears it’s likely to continue to trend in that direction, based upon apparent slowdown in the LTL sector, and its competitors taking share away from them, especially in the retail category.

When looking at the numbers over the last year the company looks to be maintaining momentum, but when considering the last couple of quarters, it is definitely in a downtrend that isn’t likely to end in the near future.

If the economy continues to get worse, and/or it’s not able to retain a significant portion of its retail business because of pricing challenges, the stock is going to remain under pressure, and it’ll probably drop below its 52-week low of $2.34 per share.

It’s going to take a couple of quarters before there is more clarity and visibility concerning tonnage and shipments, and until that is known and confirmed, it’ll be a risky company to take a position in.