Hub Group Earnings: Intermodal Volumes Plummet on Retail Sector Inventory Destocking

Narrow-moat Hub Group’s HUBG top line fell 11% year over year, led by a significant softening in intermodal volume. We’ve been expecting revenue to contract this quarter as retail sector inventory destocking and anemic import activity weigh on container demand. This dynamic was only partially offset by resilient demand in the dedicated trucking business.

Hub’s flagship intermodal revenue fell in the first quarter as a 12% decline in volume was only partially offset by a 3% increase in yield. The story has flipped versus the first half of 2022 when freight demand was incredibly robust, but poor rail service and terminal congestion constrained volume growth. Now, rail service and network velocity have improved, but underlying demand has weakened because of elevated retailer inventory levels. We suspect truck-to-rail conversion activity is also facing incremental pressure from the falling rates in the competing truckload sector.

We’ve been under the impression that restocking activity could see an inflection point by midyear as retail inventories work down. That said, management’s comments about a potential demand rebound in the latter half of 2023 were subdued, and the downward revision to full-year EPS guidance (from $7.50 at the midpoint to $6.50) points to elevated uncertainty for retail end markets. We expect to modestly lower our intermodal volume forecast, while keeping our pricing forecast roughly constant for the full year. However, downside risk is elevated.

Hub’s operating margin deteriorated more than 200 basis points (to 6.8%), driven by lost leverage from lower intermodal volumes, reduced accessorial fees, and elevated equipment costs. These negative effects were partially offset by modest margin improvement for the logistics segment driven in part by lower purchased transportation costs and yield management. We expect to lower our $83 discounted cash flow-derived fair value estimate slightly (less than 4%) due to tempering our intermodal volume forecasts.