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January 27, 2016 10:45 AM, EST
Strong Online Shopping Offers Blessings, Curses for Covenant Transportation
Covenant Transport

Covenant Transportation Group is poised to grab a share of the growing e-commerce market, which delivered a mixed bag of blessings and curses during the Christmas holiday rush, the Chattanooga, Tennessee, trucking company said Jan. 26.

On the plus side, a growing e-commerce market — which represented more than 7% of all retail sales in the third quarter of last year — generated freight demand. Longhaul trucking companies such as Covenant and U.S. Xpress Enterprises, also based in Chattanooga, are positioned to win long-distance shipping contracts with clients such as Amazon.com Inc.

U.S. Xpress ranks No. 18 and Covenant ranks No. 46 on the Transport Topics Top 100 list of the largest U.S. and Canadian for-hire carriers.

"It's every dot-com, e-shipper that's out there," Covenant founder and President David Parker said. "Amazon may be the big gorilla, but there are a lot of smaller ones out there that are doing the same things."

Increased shipments from Amazon and other online retailers helped boost revenue for Covenant in the fourth quarter and boosted company profits ahead of analysts' expectations last year.

Covenant's earnings report for the fourth quarter helped boost shares of the company by more than 10% Jan. 26, reversing half of the 20% drop Covenant had previously suffered in stock values since the first of 2016.

According to the U.S. Census Bureau, online sales have increased every quarter for at least a decade. In the third quarter of 2015, e-commerce sales hit $87.5 billion. Fourth-quarter e-commerce sale numbers from last year will be released next month.

This past holiday shopping season, however, there were jam-ups in the e-commerce supply chain, Covenant officials said during a conference call Jan. 26. Covenant took on Amazon as a direct customer in the quarter.

Covenant leadership said during the 2015 holiday peak season, glaring inefficiencies and logistics problems, as well as shifting of freight between delivery providers, resulted in Covenant trucks sitting at times and waiting, and in shipments unexpectedly changing course and even showing up late.

Parker said he believes Covenant can own part of the e-commerce shipping market, thanks to its strong relationships with key players and available infrastructure. But he said there's also room for improvement in the process. He and members of Covenant's management team will meet with Amazon officials this week in Seattle to discuss peak season 2016. Another meeting is scheduled for later this year.

"They're growing so dramatically that it's hard for anybody to keep up with what they are doing in the marketplace," Parker  said of Amazon. "They need every truck they can get their hands on. There are 3 million CDL drivers, and they can't have all of them."

According to new numbers released this week by Consumer Intelligence Research Partners, approximately 54 million Americans (about one in five adults) are members of Amazon's loyalty program, holding Amazon Prime accounts, one perk of which is free two-day shipping on most purchases.

The promise of fast delivery around the Christmas shopping holiday put significant extra strain on carriers, said Richard Cribbs, senior vice president and chief financial officer at Covenant, who compared the challenge to "trying to shove an elephant through a waterhose."

Hogan said the Covenant management team was happy with last year's profits from e-commerce. But he said the company wants to take better care of company drivers going forward, and that means having a better, smoother system in place.

"Drivers don't like to sit. Drivers don't like to wait. They like to work. They like to run," he said.

Overall, Covenant performed better than analysts' predictions in the fourth quarter of last year and earned a net income of $13.2 million, or 73 cents per share, in the period. The company reported revenues of $208.1 million in the final three months of the year and a net income of $42.1 million for the whole of 2015.

Jason Seidl, transportation analyst at Cowen and Co., said Jan. 26 that while Covenant did have a good fourth quarter, the company's earnings, and its good day in the stock market Jan. 26, also reflect a general vote of confidence in the industry by investors.

"The trucking stocks have been under pressure the last couple of months, so they still haven't regained all that they've lost year-to-date," Seidl said. "I think what you have is investors maybe breathing a sigh of relief that it's not as bad as some had feared in terms of the current market conditions."