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UPS cuts profit outlook as costs rise for holidays

Published July 29, 2014 3:17 pm

Earnings • Company spending $175 million to improve shipping from Thanksgiving on.
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Atlanta • United Parcel Service lowered its full-year profit outlook as the company boosts spending to help handle booming demand for fast shipping during the holidays. The shares tumbled the most in a year.

The company now forecasts earnings per share to be $4.90 to $5, UPS said in its second-quarter statement Tuesday. That's lower than the outlook the Atlanta-based company gave in April of $5.05 to $5.30 a share.

UPS said it plans to spend $175 million on improving its shipping during the holiday crush, specifically expanding operations on the day after Thanksgiving, and making improvements to its Orion software that helps plot the best route for drivers. Last year harsh winter weather and a last- minute surge in online orders caused UPS to miss some Christmas deliveries.

"As we've said, 2014 is the year of investing for the customer," said Chief Executive Scott Davis. "We are providing new capabilities and expanding capacity to ensure UPS meets the rapidly growing needs of the marketplace."

Preparations are already under way for the peak season, said David Abney, who will become CEO Sept. 1, on a conference call with analysts. The company may evaluate holiday pricing, with a seasonal surcharge "possible" if costs persist next year, Davis said on the call.

"UPS is taking the proper steps to ensure 4Q14 peak season volumes are handled without 4Q13's disruptions, at the expense of near-term operating profit," said Benjamin Hartford, an analyst at Robert W. Baird in Milwaukee, in a note to clients. The lowered outlook for earnings will likely weigh on the stock price Tuesday, he said.

UPS has also been battling a shift to cheaper two-day and deferred shipping for more than a year. Executives Tuesday said the movement is hurting profit margins. In the second quarter, domestic daily package volume rose 7.4 percent, led by gains in ground and deferred shipments. Revenue per package declined, as customers increasingly sent items via its more economical SurePost service which relies on the post office for the last mile of delivery.

Last month UPS said it will begin charging for ground-shipped packages by size, not just weight, as it seeks to increase revenue and reduce costs. The changes won't come until after the holiday crunch.

UPS already uses so-called dimensional pricing for packages carried in its air network and larger pieces shipped by ground. Rival FedEx Corp. is shifting to a similar charging system, as it too seeks to improve profitability of business-to-consumer shipments.

Kevin Sterling, an analyst with BB&T Capital Markets in Richmond, Va., said UPS should start to benefit from the pricing change.

Earnings per share excluding some costs and gains were $1.21 in the second quarter, the company said. That missed the $1.25 average estimate from 23 analysts compiled by Bloomberg.

Net income of $454 million, or 49 cents a share, fell 58 percent from $1.1 billion a year earlier. The results included an after-tax charge of $665 million related to a change in UPS's post-retirement health-care benefits. Profit excluding the one-time cost was $1.1 billion, the company said.

Additional costs to improve rail service and investments to expand network capacity weighed on results in domestic package shipments, the company said.

UPS cited growth in U.S. e-commerce shipments and international export business for helping to boost global package shipments by 7.2 percent. Revenue across all of its business segments rose 5.6 percent to $14.3 billion from $13.5 billion a year earlier.




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