By Angela Chen 

United Parcel Service Inc. said higher-than-expected seasonal expenses dragged down its earnings in the fourth quarter as the shipping giant took steps to avoid a repeat of the holiday shipping snafus that plagued its network in 2013.

Chief Financial Officer Kurt Huehn said the extra capacity UPS added was necessary to handle the high volume on the days just before Christmas. But demand was less than expected on other days. That resulted in a decline in productivity, increased contract carrier rates and costs associated with overtime and training hours.

Shares dropped 9% in early trading on the comments.

In addition to hiring more people, UPS had spent about $500 million on projects including automated sorting systems to rapidly identify ZIP Codes and swiftly reroute packages in the event of bad weather. The company hired more than 90,000 seasonal workers, a big increase from the previous year.

Those moves were taken after millions of packages were delivered late during the Christmas season in 2013 as delivery companies were overwhelmed by bad weather and last-minute surges in online shopping.

According to tracking-software developer Shipmatrix Inc., UPS and fellow delivery service FedEx Corp. delivered an estimated 98% of express packages on time on Dec. 24.

That success rate helped put UPS' package and revenue results in line with its expectations. The higher costs, however, dented its profit.

For the fourth quarter, the Atlanta-based shipping giant expects earnings, excluding special items, of $1.25 a share, well below the $1.47 predicted by analysts polled by Thomson Reuters.

Chief Executive David Abney called the fourth-quarter results "disappointing" and said the company plans to reduce operating costs and implement new pricing strategies.

The ongoing West Coast port dispute, which has affected shipments for multiple retailers, also caused problems due to volume fluctuations. And international operating profit was below expectations, mostly due to unfavorable currency rates.

UPS had said it expected to ship an estimated 585 million packages in December, an 11% increase over the same month in 2013. On Dec. 22 alone, it expected to deliver 34 million packages, more than any other in its history.

For the current year, the company expects earnings growth to be less than its previously announced target of 9% to 13%, due to declining interest rates, low oil prices that reduce fuel surcharges, increased pension expense of $180 million and currency headwinds that are expected to decrease profits by $50 million.

Investors have questioned whether the delivery giant can adjust to the new economics created by e-commerce, which increasingly has its drivers dropping off single packages at houses spread out in residential areas instead of multiple packages at businesses. Executives have said they need to cut costs faster to offset declines in per-package revenue. In general, UPS has been making progress on this front as new technology leads to productivity gains, and wages drop as the company hires more seasonal workers.

UPS is set to report fourth-quarter results on Feb. 3.

Shares had risen 17% over the past 12 months through Thursday's close.

Write to Angela Chen at angela.chen@dowjones.com

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