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 tied to overtime and training hours.
Shares dropped 10% in early trading on his comments, also
weighing on rival FedEx Corp., which declined more than 2%. FedEx
sought to reassure its investors in the wake of UPS' warning by
affirming its outlook for the year ending in May.
After millions of packages were delivered late during the
Christmas season in 2013 thanks to bad weather and last-minute
surges in online shopping, both UPS and FedEx sought to upgrade
their networks to handle higher volumes.
In addition to hiring more people, UPS 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.
And FedEx accelerated delivery by at least one day in more than
two-thirds of the U.S. and introduced a new reporting system to
help with delivery planning.
The moves appeared to pay off for customers. According to
tracking-software developer Shipmatrix Inc., UPS and FedEx
delivered an estimated 98% of express packages on time on Dec.
24.
UPS had said it expected to ship an estimated 585 million
packages in December, an 11% increase over 2013. On Dec. 22 alone,
it expected to deliver 34 million packages, more than any other day
in its history. FedEx, meanwhile, expected a 9% increase in
packages shipped between Black Friday and Christmas Eve from
2013.
In the days leading up to the December rush, UPS, like FedEx,
limited shipments of some packages to ensure their networks
operated smoothly. The volumes forced FedEx again to be out
delivering on Dec. 25--not a standard delivery day--to make sure
all its packages arrived.
Among the other things weighing on both companies in the fourth
quarter was the ongoing West Coast port dispute, which has affected
shipments for multiple retailers and caused problems due to volume
fluctuations.
And UPS said its international operating profit was below
expectations, mostly due to unfavorable currency rates.
For the fourth quarter, Atlanta-based UPS expects to report
earnings, excluding special items, of $1.25 a share, well below the
$1.47 predicted by analysts polled by Thomson Reuters, but flat
from the previous year. Revenue was generally in line with
expectations.
Chief Executive David Abney called the results "disappointing"
and said the company plans to reduce operating costs and implement
new pricing strategies.
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.
Shares of UPS, which is set to report fourth-quarter results
Feb. 3, had risen 17% over the past 12 months through Thursday's
close.
Write to Angela Chen at angela.chen@dowjones.com
Access Investor Kit for FedEx Corp.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US31428X1063
Subscribe to WSJ: http://online.wsj.com?mod=djnwires