UPS United Parcel Service

Carrier strains to keep up with e-commerce shift

By Paul Ziobro 

United Parcel Service Inc. was stung by the rapid shift to e-commerce this past holiday season, as higher costs from a glut of package deliveries hurt its bottom line.

The Atlanta-based carrier posted higher sales in its fourth quarter, but profit margins fell as its home deliveries outpaced its more profitable business-to-business segment. UPS pledged to spend $4 billion this year, a 33% increase from 2016, as it tries to keep up with consumers' shift to online shopping.

"E-commerce brings challenges, it certainly brings great opportunities," UPS Chief Executive David Abney said Tuesday on a call with analysts. "If this quarter taught us anything, we've got to quicken the pace."

UPS also issued a downbeat profit outlook below analysts' estimates due to lower profits from residential deliveries and a stronger U.S. dollar.

UPS shares fell 6.2% in early trading to $109.65. Rival FedEx Corp. also fell 2.4% to $188.67.

As more people shop online, UPS and FedEx are struggling to keep up with the extra costs of having its drivers stop at homes and apartment buildings. UPS said 55% of shipments in the quarter were to residential addresses, including 63% of all deliveries in December.

The company is trying to offset the added costs of those deliveries with new routing systems that optimize routes and bundling orders to be delivered on certain days.

It is also raising prices so that it can recoup the higher delivery costs as well as the additional investments it is making to handle the increased volume. Last year, UPS spent nearly $3 billion on capital expenditures, including adding 7 million square feet of new capacity.

"We have to put more emphasis on making sure that we pass on to our customers the increase in costs that e-commerce deliveries can bring," Mr. Abney said in an interview.

He added that in the company's negotiations with larger customers about rate increases, UPS hasn't gotten "any more pushback than we'd get any year."

In all for the quarter, UPS reported a loss $239 million, or 27 cents a share, compared with a profit of $1.33 billion, or $1.48 a share, a year earlier.

Excluding items such as a mark-to-market pension charge, earnings rose to $1.63 a share from $1.57. The most-recent quarter included mark-to-market expenses of $1.67 billion, while the charges for the year-earlier quarter totaled $79 million.

Revenue grew 5.5% to $16.93 billion. On an adjusted basis, the company said revenue was $16.99 billion.

For the year, UPS is forecasting earnings of $5.80 to $6.10 per share, below the $6.17 expected by analysts polled by Thomson Reuters.

The weaker forecast comes even as the carrier anticipates stronger economic conditions in the U.S., with the White House expected to push for lower tax rates and infrastructure investments.

"There's a big focus on the economy," Mr. Abney said. "That excites us because economic growth is the wood that starts our fire."

Imani Moise contributed to this article.

Write to Paul Ziobro at Paul.Ziobro@wsj.com

(END) Dow Jones Newswires

February 01, 2017 02:48 ET (07:48 GMT)

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