By Laura Stevens
United Parcel Service Inc. delivered holiday packages on time
this season, but it paid a steep price.
The company surprised Wall Street Friday by announcing that
expensive preparations for the holidays added $200 million in
unexpected costs in the fourth quarter. As a result, it said it now
expects adjusted fourth quarter earnings per share of $1.25, lower
than the $1.47 a share analysts surveyed by Thomson Reuters had
expected.
The company also warned that 2015 earnings wouldn't meet its
guidance for the year, because of pension costs, currency
fluctuations and falling fuel prices.
Right on the heels of the UPS news, FedEx Corp. issued a far
different statement. It reaffirmed its full-year targets for 2015
and said that, despite "some shifts in timing and location" it had
set a new volume record during the holiday season.
UPS's stock sank 9.8% in midday trading to $103.03 as analysts
raised questions about management's ability to properly forecast
and adjust to the new norms of e-commerce.
We "are troubled by the company's inability to get peak
(operating expenses) right during what is increasingly becoming the
most important quarter of the year," wrote Sanford C. Bernstein
& Co. analysts. UPS "got the service but not the cost, which is
going to leave the market wondering if they can only have one or
the other. "
UPS was determined this past holiday season to avoid the
problems it had the prior year when online shoppers overwhelmed the
network with last-minute orders before Christmas, and an estimated
1.2 million express packages arrived late, according to Shipmatrix
Inc.
The delivery company earned about as much revenue and shipped
about as many packages as planned in the 2014 season, Chief
Financial Officer Kurt Kuehn said in a statement. But it
overcompensated. "Ultimately, we built an operating plan that would
provide superior service if volume levels exceeded expectations,"
Mr. Kuehn said.
UPS bulked up to cover Cyber Monday and the days before
Christmas but the first two weeks of December were slower than
expected. Low productivity added about $100 million in costs, while
the remaining $100 million stemmed from items such as higher
vehicle rental expenses and staffing costs, including overtime and
training. These costs were on top of the approximately $115 million
in peak spending already planned for the fourth quarter, which
included hiring a planned 90,000 to 95,000 seasonal workers.
"Bottom-line: the network was much less efficient than it should
have been on numerous days during peak," Mr. Kuehn added.
E-commerce has become a high-cost and low-margin business that
calls on a company like UPS to make lots of single-package
deliveries scattered throughout neighborhoods. In mid-November, UPS
outlined plans to solve its e-commerce problem, including rolling
out a proprietary GPS routing system that increases driver
efficiency, as well as staggering shipments so several packages can
be delivered at once. It is also effectively increasing ground
package prices this year, charging by size instead of weight
alone.
Analysts aren't convinced. Morgan Stanley said Friday UPS's
five-year guidance "appears aggressive" in light of the company's
announcement. Cowen & Co. said UPS has underperformed its
long-term growth targets since 2011 and revised its share price
target to $102 from $106. Bernstein also said lower guidance for
2015 appears to take into account slower growth as the company
figures out how to better handle its peak season.
"What are you going to do differently in 2015 that you didn't do
in 2013 or 2014? We tried having a lean capacity network, we tried
having a full capacity network--neither one worked," said Jack
Atkins, an analyst with Stephens Inc.
Mr. Kuehn said Friday the company plans to increase prices for
the 2015 holiday season for ground packages.
Adding to fourth-quarter pain, the company's expected operating
profit was flat in its international segment, primarily because of
$30 million in one-time items. Currency exchange rates also hurt
profits.
While lower fuel prices in the quarter should have helped,
Bernstein analysts said the company hedged some jet fuel purchases.
The company tacks on fuel surcharges to cover the price of fuel,
which falls as prices do and limits the benefits of the lower price
of oil.
UPS said its full-year earnings for 2014 would be $3.28 per
share, down from $4.61 in 2013, as it books a $670 million
after-tax, noncash pension charge. Earlier, the company had
predicted a profit of $4.90 to $5 a share.
Executives decreased full-year guidance for 2015 earnings per
share to "slightly less" than the company's long-term target of 9%
to 13% of growth. The company cited higher than expected
pension-related expenses of $180 million as interest rates continue
to fall, in addition to currency changes resulting in lower
international operating profits of $50 million.
The low price of oil won't help in 2015, either. "Significant
reductions in fuel surcharge revenue in 2015 will more than offset
the benefits of lower direct fuel prices," Mr. Kuehn added.
Corrections & Amplifications
An earlier version of this story misspelled the name of UPS
Chief Financial Officer Kurt Kuehn.
Angela Chen contributed to this article.
Write to Laura Stevens at laura.stevens@wsj.com
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