By Angela Chen
Uni ted 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 9% in early trading on his comments.
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.
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.
The efforts appeared to pay off for customers. 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.
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 day in its history.
Among the other things weighing 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 international operating profit was below expectations, mostly
due to unfavorable currency rates.
For the fourth quarter, the Atlanta-based shipping giant 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.
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.
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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