By Paul Ziobro 

United Parcel Service Inc. is delivering more packages, but it is paying a much bigger price to do so.

The delivery giant said revenue rose nearly 16% in the third quarter and profit rose 11.8% amid an influx of packages moving domestically and internationally during the pandemic. Despite the boost, UPS's large domestic business posted a sharp decline in profits due to the need to hire tens of thousands of new workers, lower margins from delivering packages to homes and $179 million in spending to speed up delivery times.

The decline in U.S. profits and continued higher costs heading into the holiday season weighed on shares, which fell more than 5% in early trading amid a broader market selloff. They are still up nearly 40% for the year.

The results put added pressure on new Chief Executive Carol Tomé to operate UPS as "better, not bigger" by solving the problem of how to handle the shift to e-commerce, which was accelerated by the pandemic, more profitably.

"Continued compression in domestic margins means that the debate over whether UPS has 'fixed' e-commerce remains open," Bernstein transportation analyst David Vernon said in a research note.

Ms. Tomé, a former Home Depot Inc. finance chief and longtime UPS board member, is focusing on cutting costs and reining in spending while raising shipping rates and getting more business from higher-margin customers like smaller businesses and the health-care industry.

She is trying to do it at a larger scale than the company had done in the past, including speeding up decisions by cutting the number of committees running the business to six from 21.

"In the past, we did it by increments," she said on Wednesday's earnings call. "We're now doing it in a meaningful way."

The decline in U.S. profits was offset by big gains in UPS's other segments. Its international business posted a 12% increase in shipping volumes and a 45% jump in profits, as a reduction in passenger flights that normally handle cargo has given shippers fewer options.

The smaller supply chain and freight division posted a 22% profit increase due to strong shipping demand out of Asia.

Both FedEx and UPS have benefited from the global shipping environment, which has tightened international freight capacity and provided more packages to deliver as more people shop online. The boom in the number of packages has overwhelmed their delivery networks and stretched delivery times, but the demand has given the carriers leeway to impose fees and negotiate higher rates from shippers.

The shipping volume is expected to remain robust during the holiday season. Both FedEx and UPS have warned their largest customers that there is no extra capacity available during the busy shipping period, while other smaller carriers have stopped taking new customers until next year.

Ms. Tomé said that the shipping industry is facing "capacity constraints" for the holiday season and that UPS is working closely with retailers on the timing of their promotions and using tools like more automated capacity, faster shipping times and weekend services to manage through.

"We are projecting a pretty peaky peak," Ms. Tomé said. "While we expect this holiday season to have its challenges, we are ready to deliver a successful peak."

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

 

(END) Dow Jones Newswires

October 28, 2020 11:20 ET (15:20 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.
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