United Parcel Service Inc. insists that money spent today to accommodate U.S. e-commerce growth will eventually pay off with better margins later this year.
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For now, investors are waiting to see if those promises come true. The parcel-delivery company posted a 2.1% decline in operating profit in the first quarter, including a 2.4% decline in its domestic business.
The U.S. business is bearing the brunt of spending, with construction under way for two major automated hubs in Salt Lake City and Dallas, plus the addition of delivery and pickup services on Saturday. The company is raising rates on shippers and adding new surcharges, too, but not enough to offset the extra costs to help facilitate more consumers shopping online. UPS says shipments to homes, a proxy for e-commerce deliveries, rose about 7% in the first quarter, ahead of the 2.6% volume increase in its U.S. parcel business.
"We're stepping up the pace of investments now to enable UPS to better participate in the vast opportunities we see ahead," Chief Executive David Abney said on Thursday's earnings call.
UPS overall posted a 2.4% increase in first-quarter earnings to $1.16 billion. The bottom line was helped by a smaller income-tax expense in the period. Revenue rose to $15.32 billion from $14.41 billion a year earlier, ahead of Wall Street projections.
Shares of UPS were little changed Thursday, rising 34 cents to $107.97. The stock is down about 6% this year.
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UPS faces skeptics that it isn't moving as aggressively as rival FedEx Corp. to recoup its costs through higher prices. UPS revenue per package rose 2.6% in the quarter, around the midpoint of what it projected for the year.
In an interview Thursday, Mr. Abney said UPS is careful not to be too aggressive in pricing because customers may ship packages with other carriers.
"You do that and at some point, you can have unused capacity," he said, which can drive up overall costs further.
"I'm convinced we have the right balance," Mr. Abney added. "We're going to focus on growing the business and increasing the yield."
Shipping has become more expensive, in part because of the added costs of delivering e-commerce orders to homes, rather than its mainstay business-to-business segment, where more packages are delivered to one location. The trend has put pressure on UPS to try to keep costs under control by using technology such as route-optimization software.
One area where e-commerce is helping UPS profits is in its supply chain and freight division. Though its smallest unit, operating profit rose nearly 22%, which Mr. Abney attributed, in part, to e-commerce companies needing to store their wares closer to where their shoppers live.
Write to Paul Ziobro at Paul.Ziobro@wsj.com and Joshua Jamerson at firstname.lastname@example.org
(END) Dow Jones Newswires
April 27, 2017 11:38 ET (15:38 GMT)