UPS Ramps Up Spending to Keep Up With Online Shoppers -Update

By Allison Prang Features Dow Jones Newswires

Earnings at United Parcel Service Inc. fell slightly for the third quarter as higher costs from expanding Saturday package delivery and recent natural disasters weighed on its U.S. business.

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The results come just a day after the company announced it would increase U.S. shipping rates as it attempts to recoup the higher costs associated with e-commerce shipments. The rate hike, which could come as welcome news for investors waiting for UPS to better compete on pricing against FedEx Corp., are slated to go into effect Dec. 24.

Similar to how brick-and-mortar retail has struggled with the demise of physical storefronts, the consumer shift toward online shopping has also affected shipping companies like UPS that are tasked with making deliveries to people's homes that, in comparison to large store shipments, are more expensive.

UPS, which has raised prices in the past, also announced in June it was increasing its holiday shipping costs. FedEx, one of UPS's main competitors, has increased prices, but isn't going to apply a holiday price hike for most of its shipments.

Net income at UPS for the third quarter was $1.26 billion, or $1.45 a share, down 0.7% from the year-ago period. Both metrics were in line with analysts' expectations. The company's earnings report also follows a torturous hurricane season that disrupted the shipping industry in multiple U.S. states.

Shares in UPS were down 0.6% to $117.87 in premarket trading.

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Revenue excluding currency impacts rose by 7% to $15.98 billion. Analysts were predicting revenue of $15.62 billion. Operating expenses were $13.94 billion, up 8.1%.

Average revenue per shipment excluding currency impacts rose 2.8% to $10.78. Due to Hurricane Maria, for the bulk of this month UPS cut ground shipping rates for parcels going from the U.S. to Puerto Rico and other places by 35%.

Revenue excluding currency costs from the company's international business grew at a 12% clip, faster than its domestic segment growth of 3.9%. The company gets about 60% of revenue from its domestic operations.

Supply chain and freight revenue excluding currency impacts rose by 13% to $2.97 billion.

In addition to higher costs associated with e-commerce, UPS and its competitors could be negatively affected further by companies like Amazon.com Inc., which is testing a delivery service called Seller Flex where it would deliver goods from sellers to buyers.

For the full year, UPS now expects adjusted per-share profit to be between $5.85 and $6.10, compared with its prior guidance of $5.80 to $6.10.

Write to Allison Prang at allison.prang@wsj.com

United Parcel Service Inc. plans to spend more on bigger package-handling facilities, planes and other capacity upgrades next year, efforts to keep up with an e-commerce boom that shows no sign of slowing.

The Atlanta-based delivery giant on Thursday said it would add 5 million square feet of capacity in 2018, five times what it added this year, including new fulfillment and sorting centers, larger planes and rolling out Saturday delivery to more markets. UPS expects its spending on such initiatives to be 8% to 9% of its 2018 revenue, more than the 7% of revenue that it had forecast for the coming years.

"We are investing in order to build our network, not just for the next year or two, but for the next generation," UPS Chief Financial Officer Richard Peretz said on a call with analysts. "If we can move a little faster, it's always going to be the best thing we can do."

In an interview, Chief Executive David Abney said that the long-term capital expenditure levels aren't changing but that the company had to speed up the spending because of expected volume increases. "That can cause the numbers to change from one year to the next, but it doesn't cause the overall capex to change over time," he said.

As more people shop online, UPS, along with FedEx Corp. and U.S. Postal Service, have made investments to accommodate the increasing number of packages moving through their networks. But investors have grown concerned that the spending doesn't seem to be abating anytime soon.

UPS reported a slight decline in its third-quarter earnings, as higher costs from expanding Saturday delivery and recent natural disasters weighed on its U.S. business.

Profit fell slightly to $1.26 billion, or $1.45 a share, compared with the year-earlier period. Revenue rose 7% to $15.98 billion, with the average revenue per shipment, excluding currency translation, up 2.8%.

UPS shares rose 1.6% to $120.46 in Thursday trading.

Delivery companies are raising prices to recoup the network investments they are making. On Wednesday, UPS said it would increase rates 4.9% starting in late December, and it lowered the threshold for oversize package fees, so that a wider range of items would be subject to an extra surcharge.

UPS has previously announced plans to tack on extra fees for most packages shipped during the busiest weeks of the holiday season, which it is implementing for the first time this year. UPS expects to spread the load more evenly during the season, aiming to top 30 million packages delivered on 17 of the 21 delivery days between Thanksgiving and New Year's Eve, up from 11 last year.

Overall, UPS expects to make 750 million deliveries during that period, up 5.6% from last year.

In the months leading up to the holidays, UPS has been working more closely with shippers to anticipate how much space it will need on its delivery trucks and planes. There are now higher stakes in these forecasts, because UPS plans to charge shippers for the space and related labor costs if they go unused.

For the full year, UPS now expects adjusted per-share profit to be $5.85 to $6.10, compared with its earlier forecast of $5.80 to $6.10.

Allison Prang contributed to this article

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

(END) Dow Jones Newswires

October 26, 2017 12:01 ET (16:01 GMT)