UPS profit hit by cost of surge in Christmas online orders

Fri Jan 17, 2014 1:54pm EST

A bicycle delivery man rides past a UPS truck in New York's Times Square, July 23, 2012. REUTERS/Brendan McDermid

A bicycle delivery man rides past a UPS truck in New York's Times Square, July 23, 2012.

Credit: Reuters/Brendan McDermid

(Reuters) - United Parcel Service Inc (UPS.N) said on Friday its fourth-quarter earnings will fall well short of market estimates due to a surge in online shopping just before Christmas that caught the company off guard and led to late deliveries and higher costs.

Typically, a rise in online sales is good news for companies such as UPS and competitor FedEx Corp (FDX.N) because it translates into brisker demand. But UPS said it had been overwhelmed by the volume of holiday packages, delaying the arrival of Christmas presents around the globe and spurring angry customers to take to social websites to complain.

UPS said it delivered more than 31 million packages on December 23, the most in its history. Moreover, that highest-volume delivery day came six days later than the company had expected and volume was 7.5 percent higher than it had planned for.

That, coupled with ice storms and heavy snow that snarled roads and airports [ID:nL6N0K1049], added to shipping bottlenecks.

UPS did not say how many packages were delayed, but said it had to hire 30,000 extra workers to try to get all the parcels delivered on time. That was more than 50 percent more temporary staff than it had planned to hire. Extra equipment was also used to try to get gifts delivered on time.

The world's No. 1 package delivery company's shares fell as much as 3.5 percent early on Friday before retracing some of that loss later in the day.

While U.S. retailers and shipping companies were aware the 2013 holiday-shopping season would be shorter - there were six fewer days between Thanksgiving and Christmas - many were overwhelmed by the change in customer buying patterns.

Yvonne Roeske, for instance, owner of a home furnishing store in Park Ridge, Illinois, who uses UPS ground shipping, said she did not see a 25 percent rise in online volume coming.

She said that due to their experience with Amazon.com (AMZN.O), shoppers are getting more comfortable waiting until the last minute before making online purchases and still getting delivery in one or two days.

This past season, shoppers got direct mail from Amazon guaranteeing Christmas Day delivery on orders placed as late as December 22. But while bigger shippers like Amazon are able to fulfill last-minute demands, many others cannot.

A "GOOD" MISS:

UPS estimated fourth-quarter diluted earnings of $1.25 per share, well short of the $1.43 per share expected by Wall Street, according to Thomson Reuters I/B/E/S.

The company estimated full-year earnings of $4.57 per share, below its previous forecast of $4.65-$4.85. The average market expectation had been for a profit of $4.75 a share.

"If there's ever a 'good' miss, this is one," said Benjamin Hartford, a logistics analyst at Baird Equity Research.

Like Hartford, most analysts on Wall Street said that though UPS's fourth quarter will be affected, the jump in traffic bodes well for the company's future, especially since UPS said it was confident in its 2014 outlook.

UPS said it expects full-year diluted earnings to rise by 10-15 percent this year, implying a profit of $5.02-$5.26 per share. Analysts had expected $5.48.

"This glitch causes short-term costs like overtime and extra employees, but shows really strong online fulfillment demand. It bodes really well for UPS in the long term," said Keith Schoonmaker, analyst at Morningstar.

UPS's shipment volumes and forecasts, along with those of rival FedEx, are closely watched by Wall Street and considered an indication of overall economic health because of the vast amount of goods they transport.

Shares in UPS, due to report results on January 30, fell to as low as $97 on the New York Stock Exchange before rebounding to $98.90 in the afternoon.

(Editing by Joyjeet Das, Rodney Joyce and Peter Galloway)

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