(Reuters) - United Parcel Service Inc (UPS.N), the world's biggest courier company, slashed its earnings forecast for the year as it spends to boost capacity ahead of the busy holiday shopping season.
UPS's shares fell as much as 3.7 percent, their biggest intraday percentage decline in a year, after the company also reported a bigger-than-expected drop in second-quarter profit.
The company faced criticism last Christmas when a surge in online shopping and a harsh winter caught the company off guard, leading to huge delays that frustrated customers.
UPS said on Tuesday it would invest $175 million to beef up capacity and technology to ensure timely deliveries during the peak shopping season beginning around Thanksgiving.
The company had earlier estimated that it would spend $100 million to improve its stretched delivery network.
"... It clearly is the most pressing issue in the near-term," Cowen & Co analysts Helane Becker said.
However, the increased spending, which includes opening 50 new sorting hubs in existing locations, could weigh on earnings at a time of high fuel costs.
"The lowered outlook and elevated business investments will raise questions as when the payoff from such investments will be realized by investors," Baird Equity Research analyst Benjamin Hartford said.
UPS, like closest rival FedEx Corp (FDX.N), has been increasing prices and cutting costs.
The company said it expects capital expenditure to increase by 4-4.5 percent over the next two years.
UPS said it expects full-year adjusted earnings of $4.90-$5.00 per share. The company said in April it expected earnings to come in at the lower end of its previous forecast of $5.05-$5.30 per share.
Analysts on average expect 2014 earnings of $5.09 per share, according to Thomson Reuters I/B/E/S.
UPS's net income fell to $454 million, or 49 cents per share, in the second quarter ended June 30, from $1.07 billion, or $1.13 per share, a year earlier.
Net income included a charge of $665 million for post-retirement liabilities for some union employees.
Excluding the charge, UPS earned $1.21 per share, falling short of the average analyst estimate of $1.25 per share.
Total operating expenses rose 15 percent to $13.5 billion as the company bought additional capacity at a premium from local service partners in Europe to handle growth in shipments.
Global package shipments rose 7.2 percent in the quarter, driven by online shopping in the United States and strong international shipments.
Total revenue rose 6 percent to $14.27 billion. Analysts on average had expected $14.11 billion.
UPS's shares were down 3.5 percent at $99.07 in late morning trading. Up to Monday's close, the stock had fallen 2.3 percent since the beginning of the year.
Reporting by Sweta Singh in Bangalore; Editing by Saumyadeb Chakrabarty