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UPS Prepared Too Well For Christmas Rush And Paid The Price

Published on Jan 25 2015 8:05 AM in Technology

UPS Prepared Too Well For Christmas Rush And Paid The Price

After missing millions of deliveries on Christmas in 2013, United Parcel Service Inc. promised it would do better next time. It hired thousands more workers to ensure it could handle a deluge of shipments on its busiest days.

The improvements worked, maybe too well. While they nailed on-time deliveries during the 2014 Christmas season, on less busy days many workers and trucks were left idle.

The drop in productivity and the extra expenses for training and overtime dragged UPS’s 2014 preliminary earnings well below forecasts, the company said today, sending its stock down the most in more than eight years.

“UPS invested heavily to ensure we would provide excellent service during peak when deliveries more than double,” said David Abney, UPS chief executive officer.

“Though customers enjoyed high quality service, it came at a cost to UPS. Going forward, we will reduce operating costs and implement new pricing strategies during peak season.”

UPS worked almost all of last year on perfecting its plans for the busiest season. It hired 95,000 workers, 73 per cent more than initial plans the previous year, and spent $675 million on improvements including software to aid drivers, building temporary sorting facilities, and extra staff.

The result: Preliminary earnings per share will be $4.75 in 2014, compared with previous forecasts of $4.90 to $5.00, the company said. Fourth-quarter 2014 earnings will be $1.25, compared with analysts’ estimates of $1.47. UPS said it expects 2015 earnings growth to be “slightly below” its previous long-term target of 9 per cent to 13 per cent, due to increased pension costs and currency fluctuations.

UPS dropped the most since July 2006, closing at $102.93, down 9.9 per cent. FedEx Corp. shares also fell, leading the company to reaffirm its own 2015 earnings forecast. FedEx fell 3 per cent to $176.01.

UPS, based in Atlanta, is struggling with how to balance big swings in volume as more people push holiday orders later and do more of their shopping online. The extra capacity was needed to process the extreme spike in package volume on Dec. 1, known as Cyber Monday, and its peak day, Dec. 22, UPS said. Demand was less than it expected on other days.

The U.S. Postal Service also probably contributed to UPS’s woes, said Glenn Gooding, a senior partner at BirdDog Solutions Inc. of Alpharetta, Georgia. The Postal Service has made a strong push into eCommerce and holiday shipping, and some of its new business came from Inc. at UPS’s expense, Gooding said.

The Postal Service, which has had eight consecutive years of losses, reported delivering 524 million packages in December, up 18 percent over the previous year. In October, UPS predicted it would deliver 585 million packages in December.

FedEx also had to make some changes to its peak season planning.

The company saw “some shifts in timing and location for a significant amount of peak volume,” Memphis, Tennessee-based FedEx said in a statement, without being more specific.

Secret Sauce

In December, FedEx said congestion at U.S. West Coast ports had forced it to make capacity adjustments in key markets and in some cases, led it to impose volume limits on some retail and e- tail customers to meet service commitments.

Investors may punish UPS until the company can prove it has figured out how to deliver peak shipments on time without expanding its network beyond what’s needed, said Kevin Sterling, a BB&T Capital Markets analyst in Richmond, Virginia. He has a hold rating on UPS.

“I don’t know what the secret sauce is to prevent this,” Sterling said. “eCommerce isn’t going to slow. They’ve got to convince investors they’re ready for it.”

News by Bloomberg, edited by ESM

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