Executive Briefings

UPS Reports Weak Earnings, Work to Do on E-Commerce

United Parcel Service Inc.'s holiday-season scorecard is out, and for the third year in four it reads e-commerce: 1, company: 0.

The $96bn package-delivery company last week reported weaker-than-expected earnings-per-share for its peak holiday quarter and underwhelmed analysts with its outlook for 2017. A significant part of UPS's earnings woes are related to the strong U.S. dollar, but the company also cited a huge (11.5 percent) surge in shipments to residences from businesses. That online shopping boost is great for revenue, but not for margins. UPS's brown trucks typically only drop off one package at a time when they deliver to homes and have to make more frequent stops, resulting in higher costs.

Feeling the Pinch

It's the latest example of UPS getting caught somewhat flatfooted by the e-commerce boom, and that's making the threat posed by Amazon.com Inc.'s recent interest in starting its own logistics business loom all the larger. UPS and its rival FedEx Corp. have tried to downplay the immediate impact of having the e-commerce giant as a competitor and Amazon for its part has insisted it's trying to supplement the carriers rather than replace them, despite a steady drumbeat of investments in shipping capabilities.

And yet, UPS keeps giving investors reason to be concerned. After being under-prepared for the holiday rush in 2013 and over-prepared in 2014, UPS finally seemed to get a handle on package volume and hiring for its peak season in 2015. To its credit, it appears to have been successful on that front again in 2016. But delivering packages on time is one thing; doing so at a manageable cost is another and that's what threw things off kilter. UPS shares dropped as much as 7.1 percent.

Riding the wave of its 2015 holiday season triumph, UPS initiated 2016 guidance for as much as $5.90 in adjusted EPS last February, reconfirming that call as recently as November. The actual full-year profit it reported last week was $5.75, within its guidance range but closer to the lower end.

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The $96bn package-delivery company last week reported weaker-than-expected earnings-per-share for its peak holiday quarter and underwhelmed analysts with its outlook for 2017. A significant part of UPS's earnings woes are related to the strong U.S. dollar, but the company also cited a huge (11.5 percent) surge in shipments to residences from businesses. That online shopping boost is great for revenue, but not for margins. UPS's brown trucks typically only drop off one package at a time when they deliver to homes and have to make more frequent stops, resulting in higher costs.

Feeling the Pinch

It's the latest example of UPS getting caught somewhat flatfooted by the e-commerce boom, and that's making the threat posed by Amazon.com Inc.'s recent interest in starting its own logistics business loom all the larger. UPS and its rival FedEx Corp. have tried to downplay the immediate impact of having the e-commerce giant as a competitor and Amazon for its part has insisted it's trying to supplement the carriers rather than replace them, despite a steady drumbeat of investments in shipping capabilities.

And yet, UPS keeps giving investors reason to be concerned. After being under-prepared for the holiday rush in 2013 and over-prepared in 2014, UPS finally seemed to get a handle on package volume and hiring for its peak season in 2015. To its credit, it appears to have been successful on that front again in 2016. But delivering packages on time is one thing; doing so at a manageable cost is another and that's what threw things off kilter. UPS shares dropped as much as 7.1 percent.

Riding the wave of its 2015 holiday season triumph, UPS initiated 2016 guidance for as much as $5.90 in adjusted EPS last February, reconfirming that call as recently as November. The actual full-year profit it reported last week was $5.75, within its guidance range but closer to the lower end.

Read Full Article