UPS Earnings Preview: Operating Expenses Up On Peak Season Preparations

+4.67%
Upside
149
Market
156
Trefis
UPS: United Parcel Service logo
UPS
United Parcel Service

United Parcel Service (NYSE:UPS) is set to announce its fourth quarter 2014 results on February 3. Meanwhile, the company has provided its expectations for the quarter in a bid to prepare the market for the disappointment. In 2013, bad weather and overwhelming package volumes cost UPS millions of dollars in refunds and exposed the company to a lot of bad press. In order to avoid the recurrence of the prior year’s fiasco, UPS took precautions this time around, which were expected to temper its annual earnings per share from $5.05-5.30 to $4.90-5.00, representing a 7-9% increase over 2013. [1] However, it seems that the company may have overestimated package volumes and invested too much in its network, causing its operating expenses to overshoot and diluted earnings to decline to $3.28 per share, compared to $4.61 in 2013.

In the third quarter, UPS reported 5.7% growth in revenue, to reach $14.2 billion. [1] Revenue growth, though driven by all segments, was primarily the result of an increase in e-commerce package volumes. UPS’s operating profit improved 8.3% year-on-year, driven by productivity improvements, wage rate deflation and reductions in workers’ compensation expense. The increase in operating profit fueled 10.7% growth in net profits and 13.8% increase in diluted earnings per share.

See Our Complete Analysis of UPS

Relevant Articles
  1. Will UPS Stock Recover To Its Pre-Inflation Shock High of $230?
  2. Up 30% In A Year Is FedEx Stock A Better Pick Over UPS?
  3. Should You Pick UPS Stock After Its 10% Fall Last Year?
  4. Should You Pick UPS Stock At $140 After An 18% Fall This Year?
  5. Which Is A Better Pick – UPS Stock Or Archer-Daniels-Midland?
  6. Which Stock Is A Better Pick For The Next Three Years – UPS Or CMCSA?

UPS Increased Spending And Hiring To Manage Deliveries

In anticipation of the high package volume for 2014’s holiday season, UPS worked hard to expand its package handling capacity. It added sorting facilities, hired 90,000–95,000 seasonal employees and accelerated the rollout of its route optimization software, ORION, which helps reduce delivery times and costs. UPS also invested in the development of around 30 new technology solutions such as “mobile delivery villages” and automated scanning and sorting systems, that would strengthen its package handling capability. [2] Its automated scanning system could scan a package from all six sides at the same time to read the delivery address, saving time wasted during shifting a package to scan the address. [3] With this automated sorting system, workers were able to process 15% more packages per day. [4]

Performance During The Holiday Season

According to ShipMatrix, a logistics software firm, UPS achieved a 95% on-time delivery rate during Thanksgiving week, compared to 89% last year. [5] The company’s performance through the days leading up to Christmas was exceptional. On December 22 and 23, UPS delivered 99% of the packages on time, compared to a low 90s delivery rate a year ago. [6] Even on December 24, FedEx managed to reach a delivery rate of 98%, compared to 83% last year. [7]

Operating Costs Higher Than Expected

UPS’s on time delivery performance came at a significant cost to the company. The preparations were expected to amount to $500 million in additional capital expenditure and $175 million in added operating expenses, which UPS had taken into account while announcing its earlier guidance. However, in its recent release, the company announced that its earnings for the quarter will be $1.25 per share, compared with analysts’ expectations of $1.47. [8] This is primarily due to higher than expected operating costs.

UPS had planned its investments according to the expected package volume during busy days such as Cyber Monday and December 22, the peak day. However, on the remaining days, UPS’s network was idle, leading to sub-optimal use of its resources. The network also suffered due to volume fluctuations as a result of the West Coast port dispute. Overtime and training costs for the seasonal workers and an increase in contract carrier rates added further pressure to its operating margins.

It is clear that planning for the holiday season volumes is proving to be a very difficult task. During the 2013 holiday season, the company fell short, whereas it overshot in 2014. UPS now intends to focus on new pricing strategies for holiday seasons that will help keep in check surges in operating expense while maintaining delivery performance. We will be keeping an eye out for any information regarding this at the company’s fourth quarter earnings call.

View Interactive Institutional Research (Powered by Trefis):

Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research

Notes:
  1. UPS Delivers Strong 3Q Results; 3Q EPS Moves 13.8% Higher, October 24, 2014, www.ups.com [] []
  2. UPS Ready for 2014 Peak Season, Forecasting Record Holiday Deliveries, October 29, 2014, www.ups.com []
  3. UPS hopes for a merrier Christmas in 2014, December 14, 2014, www.usatoday.com []
  4. A Test for UPS: One Day, 34 Million Packages, December 21, 2014, www.wsj.com []
  5. FedEx and UPS are doing a better job of delivering your Christmas gifts, December 8, 2014, www.shipmatrix.com []
  6. ShipMatrix: FedEx, UPS deliver 99% of packages in time for Christmas, December 30, 2014, www.fox6now.com []
  7. FedEx, UPS step up their holiday shipping performance, January 1, 2014, www.washingtonpost.com []
  8. UPS Announces Expected 4Q Results, January 23, 2015, www.ups.com []