UPS Cost Pressures Squeeze Gains From E-Commerce Investment Push

(Bloomberg) -- United Parcel Service Inc. tumbled as concerns over a trade war added to a slump in profit margins at its U.S. ground delivery unit, where investments to cope with surging e-commerce have yet to pay off.

Chief Executive Officer David Abney in September asked shareholders for patience while his strategy -- including cutting costs, catering to small business, and adding more aircraft and sorting centers -- takes hold. Results should begin to kick in next year and won’t be fully felt until 2022, he said.

Investors aren’t in the mood to wait. UPS fell as much as 2.8 percent intraday in New York Wednesday after the company posted an operating profit margin of 9.5 percent at its domestic parcel unit, a 2.7 percentage point drop from a year earlier and well below past levels of around 14 percent.

The parcel delivery company’s third-quarter results didn’t provide much insight into Abney’s progress, said Baird & Co. analyst Benjamin J. Hartford. “However, International’s softness is notable and consistent with broader industry data points of softening global trade growth trends in recent months.”

Profit margin at the international unit dropped 2 percentage points to 16.6 percent from a year earlier because of higher fuel costs, weaker foreign currencies and “some economic softening related to changing trade policies,” UPS said in a statement.

That compounded concerns over how UPS is contending with the higher cost of residential deliveries, which often require dropping off one package at a home rather than multiple deliveries at one business.

Revving Sales

While e-commerce puts pressure on UPS profit margins, online retailing is also driving sales growth, underscoring an opportunity for UPS. Revenue rose 7.9 percent from a year earlier to $17.4 billion. The increase was led by an 8.1 percent gain at the domestic unit, which accounts for 60 percent of UPS sales, as revenue per parcel rose 5.1 percent.

A big test for the company will be the upcoming peak shipping season. To deal with the holiday rush, UPS has added sorting capacity of 400,000 parcels an hour in automated facilities that are up to 35 percent more efficient than older ones. The company has also brought on nine additional large aircraft, including six Boeing 747 jumbo jets, to handle more international volume.

Shares were down 2.5 percent to $111.35 at 9:33 a.m.

--With assistance from Herb Scheuren and Stephen Strackhouse.

To contact the reporter on this story: Thomas Black in Dallas at tblack@bloomberg.net

To contact the editors responsible for this story: Brendan Case at bcase4@bloomberg.net, Susan Warren

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