UPS Sinks After Spending Plan Crimps 2020 Profit Forecast

(Bloomberg) -- United Parcel Service Inc. fell as Chief Executive Officer David Abney said he would accelerate spending to speed deliveries and expand weekend service -- a strategy he sees as essential to the courier’s future even though it will squeeze profit this year.

In its push to capture more e-commerce business, UPS has grabbed more Amazon.com Inc. work after FedEx Corp. cut ties to the online retailer. But UPS’s investments in automation -- designed to cut costs in the long term -- are weighing on the 2020 outlook, which fell short of Wall Street’s expectations.

Parcel delivery companies are struggling to keep up with a flood of online shopping that requires faster deliveries seven days a week, as well as extended hours for retailers to ship packages. UPS is moving quicker to meet that demand, especially for small businesses. While those efforts will crank up costs and hurt profit in the short run, Abney said results will improve as soon as next year.

“The opportunities are there. Shareholders would expect us to take it,” the CEO said in an interview Thursday. “If the end number is a little bit less than what people were expecting, it’s an investment in the future, but the short-term future.”

Stock Drop

The shares tumbled 4.8% to $110.19 at 11:42 a.m., the biggest intraday drop in three months.

Adjusted earnings will be no more than $8.06 a share this year, the company said in a statement. That trailed the $8.07 average of analyst estimates compiled by Bloomberg.

UPS has dealt with negative investor reaction before. Shares tanked when Abney introduced a three-year, $20 billion spending plan in 2018 to boost automation and purchase new aircraft. The strategy eventually won over investors after the company halted a long slide in profit margins.

UPS logged a third consecutive quarter of gains in profit margins. That reversed a slide that began at the end of 2016, when rising e-commerce deliveries jacked up costs. Fourth-quarter operating margin increased to 11.1% from 10.1% a year earlier as the courier emerged unscathed from another record holiday delivery season.

Automation helped drive down the cost to deliver a package by 3.2% on an adjusted basis, the company said. Volume for all products in the U.S. surged 9% in the quarter.

Amazon Effect

UPS’s next-day air volume jumped 26% in the quarter as the company got a boost from Amazon after it broke off business with FedEx last year. Amazon-related sales, which are concentrated in the U.S., rose to about $8.6 billion, or 11.6% of UPS’s total revenue last year.

The company also wants to expand sales with large U.S. retailers, Abney said. More than 90% of large retailers are already UPS customers, including Target Corp., Macy’s Inc., Best Buy Co. and Gap Inc., he said. The company is tailoring services to attract more business from them, including extending deadlines for picking up packages from stores for next-day shipment.

“We have deepening ties with everyone. We don’t see this as you’ve got to choose one way or the other,” he said. “We’re concentrating on serving the entire e-commerce ecosystem.”

The extra spending this year to increase speed and weekend service will shave about 33 cents a share off earnings, the company said, while increased pension costs will subtract another 26 cents.

Expanding Hubs

Lower costs for its international operations drove a 3.6% gain in operating profit even as sales fell. Abney said he expects international revenue to rise this year after the U.S., Canada and Mexico approved a revised trade pact and the U.S. and China stabilized tariffs in the first phase of a trade deal. It’s too early to gauge how the coronavirus outbreak may impact trade, Abney said.

UPS plans capital spending of about $6.7 billion this year as it builds more automated sorting hubs. Last year, spending was about $6.5 billion. Free cash flow, which is money left over after paying all bills, is expected to be $4.3 billion to $4.7 billion, an increase from $4.1 billion in 2019.

Capital expenditures were about 8.8% of sales in 2019. That will trend down to a historic average of about 7% after the spending plan winds down, said Chief Financial Officer Brian Newman on a conference call with analysts.

UPS posted fourth-quarter earnings per share of $2.11, compared with the $2.10 average of analysts’ estimates compiled by Bloomberg. Revenue rose 3.6% to $20.6 billion, in line with estimates.

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, Tony Robinson

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