UPS Caught in E-Commerce Conundrum as U.S. Profit Squeezed

(Bloomberg) -- American consumers’ love for online shopping is doing great things for United Parcel Service Inc.’s revenue. The catch is that the demand for now is outstripping the delivery company’s ability to control costs.

Sales in the U.S. package division jumped 5 percent in the first quarter, Atlanta-based UPS said in a statement Thursday. But every blender, book and bath towel takes fuel and a driver to reach someone’s front door, contributing to higher expenses that pared the unit’s operating profit by 2.4 percent.

The conundrum isn’t lost on investors, who after pushing down UPS shares as the market opened later relaxed on executives’ assurances that they’re on top of the matter. To counter rising expenses, UPS raised U.S. prices at the high end of its projected range, ultimately increasing the amount collected per package by about 2.4 percent. Investments to boost efficiency are working but will take time, the company’s boss said.

“This is a good three- to five-year approach,” Chief Executive Officer David Abney said in an interview. “We are going to continue to get the benefits as we go. It’s just that they’re not going to coincide with the quarters.”

UPS shares rose 1.3 percent to $108.70 at 1:12 p.m. in New York after earlier declining as much as 1.9 percent until executives completed a conference call with analysts. Concern about home-delivery costs had sent the stock down 6.1 percent this year through Wednesday while rival FedEx Corp. rose 1.8 percent. While businesses tend to get their packages three at a time, home deliveries average just over one parcel.

Big investments to automate UPS warehouses and start delivering packages on Saturdays weighed on short-term results, and fuel expenses jumped 43 percent because of a timing delay in recovering a fuel surcharge.

“We have to continue to focus on costs,” Abney told analysts during the conference call. In addition, he vowed to “make sure we are pricing right.”

In the interview, Abney said UPS expects its investments to start paying off more fully soon. The company is trying to save as much as $1 billion a year as residential deliveries climb, in part by further automating its warehouses and outfitting drivers with mapping software.

On a per-package basis, revenue should grow faster than costs in the U.S. throughout this year, Abney said. The company also saw strong growth internationally and in its supply chain and freight units in the first quarter, he said.

Total revenue increased 6.2 percent to $15.3 billion in the year’s first three months. Analysts on average had predicted $15.2 billion, according to estimates compiled by Bloomberg. Earnings excluding certain items rose to $1.32 a share, while analysts anticipated $1.29 a share.

"We felt good about the first quarter,” Abney said. “It was a very good top-line quarter.”

To contact the reporter on this story: Michael Sasso in Atlanta at msasso9@bloomberg.net.

To contact the editors responsible for this story: Brendan Case at bcase4@bloomberg.net, Kevin Miller, Bruce Rule