UPS Puts E-Commerce Investment to Test as Holiday Surge Nears

(Bloomberg) -- United Parcel Service Inc.’s aggressive investment in handling the online shopping boom is about to be put to the biggest test yet.

Holiday-season deliveries will rise 5 percent to a record 750 million, the courier said Thursday. That will add to the strain on an already busy global network. UPS handled a 19 percent increase in daily export-related volumes in the third quarter, the third straight period with double-digit growth.

UPS Puts E-Commerce Investment to Test as Holiday Surge Nears

Getting the holidays right is crucial for UPS to persuade investors it can profit from the rise of e-commerce, and the company has been stepping up investment in automated warehouses and upgraded technology in an effort to meet the challenge. This year, it’s adding 95,000 seasonal workers and tacking an extra fee onto peak-season packages. It’s also putting new Boeing Co. jumbo jets on cargo routes across the Pacific. 

“I believe we’re well-positioned to have a successful peak season, both from a customer standpoint and investor standpoint,” UPS Chief Executive Officer David Abney said on a conference call with analysts Thursday. “And it’s coming quickly. We’ve been working a long time on this and I think there’s a lot of confidence throughout the group.”

The shares climbed 1.2 percent to $119.93 at 3:20 p.m in New York. UPS has advanced 3.4 percent this year through Wednesday, trailing the 14 percent gain of a Standard & Poor’s index of industrial companies and the 21 percent increase posted by rival FedEx Corp.

Holiday Reliance

UPS is increasingly reliant on a holiday period during which the average daily volume of 19 million packages almost doubles.

The Atlanta-based company stumbled in 2013 when it didn’t predict a surge in last-minute packages and it failed to deliver millions by Christmas. The following year it spent too much money on seasonal workers and facilities, only to see them sit idle for long stretches.

“UPS is a show-me story of how they handle fourth quarter and peak season,” said Kevin Sterling, an analyst at Seaport Global Securities.

A new surcharge will tack on 27 cents to packages sent on UPS’ residential ground network during some weeks in November and December. Customers generally have accepted the new fee without switching to UPS’ rivals, and some are choosing to ship during weeks not covered by the charge, Abney said in an interview after the conference call.

Other holiday plans include working with big retailers to prevent some of the backlogs that hampered past years, such as demand spikes on Mondays. UPS has taken delivery of two Boeing 747-8 freighters and has a third on the way.

The company has ramped up capital expenses to about $4 billion to automate its warehouses and make other infrastructure improvements to handle the annual holiday crush.

International Gains

UPS gave its peak-season forecast as it reported that earnings excluding certain items rose to $1.45 a share in the third quarter, matching the average of analysts’ estimates compiled by Bloomberg. Sales climbed 7 percent to $16 billion, compared with analysts’ estimate of $15.6 billion.

The company said it would earn $5.85 to $6.10 a share this year, a nickel higher at the low end compared with the previous forecast.

Booming revenue from overseas wowed analysts Thursday, but the extra packages will add to the company’s holiday pressure. Europe is especially strong and is seeing intra-European shipments up 20 percent, the company said. Package volumes are up a more muted 3.4 percent at UPS’s vast U.S. ground unit.

The “result was impressive, particularly considering weather-related/natural disaster disruptions in the U.S.,” Benjamin Hartford, an analyst at Robert W. Baird & Co., said in a note. “International segment results remain outstanding.”

During an appearance on Bloomberg TV, UPS Chief Financial Officer Richard Peretz called the courier’s revenue gains “some of the largest we’ve had since the recession.”

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