(Bloomberg) — United Parcel Service Inc. fell the most in more than six years after it said 2014 earnings were below prior forecasts as an overexpanded program to handle a deluge of holiday shipments left its network underutilized on some other days.
UPS invested heavily to prepare for the busiest time of the year, hiring 95,000 workers or 73 percent more than the previous year and spending $500 million on network improvements including software to aid drivers and building temporary sorting facilities. The world’s largest package delivery company made a priority of seeking to avoid the problems it faced in 2013 when a crush of late online orders caused it to miss thousands of deliveries.
Preliminary earnings per share will be $4.75 in 2014, compared with previous forecasts of $4.90 to $5.00, the company said. Fourth quarter earnings per share will be $1.25. That compares with analysts’ estimates of $1.47. UPS said it expects 2015 earnings growth to be “slightly below” its previous long- term target of 9 percent to 13 percent, due to increased pension costs.
“UPS invested heavily to ensure we would provide excellent service during peak when deliveries more than double,” said David Abney, UPS chief executive officer. “Though customers enjoyed high quality service, it came at a cost to UPS. Going forward, we will reduce operating costs and implement new pricing strategies during peak season.”
Chief financial officer Kurt Kuehn said in a recorded message posted on the company’s web site today that UPS planned to implement new “price-management” policies during the 2015 holiday season, based in part on customer size. He said the new pricing policies would mainly affect UPS domestic residential ground services and SurePost, in which UPS hands off parcels for final delivery to consumers. Those are both services that online retailers rely on heavily. Kuehn said UPS will provide more details when it reports its fourth quarter earnings in full on Feb. 3.
Shares Tumble
UPS fell as much as 10 percent, its biggest drop since October 2008. The shares were trading at $103.00, down 9.9 percent, at 9:50 a.m. in New York. FedEx Corp. declined 1.7 percent, to $178.31.
UPS spent most of last year working on its peak season plans, specifically to accommodate last-minute surges from online shopping. The extra capacity was needed to process the extreme spike in package volume on Dec. 1, known as Cyber Monday, and it’s peak day, Dec. 22, UPS said. Demand was less than it expected on other days.
Other factors that contributed to excess costs included a decline in productivity, increased contract carrier rates, as well as costs associated with overtime and training hours. The network was also disrupted by volume fluctuations caused by the West Coast port dispute.
“Bottom line, the network was much less efficient than it should have been on numerous days during peak,” Kuehn said in the recording on the UPS web site. “This drove more than $200 million in excess operating expense.”
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