UPS is grabbing more business from Amazon after FedEx cut ties to the online retailer. But automation investments weigh down UPS’s 2020 earnings outlook.

United Parcel Service Inc. CEO David Abney said Thursday 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 ecommerce business, UPS is grabbing more business from Amazon.com Inc. (N0 1  in the 2019 Digital Commerce 360 Next 1000) 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 earnings 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. While those efforts will crank up costs and hurt profit in the short run, Abney said results will improve as soon as next year.

In another move that could boost its ecommerce-related business, UPS on Wednesday announced an expansion of its UPS Access Point network of non-UPS locations where consumers can pick up and drop off packages. UPS says it will add 1,500 Package Express Centers to the network. With the expansion, 92% of the U.S. population will be within five miles of a UPS Access Point location, UPS says.

UPS also unveiled on Wednesday a deal with Square Inc. to integrate UPS shipping options into Square Online Store, a service that offers small- and medium-sized sellers to build and maintain an ecommerce website. Square revamped the online store service in March, integrating Weebly, a website builder Square acquired in 2018.

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“The opportunities are there. Shareholders would expect us to take it,” UPS’ Abney 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.”

The shares tumbled 6.5% to $108.27 at 9:37 a.m. after sliding as much as 7.3% for the biggest drop in nine 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 introduce a 3-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.

Margin gains

 

UPS logged a third-consecutive quarter of gains in profit margins. That reversed a slide that began at the end of 2016, when rising ecommerce 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.

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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.

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 business rose to 11.6% of UPS’s revenue last year.

While deepening its ties with Amazon, the company also wants to expand sales with large U.S. retailers, Abney said. More than 90% of large retailers are already UPS customers, and the company is tailoring services to attract more business from them, including extending deadlines for picking up packages from stores for next-day shipment.

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 $6.4 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.

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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.

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