UPS Investing Over $100 Million to Fix Peak-Service Snarl

Jan 30, 2014 4:41 pm ET

(Updates with closing share price in sixth paragraph.)

Jan. 30 (Bloomberg) -- United Parcel Service Inc. said it will spend more than $100 million to improve peak-period service after a late surge in online Christmas shopping caused missed deliveries that boosted costs.

With the delivery volume growth rate during the holiday period almost twice what UPS had projected, the company had to add 30,000 more workers than planned, boosting fourth-quarter expenses by as much as $150 million, Chief Executive Officer Scott Davis said today on a conference call. Some packages still didn’t arrive at their destinations by Christmas, causing refunds that sliced quarterly revenue by $50 million.

“We did not meet the service standards UPS historically does at Christmas,” Davis said. “We will make the necessary investments to insure we effectively manage peak demand in the future.”

UPS, which today reported an 8.5 percent drop in fourth- quarter earnings, is expediting the introduction of technology that helps makes delivery routes more efficient and reduces miles driven; improving communication with shippers; and stepping up expansion of some facilities. The Atlanta-based company’s revenue for the quarter trailed analysts’ estimates.

“We are very confident we have put a plan in place that’s going to take care of the volume in 2014,” said Chief Operating Officer David Abney, who is leading the company’s evaluation of the peak crisis.

The shares rose 0.5 percent to $95.78 at the close in New York. They have fallen 8.9 percent this year, as the Standard & Poor’s 500 Index declined 2.9 percent.

‘Extraordinary’ Surge

Last-minute promotions by online retailers “drove extraordinary volume growth” in the days before Christmas, Davis said, creating the latest peak day ever for UPS, six days later than expected.

Satish Jindel, president of Pittsburgh-based SJ Consulting Group, has estimated 96 percent of deliveries were on-time, with 2.9 million packages arriving after Christmas. He said UPS, FedEx Corp. and others handled about 73 million parcels on Dec. 24.

“It’s not only about capacity,” Abney said. “It’s about increasing our forecasting methods with customers, improving visibility and communications. There will be some operating costs into this year, but it’s going to pay dividends for years to come.”

UPS said fourth-quarter net income was $1.17 billion, or $1.25 a share, compared with adjusted earnings of $1.28 billion, or $1.32, a year earlier, when the company had $3 billion in one-time costs for an increase in pension expenses. Analysts surveyed by Bloomberg had estimated an average of $1.43 before UPS gave preliminary results on Jan. 17.

Sales rose 2.8 percent to $14.98 billion, short of the $15.18 billion average estimate.

The company forecast full-year profit of $5.05 to $5.30 a share, an increase of 11 percent to 16 percent over 2013 adjusted earnings.

--Editors: John Lear, Molly Schuetz