UPS warns of lower fourth-quarter earnings as high operating costs, subpar peak traffic take toll

UPS Inc. today warned its fourth quarter and full year 2014 earnings would come in below expectations, due mostly to overinvestments in its U.S. network to handle a level of peak-season demand that didn't materialize.

The Atlanta-based company also guided lower on its 2015 earnings outlook, saying higher pension-related expenses and unfavorable currency fluctuations from a surging U.S. dollar will offset what is expected to be solid growth across all its business segments. UPS said it expects 2015 earnings-per-share growth to be slightly lower than the 9- to 13-percent year-over-year gain it had originally predicted.

The 2014 results will be skewed by the underperformance of the domestic segment in the critical fourth-quarter period, UPS said. UPS' fourth-quarter earnings per share of $1.25 will come in about 22 cents a share below earlier projections, it said in a statement.

UPS stock, which had been steadily rising in recent weeks, started trading today sharply lower, as traders and investors reacted to news that was as surprising as it was negative. UPS' stock was trading down nearly 10 percent in late morning activity on the New York Stock Exchange.

It was left to UPS CEO David P. Abney, who was completing his first peak season after being named to the post in June, to put a blunt face on the results: "Clearly, our financial performance during the quarter was disappointing," Abney said in the statement.* He added that the company would reduce its future peak-season operating costs and "implement new pricing strategies" for the cycle. He didn't elaborate on either vow.

The fourth-quarter results reflect a new and rapidly changing environment UPS finds itself in and how even such a seasoned operator can struggle to master the ebb and flow of a peak shipping season now driven largely by e-commerce. Throughout 2014, the company vowed not to repeat a difficult 2013 peak season when a torrent of last-minute online orders overwhelmed its network and resulted in late deliveries of thousands of holiday packages. UPS hired 95,000 seasonal employees for the 2014 peak. It added 6,000 of its familiar brown package cars and 900 trailer-staging positions at its "Worldport" global air hub in Louisville, Ky. UPS took on a significant amount of aircraft capacity, responding to concerns that it lacked adequate air lift to handle the 2013 peak. For the first time in its 107-year history, UPS operated a full U.S. air and ground network the day after Thanksgiving; historically, UPS only operated its air network on that day.

The array of moves led to improved service reliability during the 2014 peak. However, the high costs combined with lighter-than-expected volumes throughout the nearly month-long cycle compressed UPS' quarterly operating profit. Other than "Cyber Monday" and on Dec. 22, its heaviest delivery day, UPS found that its expanded network was mostly overoptimized to manage the ensuing traffic flow.

UPS Chief Financial Officer Kurt Kuehn acknowledged that e-commerce's rapid growth has "created a complex operating environment" during peak season. "UPS is in the early stages of a multi-year initiative to adapt our operations to these market challenges," Kuehn said. "We are making progress, but this quarter reflects that much work needs to be done."

Jerry Hempstead, a long-time parcel executive and now head of a consultancy that bears his name, said UPS "went overboard" on spending in the fourth quarter. Hempstead cited the increased employee headcount, which he called "overkill." He said that UPS overreacted to the 2013 peak's problems, which were largely caused by bad weather that was out of the company's control. Hempstead urged UPS to suspend delivery guarantees on shipments that arrive in the system close to Christmas Day.

"They just need to let the service be what it is during the holidays," he said.

UPS will release its fourth quarter and full year results on Feb. 3.

Editor's note: An earlier version of this article incorrectly said that David Abney's middle initial was "L"; it is actually "P."