Financial Performance

UPS’ E-Commerce Investment Hurts Profit

Q1 revenue beat estimates but operating profit fell 2.4% as UPS spent heavily to accommodate e-commerce delivery with new facilities and services.
Matthew HellerApril 27, 2017
UPS’ E-Commerce Investment Hurts Profit

United Parcel Service’s first-quarter revenue beat estimates but the costs of adding facilities and services to accommodate e-commerce delivery weighed down operating profit.

The company reported Thursday that revenue rose 6.2% to $15.32 billion while earnings per share increased 3.9% to $1.32. Analysts had been expecting revenue of $15.17 billion and earnings of $1.29 per share.

Domestic revenue increased 5% to $9.53 billion. “Revenue came in strong this quarter with all segments adding to the topline,” CEO David Abney said in a news release. “We are accelerating investments to create the industry’s leading smart global logistics network and value-creating portfolio.”

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“UPS customers are benefiting from expanded capacity, choice and improved time-in-transit, while technology solutions continue to deliver efficiencies,” he added.

Capital expenditures were $938 million during the quarter. UPS is building two major automated hubs in Salt Lake City and Dallas and has added delivery and pickup services on Saturday in response to e-commerce growth.

But that investment is, at least for now, shrinking margins. For the first quarter, UPS’ operating profit fell 2.4% to $1.076 billion even though the company has been recouping costs by raising prices.

Abney told The Wall Street Journal that UPS has been careful not to be too aggressive in pricing because customers may ship packages with other carriers. “You do that and at some point, you can have unused capacity,” he said, which can drive up overall costs further.

“I’m convinced we have the right balance,” Abney added. “We’re going to focus on growing the business and increasing the yield.”

The WSJ noted that shipping “has become more expensive, in part because of the added costs of delivering e-commerce orders to homes, rather than its mainstay business-to-business segment, where more packages are delivered to one location. The trend has put pressure on UPS to try to keep costs under control by using technology such as route-optimization software.”

UPS was also hit in the first quarter by higher fuel prices, which cost the company $187 million, or 43%, more than in the same period of 2016.