UPS profit hurt by severe weather, issues disappointing outlook for second quarter

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FILE PHOTO: Vehicles of United Parcel Service are seen at the new package sorting and delivery UPS hub in Corbeil-Essonnes and Evry, southern Paris, France, 26 June 2018 - Reuters

REUTERS: United Parcel Service Inc. said it saw signs of softening in the US economy and issued a disappointing second-quarter profit forecast, sending shares down 7% even as it promised a strong end to the year. 

First-quarter results at UPS were slammed by severe winter weather in the US Northeast and Midwest, but executives said cost cuts and a multibillion-dollar network revamp to improve efficiency would help the company meet its 2019 profit target with a strong second half. 

Still, analysts said it would be difficult for the company to hit its reiterated 2019 earnings forecast of $ 7.45 to $ 7.75 per share, after first-quarter earnings fell short of Wall Street’s target and UPS forecast flat profit for the second quarter. 

“It implies a heroic ramp” up from an expected 5% year-over-year decline in earnings per share in the first half to a rise of 10 to 18% in the second half, Bernstein analyst David Vernon said in a note, using his own estimates. 

“There is pressure on management to execute at a high level during the peak” year-end holiday shipping season, Cowen analyst Helane Becker said. 

Logistics companies like UPS are seen a bellwethers for the global economy. Rival FedEx was first to warn about a global trade cool-down affecting its results, due in part to the US-China trade battle and to Britain’s exit from the European Union. But neither company had signalled a deceleration in growth in the United States until Thursday, when UPS Chief Executive said the domestic economy is growing “at a slower pace.” 

Operating profit in UPS’ US domestic business, its biggest, dropped to $ 666 million in the quarter ended March 31, from $ 756 million a year earlier, largely due to an $ 80 million hit from weather-related disruptions. 

Net income fell more than 17% to $ 1.1 billion, or $ 1.28 per share, from the year-earlier quarter, including a 7 cent per share hit from severe US weather. 

Excluding an 11 cent per share charge related to modernising its network, UPS earned $ 1.39 per share, missing analysts’ average estimate of $1.41, according to IBES data from Refinitiv. 

Revenue rose 0.3% to $ 17.2 billion, but was below expectations for $ 17.8 billion. 

Chief Financial Officer Richard Peretz told Reuters 2019 was a “pivot point” for the company, which is building on its three-year plan to automate package-sorting hubs, make routes more efficient and to upgrade airplanes and other equipment. 

It spent $ 7 billion on the project in 2018, when it opened four “super hubs” and built or revamped 18 other sorting facilities. 

UPS will open two more “super hubs” and 18 other modernised sorting facilities this year. It plans to open them earlier than last year, when the addition of new hubs helped its performance during the holiday peak, and related charges will hit second-quarter results. 

Peretz said UPS will see labour costs fall due to sorting facility automation and a voluntary buyout program last year. At the same time, it is adding higher-margin business-to-business shipments to balance out booming, but lower profit e-commerce shipments for retailers like and Walmart Inc.