UPS profit falls on shift to lower cost services
DALLAS — UPS said Tuesday second-quarter profit fell 4 percent as customers shifted from premium toward lower-priced shipped services.
The company called the results disappointing and said it was adapting to the changing market.
Atlanta-based United Parcel Service Co. and rival FedEx Corp. are losing some high-priced business as international shippers switch from premium next-day air deliveries to two-day or three-day services. UPS Chairman and CEO Scott Davis told analysts on a conference call that the shift could be temporary due to a lack of new technology products from Asia.
"On the other hand, some of the trade-down is likely permanent," Davis added, because of improved manufacturing supply chains and more global trade among nearby nations.
For pallet-size international shipments, cargo carriers such as UPS are facing more competition from passenger airlines, which are loading more freight in the bellies of their new, wide-body jets. Since the airlines are operating the flights anyway, they often charge lower freight rates to fill up the cargo holds.
UPS is looking to re-ignite growth by targeting developing countries and growing industries such as health care. It is expanding ship and other inexpensive delivery options, and it is offering new services to consumers such as letting them change the date or address for deliveries for an extra fee. The company has also been trimming costs by retiring older planes and reducing missed deliveries.
"We're managing through a slower economic environment and adapting accordingly," chief financial officer Kurt Kuehn said in an interview.
UPS said that it earned $1.07 billion, or $1.13 per share, down from $1.12 billion, or $1.15 per share, a year earlier.
The delivery company tipped off investors about the headline number two weeks ago, so analysts were expecting the lower earnings per share.
Revenue rose 1.2 percent to $13.51 billion but was lower than expected. Analysts had forecast $13.59 billion, according to a FactSet survey. Costs rose 2 percent.
UPS shares tumbled on July 12 after the company foreshadowed the quarterly results and lowered its full-year outlook. It blamed the shift toward slower but cheaper shipping services, overcapacity in the worldwide air freight business, and slowing in the U.S. industrial sector.
The effect of those changes showed up in disappointing performance in the company's freight-forwarding and international package-delivery businesses. The company's supply chain and freight unit earned 21 percent less in operating profit than a year ago.
The company predicted that earnings per share will grow by between 4 percent and 13 percent during the second half of this year compared with the same period in 2012. UPS still expects a full year adjusted profit of $4.65 to $4.85 per share, which would be an increase from $4.53 per share last year.
UPS, with a fleet of jets and an armada of brown trucks, delivered 15.7 million packages a day during the quarter, up 2.3 percent.
Shares of UPS fell 26 cents to $87.35 in midday trading. They were up 19 percent for the year as of Monday's close.