Dallas (AP) – UPS was caught off-guard by the crush of online shopping leading up to Christmas and plans to spend a chunk of its tax-cut savings to invest in its package-delivery network.
The company said Thursday that it plans between $6.5 billion and $7 billion of capital spending this year on things like new cargo airplanes and automation in its distribution centers. That’s an increase from $5.2 billion last year.
With the prospect of higher spending, shares of Atlanta-based UPS slumped $7.54, or 5.9 percent, to $119.78 in afternoon trading.
Rapid growth in online shopping is a double-edged sword for United Parcel Service Inc. and rival FedEx Corp. They reap higher revenue but are forced to make major investments in their networks to keep up with demand.
UPS said it delivered 762 million packages during the peak season roughly from Thanksgiving through Christmas, an increase of 7 percent over the previous year and 12 million more packages than the company expected.
Atlanta-based UPS said it had to spend $125 million more than it planned to handle the surge in demand, especially around Thanksgiving and the next several days, dubbed “cyber week.”
“The volume did exceed the capacity of our network, and it took us some days to dig out and there was a cost to doing so,” Chairman and CEO David Abney said in an interview. “The operation ran much better after that.”
Abney said the extra deliveries around Thanksgiving came from customers throughout its network, not just a few large retail shippers — suggesting that the breadth of the surge made it harder to handle.
“No doubt about it, we have to get our arms around better forecasting for cyber week,” he said.
A Citi analyst said in a note Thursday that FedEx had not encountered the same disruptions or extra costs during the peak shipping season.
To perform better in 2018, UPS plans to add 5 million square feet and more automation at 18 facilities around its system.
UPS announced Thursday that it ordered 18 more cargo planes from Boeing on top of 14 ordered last year. Nine of those planes will have arrived by the end of 2018 and the rest by the end of 2022. The company owns or leases more than 500 planes and does not plan to retire any of them because of the new order.
Executives said they plan to ask the board to increase the dividend and approve about $1 billion in share buybacks, which make remaining shares more valuable.
UPS predicted 2018 adjusted profit between $7.03 and $7.37 per share. That seemed to be about in line with analysts’ forecast of $7.21, according to FactSet, although a Cowen and Co. analyst said that excluding pension expenses the forecast was weaker than expected.
Abney said the new tax bill along with rising consumer confidence should boost package deliveries.
Executives said UPS will use one-fifth of its expected savings from the new lower corporate income-tax rate on improving the business.
In the fourth quarter of 2017, UPS earned $1.1 billion, or $1.27 per share, reversing a year-earlier loss of $239 million, when results were weighed down by a pension expense.
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Adjusted earnings, which exclude some pension and tax items, were $1.67 per share. That was a penny better than the expectation of analysts surveyed by FactSet and two cents better than a poll of analysts by Zacks Investment Research.
Revenue rose 11 percent to $18.83 billion, also topping expectations.
For all of 2017, UPS earned $4.9 billion, up from $3.4 billion in 2016.
