United Parcel Service Inc shares slid on Thursday after it gave a 2018 earnings forecast that fell short of analyst estimates and said it would spend at least $6.5 billion this year improving its delivery network.
The world`s largest package delivery company and rival FedEx Corp have already spent billions of dollars upgrading their networks to handle surging e-commerce package volumes, weighing on margins and leaving investors frustrated over the expense.
But there is still work to be done. UPS on Thursday said network bottlenecks that delayed some deliveries during the key holiday season cost about $125 million, while it spent roughly $60 million on new technology and automated capacity.
The rapid rise in e-commerce has been a boon for shipping demand, but UPS has struggled to bring down the extra costs of making more smaller deliveries to individual consumers.
The investments show UPS is betting that if it can handle more volume it can increase the number of packages it delivers to households, and eventually improve margins and profitability, versus pushing for higher prices and less volume, said Stephens analyst Jack Atkins.
"If they can`t get the delivery density - to date we haven`t seen a yearly improvement in density - that`s going to be a big problem," Atkins said.
The issue of costs and the 2018 earnings outlook overshadowed fourth-quarter revenue and adjusted earnings that topped expectations.
Analysts on a call to discuss the results pushed UPS executives on when investors will see improved margin growth at its core U.S. business and why the company had not increased prices more.
"We expect 2018 to have some challenges, because of the investment dollars," Chief Financial Officer Richard Peretz said on the call.
UPS said it would invest $6.5 billion to $7 billion in 2018, part of that on buying 14 Boeing 747-8 cargo jets and four Boeing 767s for its fleet. It plans 18 new or retrofitted facilities this year, including adding three U.S. ground hubs.
The hubs will be in areas where a surge in holiday online shopping orders overwhelmed its system, when UPS topped its own forecasts by delivering 762 million packages.
UPS pegged its 2018 adjusted diluted earnings per share at $7.03 to $7.37, with the lower end of that range falling short of the $7.16 per share analysts had been expecting on average.
(This article has not been edited by Zeebiz editorial team and is auto-generated from an agency feed.)