More parcels, higher prices lift UPS profit but costs soar

United Parcel Service Inc reported higher first-quarter net profit on Thursday, driven by strong package volumes in its core U.S. segment, but higher costs from Saturday delivery and nasty winter weather weighed on the bottom line.

Shares were up 2.2 percent in morning trade after the world’s largest package delivery company said revenue increased 10 percent to $17.1 billion in the first quarter from a year ago, topping analyst expectations of $16.47 billion.

Revenue at its core U.S. package service rose 7.2 percent to $10.2 billion from a year-ago, driven by a 4.6-percent rise in parcel volumes that reflected growth of online purchases.

However, severe winter weather dragged down its operating profit by $85 million, as did higher expenses for network improvements, higher pension costs, and a big expansion of Saturday delivery over the last year. Operating profit in its core domestic segment plummeted 20 percent, and was down 6 percent overall.

“Higher costs continue to pressure earnings,” Cowen & Co analyst Helane Becker said in a research note.

“In general, the company struggles with capacity issues during the peak season (the weeks leading up to Christmas), and could have issues achieving their EPS target unless their performance improves.”

UPS, seen as an indicator of U.S. economic strength and consumer demand, reaffirmed its 2018 earnings per share range of $7.03 to $7.37 and maintained its 2018 spending plan of between $6.5 billion to $7 billion on network improvements like new technology and automating its parcel sorting hubs.

Chief Executive David Abney has promised to deliver higher margins by pumping billions of dollars into network upgrades and expansions to handle the growth of e-commerce, as investors bristle over the costs.

The rapid rise in online shopping has been a boon for shipping demand, but UPS has struggled to bring down the extra costs of delivering to households which on average receive fewer packages at one time than businesses.

Revenue per parcel delivered rose just 2.6 percent, as higher prices and fuel surcharges offset the higher costs, the company said.

Analysts on a conference call asked Abney about Amazon.com Inc’s efforts to expand its own delivery capacity for volume traditionally handled by UPS and rival FedEx Corp.

“It’s very hard to predict what Amazon or any other of our large shippers are going to do,” Abney said, adding UPS would evaluate any market moves and react accordingly.

UPS appears to be seeking out new ways to shave costs. On Wednesday, it offered early-retirement payouts to U.S. management employees, but declined to say how many employees it expects to leave.

Abney also said UPS was making progress on non-wage matters during protracted negotiations with the Teamsters union on a contract ending July 31.

UPS posted first-quarter net income of $1.35 billion or $1.55 per share, up from $1.17 billion or $1.33 per share a year earlier, a 17 percent rise on a per share basis.

Analysts expected earnings per share of $1.54