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UPS earnings, revenue in line with expectations

CNBC with Reuters
UPS trucks at the UPS Worldport facility in Louisville, Kentucky.
Jody Gralnick | CNBC

United Parcel Service on Tuesday reported a slightly lower quarterly profit, eroded by higher costs than expected during a disappointing peak holiday season.

The Atlanta-based company had put in place equipment and workers for an anticipated surge in holiday packages that failed to materialize.

As a result of the poor quarter, UPS said it could raise prices ahead of this year's peak season.

"We will take actions necessary to improve profitability by increasing operational efficiency and adjusting price where appropriate," CEO David Abney said.

Although earnings and revenue were in line with analysts' expectations, investors should keep in mind that UPS previously revised its expectations for the quarter downward, Avondale Partners senior analyst Donald Broughton told CNBC.

He said that revision was largely the result of higher spending as the company sought to avoid service disruptions and delays during the holiday season, which it suffered the previous year.

"They had to spend what it took to protect the integrity of the brand. I think that we all understand that, and in their defense, it was the right thing to do, strategically. But tactically, it hurt them," Broughton said in a "Squawk Box" interview.

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Share prices opened slightly higher. (Click here to get the latest quotes.)

The delivery and logistics company faces challenges to growing its margins because of its more than 250,000-strong unionized workforce, Broughton said. "That's a workforce that doesn't have the flexibility that their competitor FedEx has. "

The entrepreneurial nature of FedEx's business also gives it a leg up over UPS, he said.

"The ground drivers are owner/operators. They own the route. If they get an extra package, if they get an extra stop, it's extra money in their pocket. So they're driven in a way that their hourly employee just can't be," he said.

UPS is also at a disadvantage in foreign markets because it focuses its international operations on Europe, he said. A weakening euro means that the company's profit is diluted when it brings its revenue back home.

The company posted fourth-quarter earnings excluding items of $1.25 per share. The net profit of $1.15 billion was down nearly 2 percent from $1.17 billion a year earlier.

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Revenue increased to $15.9 billion from $14.98 billion a year ago.

Analysts expected UPS to report earnings of $1.25 a share on $15.8 billion in revenue, according to a consensus estimate from Thomson Reuters.

Global shipments in the fourth quarter were up 8.1 percent, and average daily package volume totaled 21.2 million, up 6.2 percent.

The company forecast full-year earnings per share of $5.05 to $5.30.

UPS warned last month that its bottom line would be negatively impacted by a stronger dollar and the West Coast port dispute.

Last week, UPS's subsidiary, The UPS Store, launched a new online printing platform nationwide in collaboration with PrintSites. It lets businesses prepare time-sensitive print projects at home and pick them up at retail locations.

This was a second consecutive challenging peak season for UPS. In 2013, the company was caught off-guard by a late rush of online packages that left an estimated 1.3 million parcels stranded on Christmas Eve.

UPS spent $500 million last year on network improvements and worked closely with retail customers to prevent a repeat of what happened late in 2013, but the rising popularity of e-commerce made forecasting package volumes a moving target.

"As we move into 2015, we will address this disparity with both cost and revenue actions," Abney said.

The package-delivery giant experienced 12 percent year-over-year growth on Cybermonday and the last couple of days before the holidays, but it slowed down during the weeks in between, according to its CFO. "That made us a bit underutilized during that time period," Kurt Kuehn told CNBC's "Squawk on the Street " on Tuesday.

Kuehn added that the company expects 6 to 12 percent profit improvements in 2015. "It's not quite as strong as we'd hoped for," he said. Nevertheless, Kuehn said the company expects its moves to grow profits will pay off in two to three years.