UPS cuts profit outlook on soft demand, says trend will continue; shares fall

ATLANTA — UPS shares tumbled Friday after it predicted disappointing second-quarter earnings and reduced its profit forecast for the full year.

United Parcel Service Co. and rival FedEx Corp. are suffering as customers increasingly trade down from expensive priority shipping to slower and less expensive options. UPS expects this and other trends to continue.

Shares of UPS fell $5.33, or 5.8 percent, to $86.12 in trading Friday. They dropped as low as $85.78 earlier.

The Atlanta company said that second-quarter earnings, excluding special items, would be $1.13 per share. Analysts were expecting $1.20 per share, according to a survey by FactSet.

For all of 2013, UPS lowered its profit forecast to between $4.65 and $4.85 per share — that's down from a January prediction of $4.80 to $5.06 per share. Analysts expected $4.98 per share.

UPS blamed the gloomier outlook on overcapacity in airfreight shipping, which pushes prices down; the shift to cheaper shipping options; a slowing U.S. industrial economy; and "some slowing" in volume growth as a result of labor negotiations. It did not explain how the labor talks affected volume.

"We expect the second-quarter market trends to persist, and UPS is adapting to meet these conditions," chief financial officer Kurt Kuehn said in a statement.

UPS has begun to respond to the trend toward lower-cost shipping options by reducing capacity in Asia, but the sluggish U.S. economy has consumers and businesses here cutting back on spending too.

"We do not expect to see a significant uptick in next-day priority services until we see a global recovery and not just a US recovery," Becker said in a note to clients. She said she remained "somewhat cautious" on the whole industry.

Last month, FedEx reported a 45 percent drop in quarterly profit due largely to international customers trading down to cheaper forms of delivery and money that the company spent upfront in hopes of eventually reducing costs through, among other steps, offering buyouts for employees to quit. FedEx saw lucrative international priority shipments fall 2 percent during the quarter while less-expensive economy deliveries grew 11 percent.

UPS, FedEx and other shipping companies are often seen as economic bellwethers because they make deliveries for a range of businesses in many industries.