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UPS Says Retail Store Closing Spree Challenging its Growth

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While UPS posted strong revenue and profit gains in the second quarter, executives warned that the spate of retail store closings poses challenges to the top and bottom line.

The global package and freight carrier and logistics provider reported revenue increased 7.7% to $15.75 billion in the three months through June 30 from $14.63 in the year-ago period, with gains in all segments and major product categories, as expanded customer demand spread across the company’s broad product portfolio.

Operating profit was up 8.7% to $2.2 billion from $2.04 billion a year earlier, driven by strong performance in the U.S. Domestic and Supply Chain and Freight segments. Net income rose 9.1% to $1.38 billion from $1.27 billion.

“UPS generated great year-over-year revenue gains in the second quarter and we produced solid earnings per share growth, consistent with our plans,” said David Abney, UPS chairman and chief executive officer. “We continue to invest in our network to expand our capabilities, our market presence and our global reach.”

Richard Peretz, UPS chief financial officer, added, “Second quarter results were in line with our expectations and we are pleased with the progress on our strategic initiatives. Looking at the second half of the year, our core business performance will continue to produce solid results.”

However, on a conference call with analysts, executives were more sanguine.

“We are a little challenged because the number of stores that are closing is having an impact on growth” in business-to-business shipments, Peretz said.

Store closings hurt UPS because they cut down on the number of commercial customers, a side of the business that’s more profitable than home delivery, which is surging thanks to e-commerce boosting the demand.

To address this trend, in June UPS announced a new peak charge applicable during selected weeks in November and December for U.S. residential, large packages and packages over maximum limits. The new charge, according to UPS, is designed to enable the logistics provider to continue providing best-in-class value to customers while offsetting some of the additional expenses incurred during significant volume surges.

[Read more about UPS rate changes: UPS Sets New (Higher) Peak Rates for Holiday Season]

“The forecast for B-to-B, if you go back earlier in the year to today, is not quite as strong because of retail sales and also because industrial production forecasts were higher even three months ago to where they are today,” Peretz said.

Abney said UPS has been picking up some business from retailers as an increasing number of people are ordering items online and having them delivered to nearby stores.

Major department stores like Macy’s Inc., Sears Holdings Corp. and J.C. Penney Co. are shuttering hundreds of locations, while malls suffer from shifting consumer shopping habits to e-commerce and the rise of Amazon.

The total number of store closings is expected to hit a record in the U.S. this year, with Credit Suisse Group estimating the number could hit 8,640.

That puts the spotlight on UPS’s efforts to improve the efficiency of residential deliveries, with investments in warehouse automation, new jets and upgraded technology.

The company said in its full-year 2017 guidance that second half currency headwinds and continued costs for strategic initiatives will weigh on results. UPS reaffirmed 2017 adjusted diluted earnings per share guidance to be between $5.80 and $6.10, which includes about $400 million, or 30 cents per share of pre-tax currency headwinds.

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