FedEx profit falls below expectations on drop in air and truck cargo
FedEx reported profit below analyst expectations as cost cuts were not enough to make up for volume declines at the air-freight unit amid a lingering cargo recession. The company lowered its sales forecast for the fiscal year ending May 31.
Adjusted earnings were $US3.99 ($5.90) a share, the Memphis, Tennessee-based company said in a statement on Tuesday (Wednesday AEDT); analysts had expected $US4.19. Sales fell 2.6 per cent to $US22.2 billion against predictions of $US22.4 billion.
Both UPS and FedEx delivered about 98 per cent of packages on time in the week after Thanksgiving, according to ShipMatrix, a consultancy that gathers industry data. John Taggart
FedEx Express, the air-freight unit, is still struggling from overcapacity as commercial airliners resume international flights and from sluggish demand in Asia. FedEx’s freight unit, one of the largest US trucking companies, has been hurt by a drop in cargo demand and price. That weakness was offset a bit by cargo that carriers picked up from Yellow Corp, which ceased operations earlier this year.
“The miss was driven solely by Express,” said Christian Wetherbee, an analyst with Citigroup in a note. “Ground and Freight profit both beat.”
This year’s peak shipping season has been muted as consumers return to stores and contend with inflation and higher interest rates, denting buying power. Nonetheless, FedEx’s Ground unit posted gains on volume and price per package, helped by customers who made the switch from United Parcel Service.
The soft market enabled FedEx to improve its on-time delivery performance, which may make it more difficult for UPS to win back lost customers, Garrett Holland, an analyst with Robert W. Baird & Co wrote in a note. Both UPS and FedEx delivered about 98 per cent of packages on time in the week after Thanksgiving (November 23), according to ShipMatrix, a consultancy that gathers industry data.
Shares fell 10 per cent in US post-market trading to $US252.06 in New York, which would be the biggest decrease since September 16, 2022.
Pricing power
FedEx is powering through the trough in freight demand with a long-term $US6 billion cost-cutting and efficiency plan implemented shortly after Raj Subramaniam took over as chief executive from founder Fred Smith in June last year. The cost reductions are already bearing fruit, underpinning a 62 per cent gain in FedEx’s stock price this year through to Tuesday’s close.
The company lowered its sales forecast to a “low-single-digit percentage decline” from an earlier forecast of little changed.
Ground units sales rose 2.9 per cent to $US8.6 billion and operating margins rose to 10.4 per cent from 7.1 per cent a year earlier on higher volume and revenue per package, showing that the courier still has pricing power even as the market cools from the pandemic highs. Cost per package declined 2 per cent, FedEx said.
The Express unit’s sales fell 5.6 per cent on lower volume and a shift towards lower-yielding services. Adjusted operating margins tumbled to 1.3 per cent from 3.1 per cent a year earlier. At the Freight unit, sales dropped 3.8 per cent while operating margins rose to nearly 21 per cent from 18 per cent.
“I’m very confident the margins at Express will return and the cost take-out that’s continuing to take place will serve us very well, especially as the demand profile returns,” Subramaniam said.
FedEx said that this year’s peak holiday volume was similar to last year’s and that FedEx expects share buybacks of $US1 billion in the last two quarters of its current fiscal year.
Bloomberg
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