FedEx fiscal second quarter earnings trend down

Memphis-based freight transportation and logistics services bellwether FedEx reported lackluster fiscal second quarter results late yesterday.

Earnings per share, at $2.51, fell short of Wall Street expectations of $2.78, and revenue, at $17.3 billion, was down roughly 3% annually. Net income, at $560 million, dropped 40% for the same period, and quarterly operating income, at $684 million, was down compare to the $1.08 billion recorded a year ago.

FedEx explained that its operating cost were down, due to various factors, including: weak global economic conditions, increased FedEx Ground costs from expanded service offerings, the loss of business from a large customer, a continuing mix shift to lower-yielding services, and a more competitive pricing environment. It also cited this year’s later timing of Cyber Week in early December that negatively impacted results.

Revenue for FedEx Express slipped 5% annually to $9.084 billion, with the unit’s operating income, at $236 million, down 63%. Total quarterly package revenue was off 4% to $7.1 billion, with U.S. package revenue down 4% to $3.3 billion, and total international export package revenue falling 3% to $2.6 billion.

Total daily U.S. domestic packages fell 4% at 2.803 million and U.S. revenue per package was flat at $18.70. Total daily international export packages at 880,000 were up 3%, with average revenue per package down 6% to $ 48.49.

FedEx Ground revenue rose 3% to $5.3 billion, and FedEx Freight, its less-than-truckload unit, was off 4% to $1.8 billion.

“Fiscal 2020 is a year of continued significant challenges and changes for FedEx, particularly in the quarter just ended due to the compressed shipping season,” said Frederick W. Smith, FedEx Corp. chairman and chief executive officer, in a statement. “We have significantly enhanced our e-commerce capabilities with strategic initiatives including year-round seven-day FedEx Ground delivery, enhanced large package capabilities and the insourcing of FedEx SmartPost packages. These changes have been well-received by the marketplace as reflected in our record volumes this peak season. While we have experienced some higher-than-expected expenses this quarter, we forecast FedEx Ground operating margins to rebound to the teens in our fiscal fourth quarter as the bow wave of costs for these changes is absorbed.”

On an earnings call yesterday, Smith described the quarter as a anomaly, due to the compressed shipping season [with six fewer days between Thanksgiving and Christmas] that impacted expenses and volumes that would typically fall in the fiscal third quarter, coupled with significant effects on the industrial economy due to continuing trade disputes, including reductions in international air freight and tepid at best B2B domestic parcel and freight shipping.

“Despite these issues, we remain highly confident in our strategies, which we believe will begin to bear fruit by our fourth fiscal quarter and then into FY '21, absent negative macroeconomic developments,” said Smith.

Rajesh Subramaniam, FedEx President and Chief Operating Officer, said on the call that he was not pleased with the company’s financial results, explaining that the company has focus areas across the enterprise on B2B, e-commerce, international profitability, market-leading revenue quality and operational excellence.

“In the short term, this includes targeted actions to shore up our financial performance,” he said. “We expect a reduction in intercontinental and domestic air capacity post peak and an overall reduction of costs in our Express business. This action should result in the decrease of international and domestic flight hours by about 6% to 8% year-over-year in Q4. Additionally, we're permanently retiring our fleet of 10 A-310s. The reduction in flight hours would allow us to temporarily park 14 aircraft by the end of fiscal year '20. We will also permanently retire another 29 aircraft over the next 30 months. It is imperative that while we reduce our cost to serve, we also drive higher yields to improve profitability. Capacity reductions will bring greater focus on revenue quality as we generate more compensatory volume through the network.”

Weak global trade and manufacturing drove less-than-expected demand for the company’s most profitable package and freight services across all of its business segments, noted Alan Graf, FedEx Executive Vice President & Chief Financial Officer, on the call.

“These conditions are especially challenging in Europe where capacity and network reduction opportunities are limited due to the current stage of integration as we are operating duplicate road and air networks,” he said. “As we've discussed, cost headwinds at FedEx Ground are largely driven by the expansion to six-day and seven-day delivery, due to a minimum number of employees required to staff and operate the new schedule prior to the volume and revenue coming online. The loss of volume from Amazon had a larger negative impact to the second quarter than the first quarter, since the FedEx Ground contract with Amazon expired in August.”

With the fiscal second quarter ending November 30, FedEx did not have any of the Cyber Monday or holiday shipping revenue within quarterly revenue although they did have all the ramp-up costs, observed Jerry Hempstead, president of Hempstead Consulting.

“UPS is on a calendar so its a little bit of apples and oranges but it will be interesting to see how UPS stacks up versus FedEx,” he said. “We will know better when FedEx does its next earnings call, which will have the Christmas revenue in it. Based on what is being said about the service degradation and the boasting about record volumes during the FedEx call, they [FedEx] should have an awesome December financially.”

FedEx moved 37.8 million packages on Cyber Monday, topping its published projections of more than 33 million packages and represents a 17% increase over Cyber Monday last year. And it added that December 9 and December 16 both were historic volume days for FedEx.