FedEx’s results hurt by weak demand and fewer premium customers

FedEx Corp. reported its first-quarter earnings after the stock market closed Thursday. The results fell far short of expectations as customers switched to economy delivery services and demand fell, disappointing investors and sending its stock down 11 percent by the end of the session.

The express logistics provider lowered its fiscal year outlook, saying it now expects low-single-digit revenue growth from a previous forecast of low-to-mid-growth. It also narrowed its adjusted earnings per share range to $20-$21 from a previous range of $20-$22.

FedEx (NYSE: FDX) is undergoing a significant transformation under CEO Raj Subramaniam to cut costs and combine two separate delivery networks to improve efficiency and customer service, but quarterly results suggest the process will be bumpy.

Shippers are opting for cheaper delivery options, which is also hurting UPS. Companies are increasingly switching from air to ground express delivery and from ground to a cheaper hybrid service that feeds packages into the U.S. Postal Service system for last-mile delivery. Deferred services offer lower profits than premium express services. FedEx said its operating margin fell from 7.3% to 5.6%.

Adjusted operating income for the quarter ended Aug. 31 was $1.2 billion, down nearly 24% from the same period a year earlier on revenue of $21.6 billion. Revenue was down $100 million. Adjusted earnings per share of $3.60 were down 21% year over year and $1.70 below analysts’ forecasts. Revenue missed consensus expectations by $170 million.

Results were also hurt by weaker-than-expected demand, especially in the domestic packaging market in the US. Subramaniam added that a sluggish industrial economy limited business-to-business volumes in the quarter, but expressed cautious optimism that industrial production would improve in the second half of the fiscal year.

The U.S. Postal Service’s reduction in flights has not helped boost revenue, as that task has been taken over by UPS, which will take over the air cargo contract after Sept. 30. Management said it plans to cut daily flight hours by about 60% in October as it exits the postal business, FreightWaves previously reported.

Management said it expects to achieve significant cost reductions and greater flexibility by streamlining domestic flight operations in line with reduced aircraft requirements. The termination of Postal Service is expected to result in a $500 million decrease in operating income this fiscal year.

Eliminating excess capacity is a key priority. Structural cost reductions in the quarter prevented earnings from declining. FedEx said it realized $160 million in cost savings from revamping its air and international networks and $90 million from improvements to its ground network. It is on track to achieve $2.2 billion in recurring savings this fiscal year after saving $1.8 billion last year.

“Our revised outlook reflects our continued confidence in the execution of our Drive initiatives and the impact of our recent pricing actions, which we expect will help offset weaker-than-expected demand trends,” Chief Financial Officer John Dietrich said in the announcement. “We will continue to prudently manage our capital and remain committed to our plan to return $3.8 billion to shareholders this fiscal year.”

Investment bank Morgan Stanley downgraded FedEx shares to underweight after saying many of the headwinds — lower demand for packages, competition from lower-cost carriers, e-commerce — were structural, not cyclical. Equity analyst Ravi Shankar added in a research note that integrating parcel facilities would become more difficult as the Drive program expanded to larger metropolitan areas. He estimated the savings this year would be $500 million, down from $2 billion.

FedEx reported results for the first time under a new corporate structure that combines its Ground and Services segments under the new Federal Express segment. In addition, FedEx Custom Critical, a white-glove delivery service, is now reported under FedEx Freight.

Full integration of the field-level operating units will take more time, but is underway in Canada. Subramaniam said the integration of nearly 200 facilities in Canada that can handle express and ground volumes will be completed by early 2025. The facilities that have been connected so far have achieved a 10% reduction in pickup and delivery costs with service levels that meet or exceed the network average, he said.

FedEx Freight is the largest LTL carrier in the United States. (Photo: Jim Allen/FreightWaves)

Integrating the separate Express and Ground networks is expected to generate an additional $2 billion in savings over the next two years. Dietrich said the expiration of the Postal Service contract will help redesign the airline network because different sizes of aircraft can be better matched to demand by cargo lane. The shift in market demand underscores the importance of streamlining airline operations, officials said.

Express revenue fell 1% to $18.3 billion in the quarter, driven by lower domestic priority volume and higher purchased freight rates. Increased international economy volume (+8.5%) was a bright spot for the segment.

Soft revenue was largely impacted by a global decline in Priority volume and an increase in deferred volume, which kept total package profitability up 1%, nearly a point below the company’s expectations, Dietrich said on a conference call with analysts on financial results. The increase in international volume was the main reason for a $124 million increase in purchased transportation spending, which included pickup and delivery, ground transportation and commercial aviation contractors.

FedEx Freight, the less-than-truckload segment, was hurt by a decline in package weight and priority shipments, partially offset by higher underlying profitability. Revenue was $2.3 billion, down 2% from a year earlier. The company said it closed seven small-market terminals last year as part of its network improvement strategy.

FedEx recorded one fewer operating day this quarter than last year.

Officials said new international demand and fuel subsidies would boost results in coming quarters.

The results were a reversal from the previous quarter, when FedEx revenue rose 1% to $22 billion and adjusted operating income rose 5.6% to $1.9 billion. It was the first time FedEx reported year-over-year revenue growth after six quarters of declines.

Earlier this month, FedEx announced a strategic partnership and investment with Nimble, a company specializing in artificial intelligence, robotics and autonomous e-commerce fulfillment technology.

There was no news of a strategic realignment that would involve selling or spinning off the less-than-truckload business as an independent entity so the company could focus on its parcel and logistics business. Management reiterated that it expects to complete the FedEx Freight review by the end of the year.

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