FedEx Corp. reported first-quarter earnings after Thursday’s market close that were significantly lower than expected as customers traded down to economy delivery services and demand lagged, disappointing investors and triggering an 11% drop in the share price in late trading.
The express logistics provider lowered its guidance for the fiscal year, saying it now expects low-single-digit percentage revenue growth compared to the prior forecast of a low-to-mid-digit increase. It also narrowed the adjusted EPS range to $20 to $21 from the prior range of $20 to $22.
FedEx (NYSE: FDX) is undergoing a significant transformation under CEO Raj Subramaniam, aiming to cut costs and combine two distinct delivery networks to improve efficiency and customer service. But the quarterly results suggest the process will be bumpy.
Shippers choosing cheaper delivery options is a growing trend that also is afflicting UPS. Businesses are increasingly switching from express air to ground service and from ground to lower-priced hybrid service that injects parcels into the U.S. Postal Service system for final-mile delivery. Deferred package services offer lower yields than premium express service. 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 ago on revenue of $21.6 billion. Revenue ticked down $100 million. Adjusted earnings per share of $3.60 was 21% lower year over year and $1.70 below analysts’ projections. Revenue missed consensus estimates by $170 million.
Results were also hurt by weaker-than-expected demand, especially in the U.S. domestic package market. Subramaniam added that a sluggish industrial economy suppressed business-to-business volumes in the quarter, but expressed cautious optimism that industrial production will improve in the second half of the fiscal year.
Reduced flying for the U.S. Postal Service didn’t help the top line as work transitioned to UPS, which is taking over the air cargo contract after Sept. 30. Management said it planned to reduce daytime flight hours by about 60% in October as it exits the postal business, as previously reported by FreightWaves.
Management has said it expects to achieve significant cost reductions and better flexibility as it streamlines domestic air operations in line with reduced aircraft requirements. The end of the Postal Service business is expected to deflate operating income by $500 million this fiscal year.
A key priority is eliminating excess capacity. Structural cost reductions during the quarter prevented earnings from being worse. FedEx said it realized $160 million in cost savings from reorganizing its air and international networks and $90 million from surface network improvements. It is on target for $2.2 billion in permanent 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 effects of our recent pricing actions, which we expect to help offset weaker-than-expected demand trends,” said CFO John Dietrich in the announcement. “We will continue to manage our capital prudently, and remain committed to our plan to return $3.8 billion to stockholders this fiscal year.”
FedEx reported results for the first time under a new corporate structure that combines Ground and Services segments under a new Federal Express segment. Also, results for FedEx Custom Critical, a white-glove delivery service, are now reported under FedEx Freight.
Fully integrating operating units at the field level will take longer but is well underway in Canada. Subramaniam said integration of nearly 200 facilities in Canada that can handle express and ground volumes will be completed by early 2025. Facilities that have been combined so far have achieved a 10% reduction in pickup and delivery costs with service levels that meet or exceed the network average, he said.
The integration of separate Express and Ground networks aims to deliver an additional $2 billion in savings over the next two years. Dietrich said the expiration of the Postal Service contract will help the redesign of the air network because different sizes of aircraft can be better matched to demand by freight lane. The demand changes in the market underscore the importance of streamlining air operations, officials said.
Express revenue dipped 1% to $18.3 billion during the quarter due to lower domestic priority package volume and increased purchased transportation rates. Higher international economy package volume (+8.5%) was a bright spot for the segment.
Soft revenue was heavily influenced by a global decline in Priority volume and growth in deferred volume, which held total package yields to 1% growth, almost one point lower than the company expected, Dietrich said on the earnings call with analysts. The increase in international economy volume was a primary reason for the $124 million increase in purchased transportation expenses, which involved pickup and delivery, surface linehaul and commercial air contractors.
FedEx Freight, the less-than-truckload segment, was negatively impacted by a decline in weight per shipment and reduced priority shipments, partly offset by a higher base yield. Revenue was $2.3 billion, 2% lower than the prior year. The company said it closed seven small-market terminals last year as part of its strategy to streamline the network.
FedEx had one fewer operating day during the quarter than last year.
Officials said new international demand and fuel surcharges will help results in the coming quarters.
The results were a reversal from the previous quarter when FedEx revenue inched up 1% to $22 billion and adjusted operating income increased 5.6% to $1.9 billion. It was the first time FedEx had year-over-year revenue growth after six quarters of declines.
Earlier this month, FedEx announced a strategic alliance and investment with Nimble, an AI robotics and autonomous e-commerce fulfillment technology company.
There was no news about a strategic realignment that would see the less-than-truckload segment sold or spun off as an independent entity, so the company can focus on its parcel and logistics business. Leadership reiterated that it expects to complete a review of FedEx Freight by the end of the year.
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Write to Eric Kulisch at ekulisch@freightwaves.com.
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