FedEx fiscal third quarter earnings are mixed

As was the case for the fiscal second quarter, fiscal third quarter earnings for FedEx were again mixed.

Earnings per share at $2.35 were up 22 percent but fell short of Wall Street estimates of $2.65. Revenue was up 14.4 percent at $15.0 billion, and operating income at $1.03 billion was up 17.2 percent.

“Our worldwide FedEx team delivered an outstanding peak season. Even with our highest volumes ever, we achieved record service levels,” said Frederick W. Smith, FedEx Corp. chairman and chief executive officer. “We are confident our strategic investments to expand our global scope and portfolio of solutions position FedEx for greater long-term profitable growth as we adapt to meet the evolving needs of our customers.”

Individual unit quarterly performances: 

FedEx Express adjusted quarterly revenue, which excluded TNT Express integration expenses, was up 3 percent at $6.78 billion, and operating income dropped 7 percent to $555 million. FedEx said the revenue gain was due to higher base rates, with package volume partially offset by the negative impact of one fewer operating day, and the drop in operating income was caused by the “significantly negative net impact of fuel” and the one less operating day, with $31 million of the results attributed to TNT integration expenses. Total package revenue for the quarter was up 3 percent at $5.398 billion, with U.S. package revenue up 3 percent at $3.118 billion and total international export package revenue up 4 percent at $1.968 billion.  

Total average daily packages at 4.428 million were up 3 percent, with total daily U.S. domestic packages up 1 percent at 2.896 million and revenue per package up 3 percent up $17.36. Total daily international export packages at 589,000 were up 4 percent, and revenue was up 1 percent at $53.92.

TNT Express revenue came in at $1.79 billion, with operating income at $2 million. FedEx said these results include $16 million in intangible asset amortization expense and $22 million of integration expenses, including restructuring charges.

FedEx Ground revenue rose 6 percent to $4.69 billion, and operating income was down 8 percent at $515 million. Higher base rates and commercial volume growth drove growth, which FedEx said was offset by lower residential volume that were due to yield management, or pricing, actions, as well as one less operating day.

FedEx Freight, the company’s less-than-truckload segment, saw revenue head up 2 percent to $1.49 billion, with operating income down 27 percent at $41 million. Average daily shipments were flat, with the company citing a focus on revenue quality, as the U.S. industrial environment remains weak.

Raj Subramaniam, Executive Vice President, Global Strategy, Marketing and Communications, for FedEx, said on the call that third quarter results included most of the 2016 Peak Season and was a record-breaking year for volume and service.

“With volume that more than doubled our daily average on multiple days, all of our year around preparation paid off and our networks performed as designed to meet the surge in demand,” he said on the company’s earnings call. “Once again, volume during this season was impacted by the continued growth of e-commerce. The retail and e-tail industry and consumer shopping patterns continue to evolve. We had record volumes over the peak season although we had a few large customers who had volumes below their peak forecast. We are already well into our planning for peak 2017 to ensure we are ready to meet our customer's needs in a profitable manner.”

And Subramaniam explained that the retail industry is being transformed through e-commerce, with at the forefront of innovating and incrementing solutions up and down the value chain that make e-commerce convenient and accessible to consumers around the world.

In assessing third quarter results, Alan Graf, FedEx EVP and CFO, explained that while the net impact of fuel, one less operating day at Express and Ground and ground expansion costs weighed on earnings. But on a positive note, he said that yield growth for all FedEx transportation segments was a bright spot as FedEx continues to improve its revenue quality and manage yields.

That is especially reflected in how FedEx is now adjusting its fuel surcharge on a weekly basis rather than a monthly basis for Express and Ground. Graf said this should better match volatility of FedEx fuel expenses to its surcharge, and that change will not impact future results like it has in the past, with the company not “lapping” those results until February 2018.

The company’s integration of TNT Express, which is the largest acquisition FedEx has ever made, provided myriad benefits, including accelerating its European and global growth, enhancing its global footprint and leveraging TNT’s lower cost road networks in Europe, the Middle East and Asia, said Dave Bronczek, FedEx president and CEO.

“Our global integration teams are working to bring TNT and it's 54,000 employees and their operations across 200 countries and more than one million shipments daily into the FedEx Express system,” he said. “The integration of TNT and FedEx is on track with significant progress thus far in fiscal 2017. Our teams around the world are energized, they are focused on delivering the opportunities and the benefits that's provided by this combination. The integration plan that was developed prior to the close of the deal has been fully validated and did not require a significant revision, which has given us tremendous momentum as we moved into the execution phase.”

And he added that the integration benefits will be driven by:

• optimizing pickup and delivery operations by implementing new technology and optimizing the location of all of our facilities and all of its stations to deliver unmatched service;
• operating one integrated global express network, capitalizing on technology and solutions, the most efficiently route parcels and freight through our integrated hub, line haul and its Intercontinental air network, to deliver the absolute best service for combined customers while at the same time, significantly dropping costs;
• improving the efficiency of staff functions with improved IT solutions, streamlining support functions and realizing significant sourcing savings globally; and
• growing revenue by offering a best-in-class portfolio of services through a single sales team, a single online customer facing tool and through revenue management activities

Jerry Hempstead, president of Hempstead Consulting, said that like UPS FedEx had “profitless prosperity” during the holiday rush.

“One has to appreciate that two of the three months were positively impacted by a rate increase, a fuel surcharge change and a draconian adjustment of the divisor for determining dimensional weight,” he said. “It may appear that the incremental business from a ‘handful’ of seasonal e-commerce shippers erased the profits of what should have been a sterling quarter. Now FedEx blames one less shipping day and the increase in fuel (particularly noting aviation fuel) but that should have been covered by the fuel surcharge, especially when applied to higher rates as of January 1. Granted FedEx has invested heavily in highly automated ground hubs to prepare for peak and that will pay off in the future but Wall Street is anxious that this is the second quarter in a row with a miss. The management team is very bullish on the future in particular with the integration of TNT into their network and the synergies that will result when fully integrated.”