FedEx fiscal first quarter earnings reflect difficult market conditions

Following negative preliminary first quarter earnings results last week in which it highlighted global volume softness and worsening macroeconomic trends, fiscal first quarter earnings issued late yesterday by Memphis-based freight transportation and logistics services bellwether were largely mixed.

Quarterly revenue—at $22 billion—increased 6% annually, and operating income—at $1.23 billion—fell 17.4% annually, with adjusted net income—at $905 million—falling 23.9%. Diluted earnings per share—at $3.44—was down 21.3% and short of Wall Street estimates of $5.48.

FedEx officials said that quarterly results were adversely impacted by global volume softness that accelerated over the final weeks of the quarter due to weakening economic conditions. And it added that service-related challenges at FedEx Express negatively impacted earnings, while gains in yield, which included fuel surcharges, more than offset the volume decline, and increased quarterly revenue. And the company added that it has implemented cost actions in tandem with a continued focus on yield management and revenue quality in order to mitigate volume declines.

“We’re moving with speed and agility to navigate a difficult operating environment, pulling cost, commercial, and capacity levers to adjust to the impacts of reduced demand,” said Raj Subramaniam, FedEx Corp. president and chief executive officer, in a statement. “As our team continues to work aggressively to address near-term headwinds, we’re meaningfully strengthening our business and customer experience, including delivering an outstanding peak.”

FedEx Express operating income—at $174 million—was down 69% annually, with the company attributing the decline to an 11% annual decline in global package and freight volume, and revenue for the segment—at $11.1 billion—was up 1.4%.  The company said that the impact of cost actions lagged volume declines and operating expenses remained high relative to demand, adding that these factors were partially offset by yield management actions, including higher fuel surcharges.

FedEx Ground operating income—at $694 million—was up 3% annually, and revenue—at $8.2 billion—was up 6%. FedEx cited yield management efforts, including higher fuel surcharges and FedEx Home Delivery growth drove the increase but were partially offset by higher operating expenses mainly related to purchased transportation costs and other operating expenses.

The company’s less-than-truckload unit, FedEx Freight, saw operating income rise 67% annually, to $651 million, with revenue—at $2.7 billion—up 17%. The company pointed to yield management actions, including higher fuel surcharges, partially offset by higher salaries and employee benefits and lower shipments.

Total quarterly package revenue—at $8.7 billion—was up 2.3% annually, and total U.S. package revenue—at $4.1 billion—increased 6%. Total international export package revenue—at $3.6 billion—increased 2.7%, and international domestic came in at $974 million down from $1.1 billion a year ago.

Total daily U.S. domestic package volume—at 5.506 million—dropped 11.4%, and U.S. revenue per package—at $22.36—saw a 16% annual increase. Total daily international export packages—at 960,000—were down 7%, with revenue per package—at $57.78—up 10%.

For FedEx Freight, total shipments per day—at 108,278—fell 5%, and revenue per shipment—at $385.61—headed up 21%.

In its earnings pre-announcement last week, FedEx said FedEx Express results were impacted by macroeconomic weakness in Asia and service challenges in Europe, which led to a revenue shortfall of approximately $500 million relative to company forecasts, with FedEx Ground revenue around $300 million below company forecasts.

The company said it is taking various cost actions through the end of fiscal 2023, with a focus on mitigating the effects of reduced demand, including:  

• Reduction in flight frequencies and temporarily parking aircraft;
• Volume-related reductions in labor hours and other linehaul expenses;
• Consolidation of certain sort operations to drive productivity;
• Reduction of Sunday operations at a number of FedEx Ground locations;
• Cancellation of certain planned network capacity and other projects;
• Deferral of staff hiring;
• Closure of over 90 FedEx Office locations; and
• Identification of five corporate office facilities to be closed, with additional real estate rationalization planning under way

“We saw a decline in our volumes during the first quarter, which accelerated in the final weeks,” said CEO Subramaniam on the company’s earnings call yesterday. “Our softening volumes in Asia and the U.S. were predominantly due to the economy while the shortfall in Europe was both economic- and service-related. Therefore, we had costs in the system for volumes that didn't materialize. While we immediately took action, savings from these cost efforts lagged the volume decline due to the scale of our operations. As a result, while revenue was up 6% year over year, these dynamics translated to volumes being down year over year at all our transportation segments.”

Addressing the company’s plans to reduce costs, he said that for fiscal year 2023, it is prioritizing cost actions to generate $2.2 billion to $2.7 billion of savings, of which about $1 billion will be permanent. For FedEx Express, he said the company expects to drive $1.5 billion to $1.7 billion in savings this fiscal year, adding that the largest single expected contributor in fiscal 2023 will be the changes it is making to its express air network as it cuts global flight hours.

For FedEx Ground, he said the company expects savings to be $350 million to $500 million in fiscal 2023.

“Our approach to cutting costs in Ground primarily centers around rationalizing our operations,” he said. “We are consolidating sorts, which will reduce costs while maintaining service, and have canceled several planned ground network capacity projects. And as mentioned last week, we're also reducing select Sunday operations in over 170 stations. Mike will provide more details on our capital plans shortly. The final components of our expected fiscal '23 savings will be from overhead expenses as we right size our overall cost structure.”

He also discussed the company’s DRIVE initiative, a program supporting its Deliver Today, Innovate for Tomorrow strategy, which was rolled out in June.

“DRIVE is how we execute on that strategy,” he said. “Our team has already started implementing cost reductions under this program, and this will ultimately enable Network 2.0, the long-term end-to-end trend optimization of our network. In total, we expect to take out an additional $4 billion in costs related to DRIVE by fiscal year 2025…incremental to the fiscal '23 savings. These transformational changes will lay the foundation for Network 2.0, which will create an additional $2 billion benefit over the long term. [W]e are focused on actions we can control as we stabilize our near-term performance and execute against our long-term strategy.”

FedEx Executive Vice President and Chief Customer Officer Brie Carere said on the call that For FedEx continues to execute its revenue quality strategy and pursue business that provides attractive yields.

“We continue to deliver new pricing capabilities, and we've taken recent actions to stay well positioned relative to the market as we approach peak,” she said. “We have maintained a brisk pace for repricing contracts for the renewals and continue to negotiate strong increases. We just announced a 6.9% general rate increase this coming January in our response to inflationary pressures on our costs. We also announced our new remote area surcharge and peak residential pricing in the United States.”

Jerry Hempstead, president of Hempstead Consulting, was direct in addressing FedEx’s current challenges.

“FedEx is bleeding,” he said. “Some of which is self-inflicted like their cavalier attitude in shedding customers. The gift Covid gave the parcel industry, accelerating growth ahead of expense is now behind. The revenue of emergency shipments of masks, vaccines, medicines etc. is now behind. The solution, as FedEx has decided, is a massive price increase and taking down lift. We shall see how effective that strategy is moving forward. Because of my history the solution is volume. In my opinion, they need to switch focus from yield improvement to market share gain and grow packages rapidly that can feed the beast.”