FedEx fiscal second quarter earnings rise, but international concerns loom

Fiscal second quarter earnings released today by FedEx were mixed.

Earnings per share, at $4.03, topped Wall Street expectations of $3.94, while revenue, at $17.8 billion, was up 9% annually, and net income, at $935 million rose 21%. Quarterly operating income, at $1.17 billion, was up 5%. Even though there were gains for these metrics, the company said it is reducing full-year guidance, due largely to issues in its European operations. 

“Our volumes and revenues demonstrate FedEx is experiencing strong growth in the U.S. where the economy remains solid,” said Fred Smith, FedEx Chairman and CEO. “However, our international business, especially in Europe weakened significantly.”

The top FedEx executive added that China's economy has weakened due in part to trade disputes, and as a result, FedEx lowered its fiscal 2019 earnings guidance and our accelerating actions to reduce costs, given the uncertainty of global macro economic trends.

“We are highly confident that we will achieve the benefits expected with the acquisition of TNT Express, although, we will not achieve our FedEx profit improvement goal in fiscal 2019,” he said.

The aforementioned cost-reduction actions, which are focused on mitigating what it called below-plan performance, include: a voluntary buyout program for eligible employees; international network capacity reductions are FedEx Express; limited hiring in staff functions; reductions in discretionary spending; and expanding the use of technology and capitalizing on efficiencies through network scale. Smith said that the voluntary buyout program is targeted to achieve an annual savings of $225 million to $275 million per year, providing an approximately 18 to 24 months payback.

Revenue for FedEx Express headed up 6% annually to $9.6 billion, with the unit’s operating income up 3% to $620 million. Total quarterly package revenue was up 5% to $7.4 billion, with U.S. package revenue up 10% to $3.4 billion, and total international export package revenue up 4% to $2.7 billion.

Total average daily packages at 6.449 million were up 3%, with total daily U.S. domestic packages up 7% at 2.922 million and U.S. revenue per package up 3% at $18.75. Total daily international export packages at 857,000 were up 3%.

FedEx Ground revenue rose 14% to $5.1 billion, and FedEx Freight, its less-than-truckload unit, saw a 15% revenue gain to $1.918 billion.

Raj Subramaniam, FedEx executive vice president, chief marketing and communications, FedEx executive vice president, chief marketing and communications, said on the call that U.S. growth remains solid and is driven by robust consumer spending and favorable conditions in the industrial sector.

But that has not been the case on the international side, as he explained that the economic strength seen earlier this year has given way to a slowdown, with the peak for global economic growth now appearing to be in the past. Eurozone growth has slowed from 2.5% last year to under 2% in the second half of 2018, he noted, and economic growth in the UK has slowed sharply since July, with the secular slowdown in Chinese economy having been exacerbated by trade tensions. What’s more, he observed that world trade slowed in Q3 to just 3.5% compared to 5.3% in Q3 2017, with leading indicators pointing to positive but even slower trade growth near term.

The company’s Peak Season outlook was more optimistic, with Subramaniam saying that FedEx is experiencing yet another record peak-season.

“We are extremely proud of this excellent service levels that we achieved this peak season, especially given the increasing volumes,” he said. “The last three Mondays were some of the busiest days in the history of FedEx, including Cyber Monday where our volume crossed 32 million packages, more than double our average daily volume. We were able to deliver all of that volume with record service levels.”

Addressing the ongoing integration of TNT into FedEx, Dave Bronczek, FedEx president and COO, said that following TNT's recovery from the cyber attack in 2017, the company has seen an accelerating shift of its product mix to more freight than parcel, which, he said, has put pressure on its system and costs.

“Continued tariffs and trade concerns and uncertainty in Asia are impacting our business there as well,” he explained. “We continue to work with our customers as they reevaluate their supply chains. Our TNT integration activities continue and are in full swing throughout Europe, throughout Asia and Latin America. Following the cyber attack, we accelerated the integration of our sales force by one full year. And to-date approximately 70% of our global sales force has been integrated with the remainder to be completed at the end of this fiscal year. This will provide us a single point of contact for our customers, something they very much are looking forward to.”

Jerry Hempstead, president of Hempstead Consulting, said that in the wake of the TNT cyberattack, FedEx had widespread service delays, tied, in part, to employees having to use manual processes.

The legacy TNT customers’ business was hung up in the FedEx network and could not be cleared and delivered, and shippers could not use automated means to tender shipment, and these former TNT customers were then forced to negotiate deals with DHL and UPS in order to get their shipments moved, according to Hempstead.

“Often, DHL and UPS offered outstanding deals for the traffic in exchange for long term commitments after FedEx had designed a fix for the software problems,” he said. “The software problems lingered for weeks and there may still be shipments in the FedEx network that never got delivered as a result of the cyber attack. FedEx had lousy international numbers for the next year and DHL and UPS showed great growth. But that year over year impact faded in the second half of 2017. We are now comparing year over year of the good times in 2017 for UPS and DHL and you would think the negatives of the TNT event would be behind them. The reality is that the customers burned by the cyber attack had no compelling reason to run back to TNT (now FedEx) after FedEx worked out all the IT issues. My opinion is that FedEx has been in Pollyanna mode for the last year hoping that they would regain the traffic and then be able to rationalize all the projected savings from the purchase and integration. They need to take the write off for the cyber attack and the real impact now and get it behind them. I don’t believe they have been honest with themselves as to the cost to them of this software attack Now FedEx blames a softening international environment. Perhaps we are just at normal international levels.”