FedEx’s Warnings Renew Concern About Global Slowdown

The State of the Global Economy

As reported by Brendan Murray for Bloomberg, FedEx’s profit warning added to market jitters about the state of the global economy last week but the challenges may be specific to the delivery giant rather than a sign of an impending recession.

That’s one of the takeaways in the aftermath of Friday’s announcement, in which FedEx said it sees conditions worsening and is taking immediate steps like parking aircraft, cutting workers’ hours, and closing more than 90 of its roughly 2,200 Office locations. Wall Street analysts say it’s really bad and the latest caution flag from corporate America probably won’t be the last.

FedEx cited weakness in Asia and challenges in Europe as it pulled its prior outlook and reported preliminary results for the latest quarter that fell well short of analysts’ expectations.

But as Bloomberg Intelligence logistics analyst Lee Klaskow wrote in a note, Deutsche Post hosted a DHL Express capital-markets day on Sept. 8 and didn’t see the same magnitude of the weakness as FedEx, and demand through August has been mostly in-line with management's expectations.

FedEx’s outlook also stands in contrast to rival UPS, whose management earlier this month reaffirmed their full-year financial targets, despite the return of Covid-19 lockdowns in China and Europe’s energy crisis. (Click here for the full story from Bloomberg’s Ryan Beene.)

Here’s a sampling of some other developments since late last week:

The number of loaded inbound containers through the Port of Los Angeles dropped by the most since the early days of the Covid-19 pandemic last month - read more here. But other docks are still going gangbusters: The Port of Savannah announced last week that August was its busiest month ever.
Shares of HVAC producer Carrier Global dropped after CEO David Gitlin described ongoing supply-chain challenges. General Electric shares fell after the manufacturer’s finance chief warned that supply-chain challenges are weighing on the company’s third-quarter performance.
After hitting record highs in early 2022, container shipping shares are in a steady decline. Maersk dropped 10.3% last week - the sixth straight weekly decline - and shares of China’s Cosco were hovering near the lowest since April 2021. The spot market for ocean freight is still in freefall, signaling weaker demand and perhaps an end to the carriers’ record run of profits, according to a recent note from Sea-Intelligence.

FedEx CEO Raj Subramaniam Expects the Economy to Enter A 'Worldwide Recession'

FedEx CEO Raj Subramaniam told CNBC’s Jim Cramer on Thursday that he believes a recession is impending for the global economy.

“I think so. But you know, these numbers, they don’t portend very well,” Subramaniam said in response to Cramer’s question of whether the economy is “going into a worldwide recession.”

The CEO’s pessimism came after FedEx missed estimates on revenue and earnings in its first quarter. The company also withdrew its full-year guidance.

Shares of FedEx fell 15% in extended trading on Thursday.

“I’m very disappointed in the results that we just announced here, and you know, the headline really is the macro situation that we’re facing,” Subramaniam said in an interview on “Mad Money.”

The chief executive, who assumed the position earlier this year, said that weakening global shipment volumes drove FedEx’s disappointing results. While the company anticipated demand to increase after factories shuttered in China due to Covid opened back up, it actually fell, he said.

“Week over week over week, that came down,” Subramaniam said.

The chief executive also said that the loss in volume is wide-reaching and that the company has seen weekly declines since around its investor day in June.

“We’re seeing that volume decline in every segment around the world, and so you know, we’ve just started our second quarter,” he said. “The weekly numbers are not looking so good, so we just assume at this point that the economic conditions are not really good.”

“We are a reflection of everybody else’s business, especially the high-value economy in the world,” he later added.

Here's what new FedEx CEO Raj Subramaniam had to say:

“Global volumes declined as macroeconomic trends significantly worsened later in the quarter, both internationally and in the U.S. We are swiftly addressing these headwinds, but given the speed at which conditions shifted, first quarter results are below our expectations. While this performance is disappointing, we are aggressively accelerating cost reduction efforts and evaluating additional measures to enhance productivity, reduce variable costs, and implement structural cost-reduction initiatives. These efforts are aligned with the strategy we outlined in June, and I remain confident in achieving our fiscal year 2025 financial targets.”

What FedEx says it's doing to stabilize its giant ship:

“Reduction in flight frequencies and temporarily parking aircraft;

Volume-related reductions in labor hours and other linehaul expenses;
Consolidation of certain sorts of 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 underway.”

FedEx has blown three tires before the peak holiday shipping season, and chatter on the Street is that mighty Amazon may have played a role.

“It makes sense to see Amazon trade-off with this but there could also be a competitive element going on here too,” JPMorgan's Jack Atherton wrote in a note to clients. “Coincidentally, Amazon’s Seller conference has been ongoing for the last 2 days which focused heavily on new features for Buy with Prime as it further tries to break down Shopify’s moat. Amazon also launched free shipping software for sellers and discounted shipping rates. Amazon has piled money into its logistics capability over the past few years, to the point, that it has excess capacity for its own needs and is hungry for more shares which are being targeted through FBA (Fulfillment By Amazon) and could be weighing on FedEx. I’d be buying Amazon on weakness here.”

FedEx served up a brutal earnings pre-announcement after the close of trading on Thursday, sending shares crashing. The logistics giant's ticker page was the most visited on the Yahoo Finance platform in the wake of the warning, underscoring the severity of the disappointment.

Rival UPS shares also fell around 7% in sympathy as investors read-through the company may issue a lackluster quarter (or pre-announcement) in October.