Slowing International Conditions and Weaker Global Trade Growth Impacts FedEx Third-Quarter Results

FedEx Corp. Reports Third Quarter Results

Fiscal third-quarter earnings results issued late yesterday by Memphis-based freight transportation and logistics services bellwether FedEx came up short compared to initial expectations.

While revenue, at $17 billion, was up 3% annually, net income, at $739 million, was below the $2.07 billion for the same quarter a year ago but below Wall Street expectations of $17.67 billion.

Earnings per share, at $3.03, were below Wall Street expectations of $3.11.

The company said that these results were adjusted to exclude TNT Express integration expenses and business realignment costs, as well as the benefit of an estimated $1.15 billion in its U.S. net deferred tax liability due to the lower statutory rate enacted as part of the Tax Cut and Jobs Act.

“Our third quarter financial results were below our expectations and we are focused on initiatives to improve our performance,” said Frederick W. Smith, FedEx Corp. chairman and chief executive officer, in a statement.

“Our investments in innovation, network infrastructure, and automation will increase our competitiveness and drive long-term earnings growth. FedEx built and operates the preeminent global parcel and logistics network, and we have a lengthy track record of success.”

A major reason for the earnings miss was attributed to a continuation of slowing international macroeconomic conditions and weaker global trade growth trends, explained Alan Graf, FedEx EVP and CEO, on the company’s earnings call yesterday.

“Asia volume weakness, which we experienced during peak season, deepened post-Chinese New Year,” said Graf.

“Reflecting these macro challenges, FedEx Express international revenues declined year-over-year in the third quarter. U.S. volume growth continued to benefit from the expansion of our e-commerce solutions but yields were pressured by this expansion, lower weight per shipment and service mix changes.”

Fiscal third-quarter revenue for FedEx Express, at $9.005 billion, was down 6.2% annually, and FedEx Ground revenue, at $5.261 billion, was up 8.3%. FedEx Freight revenue, at $1.75 billion, was up 7.9%.

Average daily package volume for the quarter, at 6.284 million, rose 2.1% annually, while total composite yield per package, at $18.01, was off 2.5%.

“The biggest understatement on the post-earnings announcement investors call was ‘hey, we had a bad quarter,’” said Jerry Hempstead, president of Hempstead Consulting.

“Although the senior FedEx executives tried their best to paint a rosy picture for the future, they lowered earnings guidance again and pushed out when investors might see significant earnings improvement from all the money FedEx is spending.”

FedEx said in its earnings release that it will roll out a voluntary buyout program for eligible U.S.-based employees, which it said is expected to total $450 million-to-$575 million over the fourth quarter of fiscal 2019, with actual costs contingent on acceptance rates.

And it added that savings from business realignment activities are pegged to be between $225 million-to-$275 million in fiscal 2020, adding that similar programs are likely to be coming for employees in international regions.

On the call, Brie Carere, FedEx EVP, Chief Marketing and Communications Office, said that FedEx continues to be very focused on revenue management, in what she called a very rational pricing market.

“The biggest issue for FedEx is that it has never fully embraced the loss of customers due to the virus that crippled TNT after the acquisition”Jerry Hempstead, president Hempstead Consulting

“We also routinely review our fuel surcharges,” she said.

“As we announced last month and effective yesterday, we updated the tables used to determine our fuel surcharges for FedEx Express U.S. domestic services and at FedEx Ground. Although e-commerce will put pressure on yield with lighter and shorter distance packages, we continue to make structural changes to address…profitability.”

Hempstead said that the trend of mid-year pricing changes continuing at FedEx, explaining that FedEx has tinkered with the tables used to determine the trigger for the fuel surcharges to applied to domestic transactions.

The biggest issue for FedEx, according to Hempstead, is that it has never fully embraced the loss of customers due to the virus that crippled TNT after the acquisition.

“This decimated the book of business in June 2017, and the loss of traffic manifested itself for four quarters up until June 2018,” he added.

“Only in the last few months did they show growth but all the lost business should be behind them. Unfortunately UPS and DHL apparently have given back to FedEx the ugly freight that they landed during the troubles at TNT and so the mix is off at FedEx international. There may be growth there but it may not be the healthiest.”

Image: FedEx

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