The slowing US economy and severe winter storms combined to hit FedEx’s Q3 profits, with net incomedown 2%. The results, and a moderate outlook for the forthcoming quarters, led to a 1.2% fall in
the company’s share price yesterday.FedEx Corp. yesterday reported earnings of $1.35 per diluted share for the third quarterended February 28, compared to $1.38 per diluted share a year ago. But this was higher than the$1.33 figure that Wall Street analysts had been expecting. The company’s share closed at $110.99,down 1.16%.
Third-quarter group revenue grew 7% to $8.59 billion, driven by international express,domestic small parcels and consolidation of the long-haul trucking business Watkins (now NationalLTL). But operating income dropped 10% to $641 million, leaving the operating margin at 7.5%, downfrom last year’s 8.9%. Net income was down 2% at $420 million.
FedEx said that the third quarter results were negatively impacted by a slowing economicenvironment, lower fuel surcharges and severe winter storms whose impact was estimated to be $0.06per diluted share. Results for the quarter also included a $0.08 per diluted share benefit from areduction in the company’s effective tax rate.
“The US economy grew at a lower rate than we expected in the third quarter, and we sawcontinued adjustments in the automotive and housing markets. I believe, however, this represents ahealthy transition for the economy as it phases into a more sustainable growth rate,” commentedFrederick W. Smith, FedEx Corp. chairman, president and chief executive officer. “FedEx is inexcellent position to take full advantage of global economic-growth trends and deliver overalloutstanding financial results in the long run.”
For the third quarter, FedEx Express revenues grew 3% to $5.52 billion but its operatingexpenses rose 5%, including high rises for purchased transportation and inter-company charges. As aresult, its operating income dropped 12% to $391 million, and the operating margin fell to 7.1%,down from 8.4% the previous year.
Domestic volumes dropped 2% on a daily average basis, and revenue per domestic package wasstagnant at $15.75. But International Priority (IP) revenue grew 7% for the quarter, as IPrevenue per package grew 4%, primarily due to favourable exchange rates, an increase in packageweights and a higher rate per pound, offset by the lower fuel surcharge. IP average daily packagevolume grew 3%.
In contrast, the domestic small parcel company FedEx Ground increased revenue by 12% to $1.52billion, and improved its operating income by 5% to $196 million but the operating margin droppedback to 12.9% from 13.7% the previous year. Q3 average daily volumes rose 9% due to increasedcommercial business and the continued strong growth in the Home Delivery service. Yield improved 2%primarily due to the impact of general rate increases and extra service revenues.
FedEx Freight Q3 revenues jumped 30% to $1.10 billion due to the consolidation of Watkins(now FedEx National LTL). Operating income was down 32% to $50 million, and the operating marginslipped to 4.5%, down from 8.6% the previous year. The results were largely due to higher yieldsbut operating losses at the National LTL business due to a softening market and networkreorganisation, and severe winter weather.
The retail chain, FedEx Kinko’s, reported Q3 revenue down 3% to $485 million, down 3%, andoperating income down 43% to $4 million. This was due to the continuing decline in copy productrevenues which more than offset higher package acceptance fees paid by FedEx Express and FedExGround. FedEx Kinko’s is expanding its network using a lower-cost business model.
In its outlook, FedEx said that Q4 earnings are expected to be $1.93 to $2.08 per dilutedshare, while earnings for the full year are expected to be $6.45 to $6.60 per diluted share. The Q4outlook was slightly lower than previous guidance. Excluding the net impact of the costs associatedwith the new pilot labor contract, the updated guidance for fiscal 2007 is $6.70 to $6.85 perdiluted share, an increase of 12% to 15% year over year excluding the impact of last year’snon-cash lease accounting charge, FedEx said.
“Long-term we continue to maintain our goal of 10% to 15% annual earnings per sharegrowth,” said Alan B. Graf, Jr., executive vice president and chief financial officer. “However,FedEx earnings growth in our upcoming fiscal 2008, excluding the 2007 net impact of the new pilotcontract, may be below our long-term earnings target due to slower economic growth and plannedinvestments in our businesses.
“Regardless, we remain highly focused on improving margins, cash flow and returns and areconfident that we can achieve our long term earnings goals once economic conditions improve.”
