Friday March 29, 2024
18-12-19

FedEx has 'very disappointing' Q2 but 'exceptionally strong start' to peak

Raj Subramaniam
Raj Subramaniam

FedEx has posted “very disappointing” results for its current financial year (FY20) due to weak global economic conditions, increased costs at its Ground unit from expanded service offerings, the loss of business from a large customer (presumed to be Amazon), a continuing mix shift to lower-yielding services and a more competitive pricing environment.

In addition, the later timing of the Thanksgiving holiday resulted in the shifting of Cyber Week into December, which negatively impacted the quarter’s results. These factors were partially offset by lower variable incentive compensation expenses and increased yields at FedEx Freight, the company noted.

On the positive side, FedEx will take some comfort from a very strong peak period in the run-up to Christmas. 

At a conference call with analysts, the company’s president and chief operating officer Raj Subramaniam paid tribute to “our more than 490,000 team members, who are working relentlessly to deliver a successful peak season for our customers.

“And we are off to an exceptionally strong start this compressed peak season.  As data indicates, we moved 37.8 million packages on Cyber Monday. This exceeded our published projections of more than 33 million packages and represents a 17% increase over Cyber Monday last year.

“Additionally, December 9 and December 16 were historic volume days for FedEx. Our outstanding service during peak is supported by our people and the significant investments we have made in the FedEx Ground network over the past two decades.”

The peak season effort has also been bolstered by FedEx Ground's expansion to seven-day operations. Last weekend saw the company deliver over 14 million packages on Saturday and Sunday. As recently as a couple of years ago, FedEx wasn't delivering packages on weekend periods.

Returning to the Q2 results, adjusted operating income in Q2 (September-November 2019) decreased sharply to US$684 million compared to $1.33 billion a year earlier while revenue declined from $17.8 billion to $17.3 billion. Operating margin was reduced to 3.9% against 7.5% in the previous second quarter period.

“Fiscal 2020 is a year of continued significant challenges and changes for FedEx, particularly in the quarter just ended due to the compressed shipping season,” said Frederick W. Smith, FedEx Corp. chairman and CEO.

“We have significantly enhanced our e-commerce capabilities with strategic initiatives including year-round seven-day FedEx Ground delivery, enhanced large package capabilities and the insourcing of FedEx SmartPost packages. These changes have been well-received by the marketplace as reflected in our record volumes this peak season.”

Smith continued: “While we have experienced some higher-than-expected expenses this quarter, we forecast FedEx Ground operating margins to rebound to the teens in our fiscal fourth quarter as the bow wave of costs for these changes is absorbed.” 

Looking at the results by segment, Express suffered a 27% decline in operating income to $285 million on turnover down 3% at $8.95 billion. Fedex Ground's operating income was down 5% to $644 million but its revenue was up 8% to 5.18 billion. FedEx Freight achieved 10% growth in operating income to $194 million from a turnover of $1.91 billion (-3%).

This below-par performance overall has once again led to the Memphis-based shipping giant lowering its full-year earnings outlook

“Our revised guidance reflects lower-than-expected revenue at each of our transportation segments and higher-than-expected expenses driven by continued mix shift to residential delivery services,” said Alan B. Graf, Jr., FedEx Corp. executive vice president and CFO.

“In response, we are implementing reductions to the global FedEx Express air network to better match capacity with demand. We are also further restricting hiring and pursuing opportunities to optimize our networks, including investments in technology aimed at improving our productivity and lowering our costs.”

On the conference call, Graf elaborated on the factors which had contributed to the “very disappointing” second quarter results. He explained that for many years, a fundamental component of FedEx's strategy and investment had been to capitalize on the growth of global trade.

“As recently as 18 months ago, we were seeing accelerating returns from our differentiated international network with greater capabilities imminent as we continued with the TNT integration. While we are encouraged by and supportive of the recent trade agreement with China, it is clear that the dynamics of trade growth have changed, and we must adapt accordingly,” he commented.

Graf highlighted that weak global trade and manufacturing drove less-than-expected demand for FedEx's most profitable package and freight services across all of the company's business segments.

“These conditions are especially challenging in Europe, where capacity and network reduction opportunities are limited due to the current stage of (TNT) integration as we are operating duplicate road and air networks.”

He said “cost headwinds” at FedEx Ground were being largely driven by the expansion of six and seven-day delivery due to a minimum number of employees required to staff and operate the new schedule prior to the volume and revenue coming on.

Also, the loss of volume from Amazon had a larger negative impact to the second quarter than the first quarter, since the FedEx Ground contract with Amazon expired in August.

Year-over-year comparisons for the second quarter were also negatively impacted by the later timing of Thanksgiving which resulted in the shifting of cyber week revenues into December.

“The headwinds and expansion of six and seven-day delivery, the loss of Amazon volume, and Cyber Week shifting to the third quarter accounted for approximately 60% on the Ground margin decline year-over-year,” Graf revealed.

He concluded that despite the disappointment with its current results, FedEx was optimistic that its  long-term performance will benefit from an increased focus on revenue quality, reductions to the global FedEx air network to better match capacity with demand, and a more competitive solution for European customers till the completion of the integration of TNT.

Other positive factors are the modernization of FedEx's Express aircraft fleet and hubs and better utilization of FedEx Ground's assets from the expansion to seven-day operations and improved residential density through the further integration of FedEx SmartPost into standard ground operations, and continued investments in technology across the business to automate and optimize operations, reduce costs, and enable more real-time decision making.

SourceFedEx, CEP-Research
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