Wednesday February 26, 2020

FedEx quarterly profits slump on trade, Amazon and cost hits

Lower revenues and profits at FedEx Express
Lower revenues and profits at FedEx Express

Weak international trade, quitting Amazon deliveries and high investment costs combined to hit FedEx’s profits in the June – August 2019 quarter and prompted the company to reduce its full-year profit forecast.

Notably, FedEx Express revenues fell 3% and profits slumped nearly 27% as customers downgraded to slower and cheaper services.

Overall, FedEx Corp. reported flat revenues of $17.05 billion for June – August 2019 (the first quarter of its 2019-20 fiscal year), an 9% drop in operating profits to $977 million and net profits down by nearly 11% to $745 million.

CEO and chairman Fred Smith admitted: “Our performance continues to be negatively impacted by a weakening global macro environment driven by increasing trade tensions and policy uncertainty.”

But he declared: “Despite these challenges, we are positioning FedEx to leverage future growth opportunities as we continue the integration of TNT Express, enhance FedEx Ground residential delivery capabilities and modernize the FedEx Express air fleet and hub operations.”

FedEx said that its operating results declined primarily due to weakening global economic conditions, increased costs to expand service offerings and a continued mix shift to lower-yielding services, while the impact of one fewer operating day and the loss of business from “a large customer” (a reference to Amazon) also negatively impacted results. These factors were partially offset by lower variable incentive compensation expenses, revenue growth at FedEx Ground and increased yields at FedEx Freight.

FedEx Express profits slump 27%

The group’s biggest business, FedEx Express, continued to see a switch from premium express to slower and cheaper services, the quarterly results showed. Its overall revenue dropped by 3% to $8,945 million and operating profits plummeted by 27% to $285 million, leaving the operating profit margin at just 3.2% compared to 4.2% in the same quarter last year.

FedEx Express total package revenues dropped 1.6% to $7.05 billion despite a 0.6% rise in average daily volumes. US package revenues were flat at $3.3 billion despite a 2.1% rise in volumes driven by a 6.6% rise in deferred packages, the quarterly results showed.

International Priority revenues fell 3% to $1.82 billion as volumes increased fractionally, while International Economy revenues were slightly higher at $855 million on a 6.5% volume increase. But International Domestic (non-US) revenues fell nearly 5% to €1.08 billion as volumes declined by 1.8%.

In contrast, the high-margin US ground package business FedEx Ground continued to grow with revenues up nearly 8% to $5.18 billion as average daily volumes increased by 7.5% during the quarter. However, its profits fell back by 5% to $644 million and the EBIT margin weakened to 12.4% as it invested in capacity and service expansion.

Meanwhile, trucking business FedEx Freight boosted its EBIT margin to 10.2% from 9% one year ago as operating profit rose by 10% to $194 million but revenues fell slightly to just over $1.9 billion.

Lower full-year forecast 

Looking ahead, FedEx said it is lowering its fiscal 2020 earnings forecast as its revenue outlook has been reduced due to increased trade tensions and additional weakening of global economic conditions since the initial fiscal 2020 forecast in June. The company now expects lower revenues at FedEx Express this fiscal year.

The revised outlook also reflects increased FedEx Ground costs as it moves to deliveries on seven days a week and August’s loss of FedEx Ground business from a large customer (Amazon). 

CFO Alan Graf stated: “FedEx is implementing additional cost-reduction initiatives to mitigate the effects of macroeconomic uncertainty, including post-peak reductions to the global FedEx Express air network to better match capacity with demand. However, we are continuing to make strategic investments to improve our capabilities and efficiency, which we expect will drive long-term increases in earnings, margins, cash flows and returns.”

SourceFedEx Corp, CEP-Research

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