Thursday September 24, 2020

FedEx quarterly results buoyed by e-commerce boom at 'holiday season' levels

Alan Graf
Alan Graf

FedEx Corp. turned in a strong revenue and earnings performance in the first quarter of its 2021 fiscal year (June-August 2020) buoyed by the on-going e-commerce boom, largely driven by COVID-19, which saw shipments reach holiday season proportions during the period.

The Memphis-based package delivery giant said its operating results increased due to volume growth in FedEx International Priority and US domestic residential package services, yield improvement at FedEx Ground and FedEx Freight, and one additional operating weekday.

These factors were partially offset by costs to support strong demand and to expand services, variable compensation expenses, and COVID-19 related costs incurred to ensure the safety of FedEx team members and customers, it added.

Quarterly adjusted global revenue totalled US$19.3 billion compared to $17.0 billion a year earlier while adjusted operating income increased to $1.64 billion from $1.05 billion. The adjusted operating margin rose to 8.5% from 6.1%. Adjusted net income came in at $1.28 billion versus $800 million previously. This year’s and last year’s quarterly consolidated results have been adjusted for TNT Express integration expenses of $49 million for this year and $71 million for last year.

“Our earnings growth underscores the importance of our business initiatives and investments over the last several years, and, in many ways, the world has accelerated to meet our strategies,” said Frederick W. Smith, FedEx Corp. chairman and CEO. “I would like to thank our team members whose efforts during this time have helped keep the world’s health care, industrial and at-home supply chains moving despite the challenges of the global pandemic.”

Turning to the outlook, FedEx is not providing an earnings forecast for fiscal 2021 (the current year). The capital spending forecast for the year is up $200 million to $5.1 billion, driven by additional capacity initiatives to support increased volume levels, it noted.

“While business demand improved in the first quarter, continued uncertainties cloud our ability to forecast full-year earnings,” commented CFO Alan Graf. “However, we expect to continue to benefit from our strong position in the US and international package and freight markets, yield improvement opportunities and cost management initiatives.”

Higher express, ground and freight profits

Speaking at a conference call with analysts which followed the publication of the financial results, Graf said: “I am very proud of our first quarter performance.  Adjusted operating margin improved 240 basis points year-over-year to 8.5% as FedEx Express adjusted operating income more than doubled and adjusted margin improved 390 basis points. FedEx Ground operating income increased 30% despite a significant mix shift to residential delivery. And FedEx Freight operating income increased 41% despite a 9% decline in average daily shipments.

“All totalled, our first quarter adjusted operating income increased 56% year-over-year primarily due to international priority volume growth of 31%, a surge in demand for US residential delivery, yield improvement at FedEx Ground and FedEx Freight, a $130 million benefit from an additional operating day, a $65 million benefit from a reduction in aviation excise taxes provided by the Cares Act and a better alignment of our expenses, especially at FedEx Freight.”

He highlighted that these factors were partially offset by higher cost driven by the package volume surge and expanded service offerings at FedEx Ground, increased variable compensation expense, and an approximate $100 million in COVID-19 related cost to ensure the safety of team members and customers.

While FedEx is reluctant to forecast full year earnings, given the uncertainty generated by the pandemic, Graf added that based on the current trends in its business, the company is anticipating increased demand to result in higher revenue and operating income at FedEx Ground and FedEx Express for the remainder of fiscal 2021. In addition, yield management and improved productivity are expected to contribute to revenue and operating income growth at FedEx Freight in FY 2021.

Graf is stepping down as CFO on 22 September after 30 years in the post and 40 years’ service at FedEx.

Analyst hails strong performance

Bloomberg quoted Matt Arnold, an analyst with Edward Jones, who said of FedEx's quarterly performance: “Demand is so strong at this point that they're emboldened to start taking price to a greater extent, which can be a very powerful driver of profitability.”

It underlined that FedEx “is cashing in surcharges for big customers that are making home deliveries more profitable after years in which residential shipments weighed on margins. Like rival United Parcel Service Inc., which dazzled Wall Street with its results less than two months ago, FedEx is getting an early payoff on investments to boost efficiency and automation to handle demand spurred by the rise of online shopping.”

An additional surcharge of 30 cents a package for large Ground customers is helping FedEx offset the extra costs of operating during the pandemic. Higher pricing pushed package yields to an increase of 2.2%, reversing declines in the previous three quarters.

The gains helped FedEx make up for revenue it lost after parting ways with, Bloomberg added.

SourceFedEx, CEP-Research

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