Delivery giant FedEx reported adjusted earnings during the fiscal first quarter of $3.44 a share, matching the preliminary figure from the Sept. 16 profit warning. Revenue was $23.2 billion in the period ended Aug. 31. FedEx continued to be wounded by a collapsing European and Asian economies. Global volume softness accelerated in the final weeks of the quarter. FedEx warned last week that Q1 was down from $4.37 last year and well below the consensus of $5.14. The company reaffirmed plans to buyback $1.5b shares.
FedEx Fiscal Q1 Highlights
- Final Q1 Non-GAAP EPS of $3.44
- Final Q1 Revenue of $23.2B (+5.5% Y/Y)
- Global package and freight volume declining 11%,
- Ground-delivery unit saw operating profits gain 3%, aided by higher fuel surcharges and an uptick in home deliveries though they were partially offset by higher operating costs.
- Capital spending for fiscal year 2023 of $6.3B.
- Repurchase of $1.5B of FedEx common stock during fiscal 2023.
- The company expects to repurchase $1 Billion common stock during the second quarter.
- Market Reaction $154.54 +1.25 (0.82%) today
FedEx Corp. expects to save as much as $2.7 billion this fiscal year through wide-ranging cost-cutting measures in response to weakening business conditions. FDX is looking to save about $700 million in the current quarter through a reduction in flight frequencies, deferred projects and the closure of some offices, according to their regulatory filing Thursday. The actions are in line with those announced last week when the company warned.
Expected cost savings in fiscal 2023 will consist of:
- $1.5-1.7 billion at FedEx Express, including reducing flight frequencies and temporarily parking aircraft.
- $350-500 million at FedEx Ground, including closing select sort operations, suspending certain Sunday operations, and other linehaul expense actions.
- $350-500 million across shared and allocated overhead expenses, including reducing vendor utilization, deferring certain projects, and closing certain FedEx Office and corporate office locations.
“We’re moving with speed and agility to navigate a difficult operating environment, pulling cost, commercial and capacity levers to adjust to the impacts of reduced demand,” Chief Executive Officer Raj Subramaniam said in the filing, which also detailed quarterly earnings. FedEx also plans to increase delivery rates across its express, ground and home delivery operations by an average of 6.9% in January.
In addition to the cost savings detailed above, by fiscal 2025 the company expects to generate approximately $4.0 billion in incremental annualized cost savings across its existing network, including:
- Approximately $1.4 billion in FedEx Express operating expenses;
- Approximately $1.1 billion in FedEx Ground operating expenses; and
- Approximately $1.5 billion in shared and allocated overhead expenses.
In addition, the program is supporting initiatives to recognize approximately $2.0 billion in long-term benefits from the company’s network optimization strategy (Network 2.0).
Fiscal Q2 Outlook
- Revenue of $23.5B to $24B vs. consensus of $23.78B.
- Earnings per diluted share of $2.65 or greater
- Earnings per diluted share excluding costs related to business optimization initiatives and business realignment activities of $2.75 or greater vs. consensus of $2.80.
- Anticipated capital spending for fiscal year 2023 of $6.3 billion
2023 Rate Increases
Effective January 2, 2023, FedEx Express, FedEx Ground, and FedEx Home Delivery rates will increase by an average of 6.9%. FedEx Freight rates will increase by an average of 6.9%-7.9% dependent on the customer’s transportation rate scale. Details related to these and additional changes to rates, surcharges, and fees are available at fedex.com/en-us/shipping/current-rates.html.
FedEx Warning Highlights
- $FEDX 181.84▼ 23.03 (▼11.24%) After Hours
- $ES_F lower
- $UPS $175.30▼ 9.70 (▼5.24%) After Hours.
- $AMZN $123.03▼ 3.25 (▼2.58%) After Hours
- Prelim Q1 Adj EPS $3.44, Est. $5.14
- Prelim Q1 Rev. $23.2b, Est. $23.59b
- Prelim Q2 Adj. 2.75, Est $5.48, according to Refinitiv.
- Prelim Q2 Rev. $23.5 billion to $24 billion, Est of $24.86 billion, according to Refinitiv.
- Reaffirms Plan to Buyback $1.5b Shares
- Withdrawing FY 2023 Earnings Forecast
The announcement also made investors nervous about any upcoming UPS warning. UPS shares were down $175.30▼ 9.70 (▼5.24%) After Hours.
FedEx cited specific weakness in Asia as well as challenges to service in Europe for its underperformance in the first quarter. While these factors choked shipping volume, the company said operating expenses remained high.
“Global volumes declined as macroeconomic trends significantly worsened later in the quarter, both internationally and in the U.S. We are swiftly addressing these headwinds, but given the speed at which conditions shifted, first quarter results are below our expectations,” said Raj Subramaniam, FedEx Corporation president and chief executive officer.
Rail workers 24% wage rise
FedEx has already been hit by labor shortage which has led to inefficiencies, perhaps the biggest freight railroads and union leaders reached a tentative labor agreement to avert a nationwide strike also impacted the decision. The terms largely reflected a proposal put forth by a federal panel a month ago, including about 24% in wage increases over five years. The tentative agreement must now be ratified by members of the various unions covered by the contracts.
The deal, which is retroactive to 2019, includes a 14.1% wage increase upon ratification. Workers would then get a 4% raise in July 2023 and 4.5% increase in July 2024, as well as five annual $1,000 lump-sum payments. There are no changes to health insurance copays or deductibles in the new deal.
FedEx has never got back to the levels when it benefitted from surging demand for online purchases driven by the pandemic. Demand was not FedEx’s problem; the main issue facing the company was surging labor costs. Now demand is down on inflation and there are delivery problems. Not a pretty scenario.
The biggest culprit for previous huge EPS misses was higher labor costs, not its freight issues on top of that. The inability to hire, particularly package handlers, has driven wage rates higher. However, the more significant impact is the widespread inefficiency in operations that results as FedEx uses overtime to cover open shifts and route volume.
The company expects the benefits of cost actions to mitigate the effects of reduced demand throughout the remainder of fiscal 2023. These cost actions include:
- Reduction in flight frequencies and temporarily parking aircraft.
- Volume-related reductions in labor hours and other linehaul expenses.
- Consolidation of certain sort operations to drive productivity.
- Reduction of Sunday operations at a number of FedEx Ground locations.
- Cancellation of certain planned network capacity and other projects.
- Deferral of staff hiring.
- Closure of over 90 FedEx Office locations; and
- Identification of five corporate office facilities to be closed, with additional real estate rationalization planning under way.
- Anticipated capital spending for fiscal year 2023 has been revised to $6.3 billion, compared to the prior forecast of $6.8 billion.
“While this performance is disappointing, we are aggressively accelerating cost reduction efforts and evaluating additional measures to enhance productivity, reduce variable costs, and implement structural cost-reduction initiatives. These efforts are aligned with the strategy we outlined in June, and I remain confident in achieving our fiscal year 2025 financial targets.”
FedEx indicated previously that it also remains focused on last-mile optimization, including the continued rollout of the FedEx Express initiative to utilize FedEx Ground for the transport and delivery of select day-definite FedEx Express residential packages within the U.S. FedEx Ground will complete the integration of FedEx SmartPost packages into standard FedEx Ground operations by peak season. Given that the current issues are beyond their control.
FedEx plans to provide additional details on its cost initiatives and updated outlook during its upcoming earnings call, scheduled for 5:30 p.m. EDT on September 22, 2022.
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