Delivery giant FedEx issued a major profit warning after the close Thursday for the first quarter and withdrew guidance for the year. $FDX was down over 11% after hours. FedEx continued to be wounded by a collapsing European and Asian economies. Global volume softness accelerated in the final weeks of the quarter. FedEx sees Q1 non-GAAP EPS of $3.44, down from $4.37 last year and well below the consensus of $5.14. The company reaffirms plans to buyback $1.5b shares.
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.
Cost reductions
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.
Sources: FedEx
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