Tuesday, September 18, 2012

Global economy continues to play a major role in FedEx’s earnings

Perhaps a recent Wall Street Journal blog entry best describes the main reason behind FedEx’s latest earnings report, “It’s the economy, stupid”. Even though FedEx pre-warned earnings would be below expectations, the actual results served as a stark reminder of the uncertain global economy.

Rate increases appears to have resulted in some positive gains for the company. While overall revenue increased 3% to $10.79bn, the Express division, the largest of FedEx’s divisions, reported revenue of less than 1% to $6.63bn. Overall operating income increased 1% to $742m while the Express division reported a 28% decline to $207m. The culprit, according to the company, is the weak global economy and “tepid” manufacturing activity around the world. As a result, customers traded down from more expensive priority services to economy services. According to the CEO, Fred Smith, FedEx was not able to cut costs fast enough to match the decline in demand. This is similar talk from last year when the company was blindsided with too much capacity in the transpacific tradelane and was not able to adjust capacity to match demand quick enough. Interesting side note, Mr. Smith mentioned that despite the downturn in its Express division, the company is gaining market share in air cargo.

Still, the economy is playing a harsh role in many transport and logistics providers’ earnings reports, including FedEx. The company is reducing flights, taking planes out of service and has offered buyouts to employees. It is also raising rates effective January 2013. However, this may not be enough. FedEx will elaborate further on its restructuring plans at its investor’s conference next month. Until then, we can only speculate.

The Ground division proved a highlight in the earnings report. Revenue increased 8% to $2.46bn and operating income increased 9% to $445m. Volumes increased 5% thanks in part to FedEx Home Delivery and FedEx SmartPost which reported average daily volume increased 18% primarily due to growth in e-commerce.

FedEx Freight also reported positive financials with revenue growth of 5% to $1.40bn and operating income increased 114% to $90m thanks to profitable volume growth, higher yield and continued improvements in operational efficiencies.

The outlook does not look positive as the company downgraded its full year earnings forecast. The company’s economist downgraded its GDP forecast as well. FedEx is not the only provider suffering the consequences of a weak economy. The economy has and will continue to play a negative role in many transport and logistics providers’ earnings for this year and likely into 2013.