Logistics giant FedEx Corp reported lower-than-expected quarterly profits on Tuesday, sending its shares tumbling nearly 10% in after-hours trading. The company also cut its full-year revenue forecast, citing volatile macroeconomic conditions weighing on customer demand.
The results highlight the challenges facing the delivery industry as consumers and businesses rein in spending amid surging inflation and fears of a potential recession.
FedEx now projects a low single-digit percentage decline in full-year revenue, a stark reversal from its previous guidance of roughly flat year-over-year results. Operating income plunged 60% in its air-based Express delivery unit, which saw volumes from the U.S. Postal Service shift to more economical ground services.
The quarterly adjusted earnings of $3.99 per share also fell short of analysts’ consensus forecast by 19 cents.
“Global volumes declined as macroeconomic trends significantly worsened later in the quarter, both internationally and in the U.S.,” said FedEx CEO Raj Subramaniam. “We are swiftly addressing these headwinds, but given the speed at which conditions shifted, first quarter results are below our expectations.”
Restructuring Express Operations
In a bid to boost profitability, FedEx said it is restructuring its Express operations and expects margins to improve once demand rebounds. Analysts questioned whether the unit’s financial performance is fixable amid ongoing volume weakness.
“I’m very confident that the margin at Express will return,” Subramaniam reassured investors during an earnings call.
The company has been in negotiations with the U.S. Postal Service to renew a major contract that expired in September on more favorable terms. The postal service has increasingly shifted packages to FedEx’s Ground network, which operates at a lower cost.
Ground Gaining Share
The Ground unit was a rare bright spot, with operating income surging 51% on increased volumes. FedEx said it gained market share during the quarter and retained nearly all the customers it won from rival United Parcel Service earlier this year.
“I’m confident we’ll hold on to them,” said FedEx Chief Customer Officer Brie Carere. The company appears to be successfully capitalizing on the expiration of UPS’s union contract over the summer.
Capital Returns
Under growing pressure from investors to improve capital returns, FedEx said it plans to repurchase an additional $1 billion of its shares in fiscal 2024. That comes on top of an existing $1.5 billion buyback program authorized in June.
The company has faced criticism for overinvesting in capacity expansions relative to shipping demand. The latest results may spur further calls for FedEx to cut costs and streamline operations amid the uncertain economic climate.
Pressured Peak Season
The disappointing quarterly performance comes at the start of the pivotal holiday peak season, which analysts warn could be the most challenging in years for delivery firms. Soaring inflation and higher borrowing costs have squeezed consumer budgets and led to pullbacks in discretionary spending.
Total U.S. retail sales likely grew at their slowest pace in several years in November. That does not bode well for package volumes or the peak shipping period overall. FedEx rival UPS faces similar demand headwinds.
If macroeconomic uncertainty continues depressing volumes into 2023, analysts say further financial restructuring may prove necessary across the industry. For now, FedEx aims to improve productivity through better peak season planning and scheduling optimization.
After significantly trailing the broader market this year, FedEx stock looks unlikely to bounce back substantially until underlying shipment trends show more definitive signs of improvement. Tuesday’s after-hours shellacking puts even more pressure on the company to demonstrate progress reining in costs and stabilizing the Express unit’s profitability.
