FedEx warning reflects both global economy and internal shortcomings


A FedEx employee makes a delivery on September 16, 2022 in Miami Beach, Florida.

Joe Raedle | Getty Images

FedEx warned of weakening global shipping demand in a preliminary earnings report last week, leaving the market to scramble to determine whether the issues reflect internal company shortcomings or a more economic diagnosis. wide.

CEO Raj Subramaniam pointed to external factors after the shipping giant missed Wall Street’s revenue and revenue estimates, telling CNBC’s Jim Cramer on “Mad Money” that the company is “a reflection of the business of everyone” and that he expects a “global recession”. But some analysts note the relative stability of rivals UPS and DHL, and said FedEx’s inability to adapt has also helped its performance.

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“This is the second year in a row that FedEx has missed its own guidance for its first fiscal quarter, and I think that’s creating a bit of frustration among investors,” said Moody’s analyst Jonathan Kanarek.

Kanarek was among analysts who noted the mix of factors — internal and external — that likely played a role in FedEx’s disappointing results.

Face reality

Some pundits view FedEx’s performance as a belated confrontation with market realities stemming from the Covid pandemic, something the company had previously failed to acknowledge.

At its Investor Day in June, FedEx presented an upbeat outlook for 2025, driven by annual revenue growth of between 4% and 6% and earnings per share growth of between 14% and 19%.

“Raj came out with a big show in June, their first analyst day in two years, and spoke of a fairly bullish environment. Yet here we are three months later,” said Ken Hoexter, an analyst at Bank of America. CNBC.

“They didn’t expect an economic downturn and didn’t price it in,” Hoexter said.

Since around the time of its Investor Day, Subramaniam said last week that FedEx had seen weekly declines in shipping volumes. That’s why the company withdrew its guidance for 2023 and said it would close offices and park planes to cut costs. Its stock fell more than 21%, wiping nearly $11 billion off its market capitalization the day after the report.

Still, FedEx stuck to its 2025 expectations, a move Gordon Haskett Research Advisors called “borderline wacky.” FedEx’s competitors, they say, are taking a more realistic approach to ending the surge in demand in the pandemic era.

While FedEx flagged weak European demand among its ills last week, UPS gained market share in the region. On its latest earnings call, UPS boasted its highest consolidated quarterly operating margin in nearly 15 years, citing its agility in tough macroeconomic conditions.

“UPS is two to three years ahead of FedEx in how they view post-Covid margins,” Capital Wealth’s Kevin Simpson said on “Closing Bell: Overtime.” “It’s almost like FedEx doesn’t think the environment will ever return to normal.”

As part of its cost-cutting efforts, FedEx said it would reduce some ground operations and defer hiring. Meanwhile, UPS will hire more than 100,000 seasonal employees for the holiday season.

A fighter?

Analysts note that FedEx ground and express delivery are nonetheless vulnerable to global economic conditions, and that the categories’ disappointing performance could reflect a recessionary environment.

“We really haven’t seen evidence of a broad-based slowdown. But obviously FedEx is an indicator and we don’t want to dismiss what they’re saying,” Moody’s Kanarek said.

Bank of America’s Hoexter sees the express category’s performance, which came in $500 million below FedEx expectations, as the first indicator of a broader slowdown. He said small drops in volume have a significant impact on margins because air delivery is so expensive to maintain.

Floor service, which is $300 million below the company’s forecast, is the next to feel a downturn: “When the consumer stops buying, stores start to see shelves full, you stop restocking these stocks,” Hoexter said.

Hoexter’s bi-weekly survey of truck shippers reported 11 consecutive periods in the “recession range” according to a report by Bank of America Global Research. It comes as FedEx reports weaker-than-expected business with major customers Target and Walmart, both of which have been struggling with excess inventory in recent months.

FedEx reported strong freight margins, but Hoexter noted that the category is “more manufacturing-weighted, which didn’t seem as important.” If demand continues to slow and manufacturers need less production, Hoexter said FedEx could also begin to see freight volumes decline.

Holiday Sparkle

Whatever factors are causing FedEx’s troubles, the upcoming holiday season is unlikely to bring any relief. In a statement, FedEx said cost-cutting measures announced last week are not expected to impact service. “We are confident in our ability to deliver this holiday season,” the company said.

But retailers expect muted holiday sales. And fearing last year’s delays, many had items shipped earlier. The Port of Los Angeles said 70% of holiday cargo had already reached shore by the end of August.

The inventory gluts that have plagued retailers in recent months could also persist, leading to lower shipping volumes and a further slowdown in FedEx business. A KPMG survey found that 56% of retail executives expect to end up with excess merchandise after the holidays.

FedEx has some cushion if problems persist, notes S&P’s Geoff Wilson. The company has plenty of cash — nearly $7 billion as of May 31 — compared to the roughly $3 billion to $4 billion it typically had before the pandemic. He also noted that the company reaffirmed its roughly $1.5 billion share buyback plan.

“It’s the best signal management can give about FedEx’s long-term strength,” Wilson said.


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