FedEx lowers fiscal first quarter earnings forecast

In an 8-K filing with the Security and Exchange Commission last night, FedEx said it has lowered its earnings outlook for the fiscal first quarter, which ended on August 31.

The company said that earnings are expected to be between $1.37-$1.43 per share, down from $1.46 per share for the same quarter a year ago. Its original forecast for the quarter was between $1.45-$1.60 per share.

“Earnings during the quarter were lower than originally forecast, as weakness in the global economy constrained revenue growth at FedEx Express more than expected in the earlier guidance,” the 8-K filing stated.

FedEx’ fiscal first quarter earnings will be released on September 18, and the company will host an earnings conference call on September 19. Should this week’s projection hold true, it would represent the company’s first earnings decline since 2009.

Wall Street analysts commented in research reports that the downward revision in earnings was not unexpected. The company’s stock price has dropped 1.49 percent to $86.24 since the opening bell this morning.

Robert W. Baird & Co. analyst Ben Hartford wrote that the EPS shortfall is unsurprising given recent data points indicating very weak international air freight demand conditions in July and below-seasonal August domestic freight demand.

And Stifel Nicolaus analyst David Ross pointed out that this miss looks like it was due more to international express weakness than domestic although it is all part of the same global network.

“The company had been banking, in our view, on international packages traveling in the domestic network (domestic portion of international journey) to offset secular declines in domestic traffic, and it hasn’t happened – which is why they’re now talking about restructuring,” wrote Ross. “We believe a smaller domestic express network is necessary to preserve/expand margins.”

These sentiments are in line with recent data from the International Air Transport Association, which recently stated that announced global traffic results for July showed slower growth in freight, but with considerable variation by region and market. IATA said July freight demand was 3.2 percent lower than it was in the same month last year. This is down on the 0.1 percent year-on-year growth rate of June. A large part of that decline was due to a comparison with a relatively strong July last year, but overall the trend in air freight is weak, in line with subdued world trade growth.

Jerry Hempstead, principal of Orland-based Hempstead Consulting, told LM that this announcement was largely expected, due in large part to a faltering economy.

He explained that FedEx has an opportunity to rationalize some of their management and sales structure to take out cost.

“The upcoming quarter is always the busiest because of shipping for Christmas and because of the Internet (e-commerce) FedEx may have an outstanding November-December-January quarter,  because the volumes don’t drive as much incremental cost but usually has outstanding incremental revenue,” he said. “The unknown will be the introduction and acceptance of Apple’s new iPhone, the iPad mini and the new iPad.
These roll outs often drive some big revenue out of Asia and then big activity here in the U.S. distributing products to consumers.”

On top of depressed global air cargo conditions, a Wall Street Journal report noted that FedEx is currently focusing on restructuring its domestic express business, with details expected in October.

And in August FedEx said it will offer “voluntary buyout incentives to certain U.S.-based employees in mostly non-operational staff groups.” Company officials said that they expect the majority of these buyouts to be staff employees at its FedEx Express and FedEx Services groups, adding that analysis is underway to determine which workgroups will be eligible for these incentives, as well as permitted participation levels by functional area.

For the fiscal fourth quarter, FedEx reported earnings of $550 million, which was down from $558 million for the same period a year before, while revenue was up to $11 billion from $10.55 billion.

FedEx CFO Alan Graf said on a fiscal fourth quarter earnings call in June that Express operating margins declined year-over-year, primarily due to a $134 million aircraft impairment charge and declining package volumes, adding that a demand shift toward lower yielding International services also negatively impacted margins.