FedEx posts solid Fiscal Year Q2 earnings results

Memphis-based FedEx reported solid fiscal second quarter earnings results today.

Quarterly net income of $616 million was up 23 percent annually, and revenue, at $11.9 billion, was up 5 percent. Operating income at $1.01 billion was up 22 percent.

Quarterly operating margin—at 8.5 percent—was up from 7.3 percent a year ago. And earnings per share of $2.14 was up 36 percent from $1.57 per share a year ago but did not meet Wall Street expectations of $2.22 per share.

“FedEx posted strong results and a higher operating margin, with earnings up year-over-year 36 percent per share and continued growth in volumes and base yields in our transportation segments,” said Frederick W. Smith, FedEx Corp. chairman, president and chief executive officer, on the company’s earnings call this morning. “Results were also positively affected by the benefits from our own FedEx Express profit improvement program, which is on track. We expect revenue and earnings growth to continue into the third quarter and the remainder of 2015, driven by ongoing improvements in the results of our transportation segment.”

In regards to peak shipping season at FedEx, T. Michael Glenn, FedEx executive vice president, market development and corporate communications, said on the call said that FedEx’ more than 30,000 team members are “working around the clock to deliver the holidays worldwide,” adding that the dedication of the team members combined with the investments made into the company’s networks have allowed the company to deliver outstanding results despite weather and other challenges it encounters during the holiday season.

“While we are still in the heart of Peak Season, there are still several trends and developments affecting the season, including labor issues at the West Coast ports that have affected productivity and impacted retailers’ ability to get inventory to where it is needed and when it is needed,” said Glenn. “This issue has impacted our operations, and we have made adjustments to capacity in key markets to support our customers facing these ongoing slowdowns. In some situations, these slowdowns have caused unexpected shifts in retail and e-tail customer needs in certain markets, and we have put limits on customer volume in order to ensure we meet our service commitments. Despite these challenges and significant weather events in the Peak Season both in the Northeast and on the West Coast…we have been able to maintain outstanding levels of service across our network. We have already delivered multiple days this Peak Season that rank among the busiest in the history of the company, and our service levels have been terrific.”

Individual unit quarterly performances: FedEx Express quarterly revenue was up 3 percent at $7.02 billion, with an operating margin of 6.9 percent, up from last year’s 5.2 percent and an operating income of $484 million for a 36 percent annual increase. FedEx said that revenue was up because of higher U.S. domestic package volume and international export package base revenue, which was partially offset by lower fuel surcharges and exchange rates.

Revenue at FedEx Ground increased 8 percent at $3.06 billion, with an operating margin of 15.2 percent, down from 15.4 percent last year, and an operating income of $465 million for a 6 percent annual gain. FedEx said that average daily ground volume was paced by business-to-business and FedEx Home Delivery services growth, with revenue per package up 3 percent at $9.25, which was attributed to rate increases and higher residential fuel surcharges.  Total package volume for the quarter was 598,076, with average daily volume at 4,709 for a 5.4 percent gain.

FedEx Ground’s SmartPost, its “last mile” delivery service partnership with the United States Postal Service, saw average daily volume drop 4 percent to 2,000 packages per day, with revenue per package up 7 percent to $1.87 because of a combo of rate increases and an improved customer mix that was partially offset by higher postage rates.

FedEx Freight, the company’s less-than-truckload carrier, saw an 11 percent revenue gain at $1.59 billion, with operating income up 35 percent at $112 million, and operating margin up to 7.1 percent compared to 5.8 percent a year ago. Average daily shipments were up 8 percent, which included a 10 percent increase in Priority service demand, with revenue per shipment up 3 percent because of a higher weight per shipment, higher rates, and increased fuel surcharges.

Separate from its earnings release, FedEx said that it will update certain tables at FedEx Express, FedEx Ground, and FedEx Ground, effective February 2, 2015, with details available on the company’s Website by December 23.

Looking at FedEx’ quarterly results, Jerry Hempstead, president of Hempstead Consulting, said that the key measure of success in the parcel business is package count.

“Everything except SmartPost is clicking right along as it should and growing at a pace well in excess of the improvement in the economy,” he said. “The key number on the air side is the overnight box traffic ( this is the coal that makes the steam, that animates the engine that pulls the rest of the FedEx train). Growth in packages was very strong. The negative growth in SmartPost was clearly the remnant effect of the decision of a major shipper who made a decision that it had enough critical mass to do its own DDU (destination delivery unit) induction with the USPS.  This should be the last quarter with this drag on SmartPosts’ package count. It is telling that shipments for this service dropped by 4 percent but yields improved by 7 percent.

In regards to fuel, Hempstead said that it has been widely known for more than a year now the fuel surcharge applied by FedEx is lower than that charged by UPS. This selling advantage is lost for the most part, and he said it is not appreciated by the FedEx customers and is rarely taken into account when comparing tariff prices, with FedEx essentially leaving money in the table with every transaction.

“Falling fuel prices help shippers but will hurt the carriers in the long term when fuel turns back up because there is a lag between the price paid today, and the fuel surcharge that was calculated two months ago,” he said. “Dropping prices trim the top line and improve the bottom line, but when it goes back up the reverse is true. With fuel the lowest it’s been in recent memory, FedEx most likely will be raising the fuel surcharge imposed because it can.

Prior to issuing its Fiscal Year 2015 second quarter earnings today, the company announced two separate acquisitions this week.

On Monday, it announced that it entered into an agreement to acquire Pittsburgh-based GENCO, a Pittsburgh-based third-party logistics (3PL) services provider specializing in product lifecycle and reverse logistics for an undisclosed amount. And yesterday it said it acquired Bongo International, a leader in cross border enablement technologies and solutions. Bongo is based in St. Petersburg, Fla. and will operate as a subsidiary of FedEx Trade Networks, the company’s forwarding arm, said FedEx.