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FedEx reports 22 percent increase in net income for fiscal first quarter 2012

Despite profitable quarter, concerns over Express growth are front and center

September 22, 2011

Despite the myriad signs of economic malaise occurring in recent months, FedEx posted strong fiscal first quarter earnings, with net income up 22 percent to $464 million.

Quarterly revenue of $10.52 billion was up 11 percent from $9.46 billion a year ago, and operating income at $737 million was up 17 percent from $268 million. FedEx reported earnings per share of $1.46, which edged Wall Street estimates of $1.45 per share.

Company officials said signs of a global economic slowdown, which resulted in lower volumes and lower productivity for FedEx Express, were offset by improved results at the company’s FedEx Ground and FedEx Freight units.

“Revenue and income were up due to the continued success of the company’s yield management actions,” said FedEx Chairman, President, and CEO Frederick W. Smith on a conference call. “While there has been considerable speculation that the economy has or will soon enter a recession, this is not our view at present. We expect sluggish economic growth to continue, largely due to a lack of confidence that U.S. and European policy makers will effectively address current economic challenges.”

While the current economic environment remains challenging, Smith said FedEx remains confident that the company will improve earnings, margins, and cash flow during this fiscal year.

FedEx also announced on the earnings call that FedEx Express will increase shipping rates by a net average of 3.9 percent for U.S. domestic, U.S. export and U.S. import services, effective January 2, 2012. They added that FedEx Ground and FedEx SmartPost pricing changes for 2012 will be rolled out by the end of 2011.

Individual unit quarterly performances: FedEx Express quarterly revenue was up 12 percent at $6.59 billion, with an operating margin of 4.4 percent, down from last year’s 6.0 percent and an operating income of $288 million for a 19 percent annual decrease. Revenue at FedEx Ground was up 16 percent at $2.28 billion, with an operating margin of 17.9 percent, compared to 14.6 percent last year, and an operating income of $407 million for a 42 percent annual gain. FedEx Freight revenue at $1.33 billion was up 6 percent from $1.26 billion last year, with an operating margin at 3.2 percent compared to -1.3 percent a year ago.

At FedEx Freight, yield was up 11 percent due primarily to higher LTL fuel surcharges and yield management efforts, which also saw average daily LTL shipments fall 7 percent.

Average daily package volumes at FedEx Ground were up 5 percent at 3,722 packages per day, due to increases in the B2B and FedEx Home Delivery service markets, according to company officials, with yields up 9 percent due to higher fuel surcharges and yield management actions. FedEx SmartPost, its “last mile” delivery service partnership with the United States Postal Service saw daily volume up 29 percent at 1,415 average daily packages per day and revenue per package at $1.76 up 5 percent

Total U.S. domestic express packages were down 3 percent at 2,638 per day, while International Priority was up 11 percent at 585 packages per day.

For FedEx Express, company officials noted that operating income and margin decreased as package volume declines accelerated during the quarter due to slowing global economic growth. They added that package volume declines were more pronounced in certain premium services and that expense reductions related to volume also accelerated during the quarter but only partially offset increases in wages, incentive compensation programs, benefits and fixed costs.

Jerry Hempstead, president of Hempstead Consulting told LM that FedEx Express growth numbers were “not pretty” as Express “is the engine that pulls the [FedEx] train.”

Hempstead added that unless FedEx announces some change in the rules or accessorial charges it is going to have a very difficult year financially beginning in January on a year-over-year basis.

“I can’t see the Street liking what was said and displayed today other than compared to last year there was positive revenue and positive profit. Now, SmartPost still amazes me with awesome growth. That B2C product is the shining star in the product menu from a revenue and profit basis.”

Looking ahead, FedEx is calling for earnings-per-share to be between $1.40-to-$1.60 per share in the second quarter and $6.25-to-$6.75 per share for fiscal 2012, with this guidance contingent on the current market outlook for fuel prices and moderate growth in the global economy.

“Our Express network is now properly aligned to current volume levels, and we have additional action plans and trigger points identified to quickly further reduce frequencies and expenses as economic conditions deteriorate from here,” he said. “We are not relying on significant express volume growth to drive operating improvement in quarters two through four for Express, but we know it will come.”

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