FedEx reports 7 percent gain in fiscal first quarter net income

Fiscal third quarter earnings for transportation and parcel bellwether FedEx impressed, with the company announcing today that quarterly net income of $489 million was up 7 percent annually.

The Memphis-based company also said that quarterly revenue—at $11.0 billion—was up 2 percent, and operating income—at $795 million—saw a 7 percent gain. Operating margin—at 7.2 percent—moved up from 6.9 percent a year ago. FedEx reported earnings per share of $1.53, which was up 5.3 from $1.45 from last year, topping Wall Street estimates of $1.50 per share.

Company officials said that drivers for these gains include strong performance at each of the company’s transportation segments.

“FedEx had a good quarter despite higher fuel costs and one fewer operating day,” said Frederick W. Smith, FedEx Corp. chairman, president and chief executive officer, on an earnings call today. “Growth and overall customer demand for a wide range of global transportation solutions drove improved earnings. FedEx Ground reported another outstanding quarter as average daily volume grew 11 percent. FedEx Express is skillfully executing its profit improvement plans. As part of this, earlier this month, FedEx took delivery of its first new Boeing 767-300 freighter, which uses about 30 percent less fuel compared to the MD-10 it replaces.”

Smith said that FedEx is reaffirming its forecast for full-year earnings per share growth of 7-to-13 percent over Fiscal Year 2013’s adjusted results, adding that FedEx is well-positioned for continued growth and success.

Individual unit quarterly performances: FedEx Express quarterly revenue was down 0.4 percent at $6.61 billion, with an operating margin of 3.6 percent, up from last year’s 3.1 percent and an operating income of $236 million for a 14 percent annual increase. FedEx said revenue fell because of lower fuel surcharge revenue and one fewer operating day. And it added that the company’s shipping rates for FedEx Express will rise by an average of 3.9 percent for U.S. domestic, U.S. export, and U.S. import services, effective January 6.

FedEx Ground revenue at $2.73 billion was up 11 percent, and operating income at $468 million was up 5 percent. Quarterly operating margin at 17.1 percent was down from 18.1 percent. 

Revenue at FedEx Freight, its less-than-truckload unit, at $1.42 billion was up 2 percent from $1.40 billion last year, with an operating margin of 6.4 percent which was flat compared to a year ago. FedEx Freight had an operating income of $91 million which was 1 percent ahead of last year’s $90 million.

FedEx Freight yield was up 1 percent due to base yield improvements in its FedEx Freight Economy and FedEx Freight Priority offerings, and weight per shipment saw a 1 percent increase because of heavier FedEx Freight Economy loads. Daily LTL shipments rose 1 percent due to FedEx Freight Economy, the company said. And it said that the slight gain in operating income was due to higher weight per shipment, yield average and daily shipments, which countered having one less operating day in the quarter.

Average daily package volumes at FedEx Ground were up 11 percent at 4.313 million packages per day, due to growth in FedEx Home Delivery services and commercial business services, according to FedEx officials. And revenue per package—at $9.05—rose 1 percent due to increased rates and higher residential fuel surcharge revenue that were partially offset by lower fuel surcharges.

FedEx SmartPost, its “last mile” delivery service partnership with the United States Postal Service continued to post impressive gains, with daily volume seeing a 26 percent increase at 2.092 million packages, with e-commerce gains leading the way, while net revenue per package dropped 5 percent to $1.67 because of higher postage rates and lower fuel surcharges that were partially offset by rate increases.

Jerry Hempstead, president of Orlando, Florida-based Hempstead Consultants, explained in an interview that SmartPost now represents almost a third of the FedEx suite of Ground delivery solutions and really is the “star” of the Ground portfolio.

“What is of note is that this quarter represents the months of June, July and August, which is traditionally a slow period for home delivery because people with disposable income go on vacation,” he said. “We now are in the ‘busy season’ building up to [the holidays], where seasonal volumes exhibit a hockey stick growth rate. So if the last quarter is an indication, buckle your seatbelt, Smartpost is about to pick up speed.”

Hempstead added that based on FedEx’ data, some of the gains in this volume are coming at the expense of UPS, noting that it is unlikely UPS will sit idly and watch their market share erode.

“It was obvious on both today’s FedEx call and the last UPS earnings call that the carriers are either into a cycle or anticipating a cycle of new product introductions of the next “it” thing, something we will all have to buy this holiday season,” he said. “FedEx looks like they have their house in order and have made all the right moves to prepares itself for the next few quarters.”

What’s more, Hempstead said it looks like the current express volume environment at both UPS and FedEx is stable, which serves as a sign of the general health of the economy, while it appears the declines of the recent past have stabilized.