FedEx reports mixed fiscal first quarter earnings

Fiscal first quarter earnings for FedEx were mixed, based on results announced by the Memphis-based transportation and logistics bellwether yesterday.

Earnings per share at $3.46 were well below Wall Street estimates of $3.80, while revenue was up 11% at $17.1 billion and net income came in at $835 million for a 40% annual gain. Operating income for the quarter, at $1.071 billion, was up 6.3%

“FedEx delivered higher earnings driven by a solid execution of our business plan and a strong U.S. economy,” said Fred Smith, FedEx Chairman and CEO on the company’s earnings call yesterday.  “We believe we will continue to increase revenue, cash flows, earnings and returns in fiscal 2019 and beyond. We’re very optimistic about our prospects for profitable growth and remain confident we’ll reach our goal to improve FedEx Express operating income by $1.2 billion to $1.5 billion in fiscal 2020 versus fiscal 2017.” 

Revenue for FedEx Express headed up 10% annually to $9.2 billion, with the unit’s operating income up 15% to $367 million. Total quarterly package revenue was up 8% to $7.1 billion, with U.S. package revenue up 7% to $3.3 billion, and total international export package revenue up 7% to $2.6 billion.

Total average daily packages at 5.887 million were up 5%, with total daily U.S. domestic packages up 3% at 2.698 million and U.S. revenue per package up 4% at $18.85. Total daily international export packages at 794,000 were up 5%.

FedEx Ground revenue was up 13% to $4.799 billion, and FedEx Freight, its less-than-truckload unit, saw an 18% revenue gain to $1.959 billion.

FedEx said that the quarterly gain in operating income benefitted from higher volumes, increased yields, as well as a favorable net impact of fuel for each of its transportation groups. And it added that net results saw gains of $0.50 per diluted share, due to the Tax Cuts and Jobs ACT, resulting from a lower statutory income tax rate.

The company added that it recognized “substantially higher variable compensation accruals” during the quarter, as last year’s first quarter results were negatively impacted by the NotPetya cyberattack at TNT Express. And during the fourth quarter of fiscal2018 FedEx said it accelerated wage increases for certain hourly employees due to the enactment of the TCJA, with the cumulative impact negatively affecting annual results by $170 million ($0.48 per diluted share).

“As expected, the quarter’s results were affected by our decision to invest in our team members following the passage of the Tax Cuts and Jobs Act,” said Alan B. Graf, Jr., FedEx Corp. executive vice president and chief financial officer, in a statement. “We remain committed to increasing earnings, margins, cash flows and returns this year.”

On yesterday’s earnings call, Dave Bronczek, FedEx president and COO, highlighted the company’s recent announcement regarding its move to operate its FedEx Ground networks six days per week year-round.

“We anticipated this and are prepared for customer demand in the rapidly growing e-commerce market,” he said. “Our significant investments in automation over the last decade has given us the flexibility and speed in the network to continue to expand even while we are reducing capital spending at FedEx Ground.”  

Addressing the economy, Raj Subramaniam, FedEx executive vice President, chief marketing and communications officer, said that FedEx is seeing solid economic growth, especially in the U.S., with growth in jobs and incomes keeping confidence high and driving positive trends in the consumer spending and retail sales, adding that the industrial sector continues to perform well and the outlook for business investment is strong.

As for tariffs, which have been a major theme of late, especially with the White House announcing this week that it will place an additional $200 billion in tariffs on goods coming out of China to the U.S., Subramaniam explained that current tariffs impact a small portion of FedEx’ volume coming out of China.

“However, the uncertainty surrounding the issue is not helping and thus has a broader impact on the market,” he said. “It’s important to note that our revenue on the China-U.S. lane bi-directionally represents 2% of our total FedEx revenues, and the tariffs impact only a small portion of that. It’s very difficult to predict the future course of tariff implementation. We’re monitoring the situation very carefully and we’ll adjust our strategies according to market conditions. Clearly, we continue to support lower trade barriers for all our customers.”

Looking at pricing, he said FedEx continues to see success with its pricing strategies, as it grows composite volumes and yields, adding that it has had success at holistically managing base yields and surcharges including fuel.  

And Peak Season prospects for FedEx, he noted, are bright, with the company forecasting another record year with four Mondays during peak expected to be among the busiest days in the history of FedEx.

Jerry Hempstead, president of Hempstead Consulting, said that the lower than expected earnings per share was a “huge miss,” which was evident today with the company’s stock currently down $13 to $243.88 per share at press time.

“From a business standpoint the top line revenue was a big beat,” he said. Some of the extraordinary items like the pay increase are going to be ongoing. But the bonuses for the execs are not necessarily ongoing at the level they are and of course the expenses of the TNT acquisition and the affect of the cyber attack is soon to be all behind them. FedEx is in good shape from a service and cost perspective and they invested heavily to be ready for the peak holiday surge. Weather is a concern to income right now because of the damage done by Florence and that will manifest itself in three months.”