FedEx reports solid fiscal fourth quarter earnings

Memphis-based FedEx reported solid fiscal fourth quarter earnings today.

Quarterly net income of $730 million was up 42 percent annually, and revenue, at $11.8 billion, was up 3 percent. Operating income at 1.18 billion was up 136 percent.

Quarterly operating margin—at 10.0 percent—was up from 9.6 percent a year ago. FedEx reported earnings per share of $2.46, which outpaced last year’s $0.95 and was impacted by a $0.98 peer diluted share business realignment program charge and a $0.20 per diluted share noncash aircraft impairment charge. Fiscal fourth quarter earnings per share beat Wall Street expectations of $2.40 per share.

For fiscal year 2014, net income was up 25.8 percent at $2.1 billion, and operating income was up 26 percent at $3.45 billion.

“As you can see our numbers are fairly straightforward,” said Frederick W. Smith, FedEx Corp. chairman, president and chief executive officer, on the company’s earnings call this morning. “Ground and Freight are performing well, and Express remains on track to achieve its profit improvement plan, despite the headwinds we have experienced.”

In terms of the how FedEx views the economy, T. Michael Glenn, FedEx executive vice president, market development and corporate communications, said on the call that the FedEx U.S. GDP forecast is now at 2.2 percent for calendar year 2014 3.1 percent for calendar year 2015.

The 2014 forecast is due to the poor first quarter weather and the inventory shift experienced during the quarter.

“We expect industrial production growth of 3.6 percent this year and 3.7 percent in calendar year 2015,” he said. “The global economy is recovering from the Q1 setback in the U.S. and slowdown in China and should steadily improve. We expect global growth of 2.7 percent in calendar year 2014 and 3.1 percent in calendar year 2015.

Individual unit quarterly performances: FedEx Express quarterly revenue was up 2.0 percent at $7.0 billion, with an operating margin of 6.8 percent, up from last year’s 6.6 percent and an operating income of $475 million for a 3 percent annual increase. FedEx said that revenue was up because of higher package volume and higher base package yields, which were offset by one fewer operating day, lower fuel surcharges, and lower express freight volumes.

Revenue at FedEx Ground increased 8 percent at $3.01 billion, with an operating margin of 19.5 percent, compared to 20.1 percent last year, and an operating income of $586 million for a 5 percent annual gain. Company officials said operating results were aided by higher Ground volume and revenue per package, which was offset partially by higher network expansion costs and one fewer operating day.

FedEx Freight revenue saw a 12 percent increase to $1.55 billion, and operating income headed up 51 percent to$122 million. Operating margin at 7.9 percent was up from 5.8 percent a year ago.  Average daily shipments—at 95,700—were up 12 percent, and weight per shipment—at 1,200—was up 2 percent. Revenue per hundredweight was flat at $19.66. Higher average daily shipments and higher weight per shipment, coupled with improved operational efficiencies partially offset by one fewer operating day, were drivers for the solid results.

On the Ground side, FedEx SmartPost, its “last mile” delivery service partnership with the United States Postal Service, saw average daily volume dip 8 percent to 1.92 million packages per day, while revenue per package was up 8 percent at $1.88.  FedEx explained that the yield was up due to rate increases, improved customer mix, and was partially offset by higher postage costs.

FedEx Ground CEO Henry Maier said on the call that annual volume comparisons for SmartPost were primarily impacted by one customer that changed its distribution model this year.

“If you exclude that one customer, SmartPost grew roughly 14.5 percent, which is still a pretty good business,” he said. “We are uniquely positioned to ride this wave that e-commerce is generating. It is a portfolio play…for customers that want to offer free shipping and FedEx home delivery for high-touch, high-visibility customers who choose that type of service for their products. I don’t think those can be disconnected, as our customers are increasingly telling us that they want the option for both services in the portfolio.”

The gain in yield and the decrease in volume for SmartPost speaks to the fact that there is sometimes business that is simply not worth having, according to Jerry Hempstead, principal of parcel consultancy Hempstead Consulting.

“The fact that FedEx lost a big chunk of volume and yield went up is telling,” he said. “The mantra is ‘yield improvement’ as it is no longer a race for volume, but, instead, a race for profits. Most of what I see in the numbers can be attributed to the 3,000 people that are off the payroll compared to this time last year and also the price increases, in particular the increase in the minimum charges.”