Solid fiscal Q2 earnings for FedEx, coming in ahead of Wall Street estimates

Fiscal second quarter earnings results for FedEx released Wednesday afternoon came in ahead of Wall Street expectations.

Quarterly net income at $691 million was up 4 percent annually, and revenue at $12.5 billion was up 4.8 percent. Operating income at $1.14 million was up 4.4 percent.

Quarterly operating margin—at 9.1 percent—was flat, and adjusted earnings per share of $2.58 were up nearly 16 percent and ahead of Wall Street estimates of $2.51 per share.

“FedEx Corp. posted solid earnings despite continued weakness in industrial production and global trade, and we are making impressive progress toward our goals to increase margins, earnings per share, cash flows, and returns on invested capital,” said Frederick W. Smith, FedEx Corp. chairman, president and chief executive officer, in a statement. “A record number of holiday shipments – fueled by the steady rise of e-commerce – are flowing through the FedEx global networks, and we greatly appreciate the dedication of our 340,000 team members around the world who are delivering outstanding service to our customers.”

Individual unit quarterly performances: FedEx Express quarterly revenue was down 6.0 percent at $6.59 billion, with an operating margin of 9.4 percent, up from last year’s 7.0 percent and an operating income of $622 million for a 26 percent annual increase. FedEx said that revenue declined due to lower fuel surcharges and “unfavorable” currency exchange rates that more than offset base yield growth. It added that U.S. domestic package volume rose 1 percent and was pace by overnight package growth and that U.S. domestic revenue per package fell 2 percent due to lower fuel surcharges that were partially offset by higher base rates. FedEx International Economy volume and FedEx International Priority volumes were up 3 percent and down 5 percent, respectively, with International export revenue per package off 7 percent.

Revenue at FedEx Ground was up 32 percent at $4.04 billion, with an operating margin of 13.0 percent, down from 15.2 percent last year, and an operating income of $526 million for a 13 percent annual gain. FedEx attributed revenue gains to including results from its acquisition of GENCO, the recording of FedEx SmartPost service revenues on a gross basis compared to the previous net treatment and higher ground volume and base rates. Average daily volume was up 9 percent and paced by e-commerce, with revenue per package up 10 percent, due to the recording of SmartPost revenues on a gross basis and higher base rates, including additional dimensional weight charges and partially offset by lower fuel surcharges.

Revenue at FedEx Freight, the company’s less-than-truckload (LTL) unit, was down 2 percent annually at $1.55 billion, with operating income down 10 percent at $101 million, and operating margin at 6.5 percent, down from 7.1 percent a year ago. FedEx said average daily shipments were up 1 percent and weight per shipment fell 1 percent and revenue per shipment dropped 3 percent, due to lower fuel surcharges that were offset by higher base rates.

“FedEx had a strong quarter,” said Jerry Hempstead, president of Hempstead Consulting. “The top line was hurt because they charged less in fuel surcharges than the prior year because as we all know when we fill up our car, the price of fuel has come down tremendously. Obviously this will hurt the top line revenue and FedEx failed to make the Wall Street projections, however the decline in the price of fuel is helping their bottom line FedEx took up the table by which they calculate fuel surcharges was increased effective November 2 and FedEx has room to raise fuel again if they so desire because the FedEx fuel surcharge will be less than that charged by UPS after the end of this month.”

Hempstead added that Ground volumes were again very strong, air volume up modestly but there is still some down trading going on with the international market with international express being cannibalized for the less expensive albeit slower economy service.

“FedEx has modified the method and means by which it transports the economy international freight so the margins are stronger now regardless of the service type the shipper requires,” he said. “Looking forward with seven days to go to Christmas, and checking the weather outlook for the nation, one can suspect that the next quarter for FedEx may be even stronger. Fred and company in Memphis may deliver a Christmas present to the shareholders on the next call.”