FedEx reports fiscal third quarter earnings gains

Fiscal third quarter earnings for Memphis-based freight transportation and logistics services bellwether FedEx issued yesterday showed gains, amid various challenges.

Quarterly revenue—at $23.6 billion—saw a 10% annual increase, and operating income—at $1.33 billion—saw a 32% annual gain. Diluted earnings per share—at $4.20—were up 27% annually, coming up short of Wall Street expectations at $4.65.

FedEx officials observed that quarterly operating income saw gains related to higher revenue per shipment as well as a net fuel benefit at all transportation segments. And they added that results saw gains from lower variable compensation expense and less severe winter weather, resulting in favorable annual comparisons. The improved results were partially offset by the effects of the Omicron variant and also higher purchased transportation costs and wage rates, too.

FedEx Express quarterly revenue—$11.304 billion—saw a 5% annual gain, with operating income up 12%, to $520 million. The company said that gains, for this segment, were paced by higher yields, a net fuel benefit, and lower variable compensation expense but were partially offset by the negative effects of the Omicron variant, which constrained near-term economic growth, labor availability, and shipping demand.

FedEx Ground revenue—at $8.8 billion—saw a 10% annual increase, with operating income down 9%, to $641 million. FedEx said that its results were impacted by increased rates for purchased transportation and employee wages, network inefficiencies, and expansion-related costs.

Revenue for FedEx Freight, its less-than-truckload segment was up 23%, to $2.253 billion, with operating income up 183%, to $337 million, due to what the company called a continued focus on revenue quality and profitable growth.

Total quarterly package revenue—at $8.80 billion, was up 6% annually. And total U.S. package revenue—at $4.176 billion—saw a 6% annual gain, with total international export package revenue up 14%, to $3.688 billion, and international domestic down 13%, to $1.016 billion. Total daily U.S. domestic package volume increased fell 8%, to 3.331 million and U.S. revenue per package, at $20.34, was up 15%. Total daily international export packages at 1.081 million rose 2% annually, with revenue per package up 11%, to $55.06.

For FedEx Freight, revenue per freight pound, at $1.25, was up 12%, with total average daily freight pounds, at 26,728 off 19%, and revenue per shipment up 14%.

“Execution of our strategies resulted in substantially higher operating income for the quarter as team FedEx delivered yet another outstanding peak season,” said FedEx President and COO Raj Subramaniam on the company’s earnings call last night.

“December 2021 was our most profitable December in FedEx history. Our ability to handle the influx of packages was years in the making as we've taken deliberate steps to enhance our unparalleled network and support of customers large and small.

We have fundamentally changed our performance as we handled increased e-commerce volume during peak and set a new precedent for peak seasons moving forward. Having said that, we are laser focused on improving our margins.” 

Addressing the impact of the Omicron variant on earnings, the executive explained it affected our business in different ways.

“First, we experienced staffing shortages, particularly in our air operations,” he said. “In January alone, the absentee rate of our crew due to Omicron was over 15%, which caused significant flight disruptions. Second, our customers experienced Omicron-driven staffing shortages, which reduced demand for our services, especially in U.S. domestic and European markets. Both of those factors resulted in softer-than-expected volume levels, especially in January. We estimate the effect of Omicron-driven volume softness in our Q3 results was approximately $350 million.”

What’s more, the executive explained how FedEx that staffing levels and the rapid acceleration in labor costs have stabilized with its network operating at normal levels.

“Despite improvement in the labor headwind, volume levels in Q3 were softer than we had previously forecasted, in part due to the Omicron surge slowing customer demand,” he said. “Over the years, FedEx Ground has built a strong foundation to serve B2B and small and medium customers with an unmatched value proposition. As a result, we have grown market share in these segments and they remain strong priorities for the future. And then more than three years ago, we built upon this foundation and embarked on a strategy that positioned FedEx squarely in the center of the fast-growing e-commerce market with a differentiated portfolio and a diversified customer base. This included a period of strategically investing in our network to meet growing market demand. By building on our current base of business and making those prior investments in our network to facilitate growth, we are in a position to generate improved operating profit and margins. We saw this potential in our financial results for December prior to the surge of Omicron. And moving forward, our financial performance will be further enhanced by maximizing existing assets, improving capital utilization and leveraging technologies that facilitate optimization of our existing physical capacity and staffing.”

Brie Carere, FedEx Executive Vice President, Chief Marketing and Communications Officer, observed on the call that FedEx is very pleasedwith the results of its revenue quality strategy, adding it has a great opportunity to increase the flow-through to margin expansion.

“In the third quarter, revenue growth was 10% year-over-year, with double-digit yield improvement for FedEx Express and FedEx Freight, close behind with FedEx Ground at 9% year-over-year yield improvement,” she said. “In the United States, our package revenue grew 9% in Q3 on strong yield improvement of 10%. We executed on our peak pricing strategy in the month of December, delivering more than $250 million in peak surcharge revenue. Softness in parcel volumes came predominantly from constraining FedEx Ground economy and the effects of Omicron on both our network and on our customers.”

Jerry Hempstead, president of Hempstead Consulting, was direct in assessing FedEx’s quarterly performance, saying “Once again FedEx is blessed with an abundance of new revenue and yet can’t seem to make improved earnings on the windfall. More profitless prosperity.”

And Robert W. Baird & Co. analyst Garrett Holland wrote in a research note that quarterly results were noisier as expected, but the company’s FY22 outlook was unchanged.

“Macro growth has dimmed with rising geopolitical risks, but the parcel pricing environment remains solid, and volume growth should recover following the Omicron disruptions,” he noted.