FedEx sees fiscal second quarter earnings gains

Fiscal second quarter earnings for Memphis-based freight transportation and logistics services bellwether FedEx issued yesterday showed gains, reflecting lessening labor-related issues and strong holiday demand.

Quarterly revenue—at $23.5 billion—was up 14% annually, and operating income—at $1.6 billion—rose 9% annually. Diluted earnings per share—at $4.83—were flat, exceeding of Wall Street expectations of $4.28.

FedEx officials explained that quarterly operating income saw gains related to higher revenue per shipment at all transportation segments, despite the negative effect of labor market challenges that have contributed to global supply chain disruptions. And it added that the challenging labor market affected the availability and cost of labor resulting in network inefficiencies, higher purchased transportation costs, and higher wage rates, which increased costs by an estimated $470 million year over year, primarily at FedEx Ground. The company also said earnings saw gains from continued strategic management actions to improve revenue quality and favorable net fuel.

FedEx Express quarterly revenue—at $11.605 billion—saw a 12% annual gain, with operating income up 5%, to $949 million. FedEx Ground revenue—at $8.264 billion—increased 13% annually, with operating income down 13%, to $481 million. Revenue for FedEx Freight, its less-than-truckload segment was up 17%, to $2.272 billion, with operating income up 33%, to $334 million.

Total quarterly package revenue—at $8.990 billion, was up 12% annually. And total U.S. package revenue—at $4.030 billion—saw a 10% annual gain, with total international export package revenue up 20%, to $3.813 billion, and international domestic up 5%, to $1.147 billion.

Total daily U.S. domestic package volume increased 1%, to 3.279 million and U.S. revenue per package, at $19.71, was up 11%. Total daily international export packages at 1.123 million rose 8% annually, with revenue per package up 12%, to $53.93.

For FedEx Freight, revenue per freight pound, at $1.20, was up 17%, with total average daily freight pounds, at 29,938, off 3%, and revenue per shipment up 14%.

“As expected, we are seeing strong levels of volume in our network given unprecedented levels of shopping and shipping this holiday season. FedEx Ground had an outstanding Cyber Week, with 100 million packages picked up during the first official week of peak,” said Raj Subramaniam, FedEx President and COO, on the earnings call. “Our ability to handle this influx of packages has been years in the making as we have taken deliberate steps to enhance our unparalleled network to support customers, large and small. This includes strategically adding more capacity across our network to support our growing customer base.”

The executive also highlighted how overcoming staffing and retention challenges, due to the constrained labor market, has been a key focus, stating that FedEx continued to take bold actions over the quarter to hire and invest in its frontline team members and increase network efficiency. And he said that FedEx estimated the effect of labor shortages on its quarterly results was approximately $470 million, in line with our original expectations and also the fiscal first quarter, with FedEx Ground accounting for $285 million of that tally.

Brie Carere, FedEx Executive Vice President, Chief Marketing and Communications Officer, observed on the call that constrained capacity has continued to support a favorable pricing environment.

“We are maintaining a brisk pace for repricing contracts, ensuring a high surcharge capture and yield improvements,” she said. “We are working with large customers to identify opportunities, to move their volume from our national network to our regional and local networks, freeing up additional capacity for small business customers. Small businesses relied on our market leading transit times in our seven-day a week network to compete. They cannot afford to deploy inventory at the same scale as large retailers.”

Regarding pricing, Carere said that domestic yield growth was up 9.1%, including fuel, and the company’s general rate increase will take effect next month, adding that in January the Ground Economy peak surcharge will be replaced by the new Ground Economy (formerly SmartPost) delivery surcharge at a $1, which she said solidifies the price point for its Economy product.

Robert W. Baird & Co. analyst Garrett Holland wrote in a research note that second quarter results and the company’s outlook were encouraging and clearly topped low expectations.

“Strong demand/pricing, fading labor headwinds, and benefits from maturing investments should drive improving Ground margins in calendar 1H22,” he wrote. “Longer term, revenue quality initiatives and operational savings led by completion of the European network integration should help FDX structurally improve profitability, and Chairman/CEO Fred Smith cited ‘massive margin improvement opportunity’ at the company.”