A FedEx employee makes a delivery in Miami Beach, Florida on September 16, 2022.
Joe Raedle | Getty Images
FedEx warned of a softening in global shipping demand in a preliminary earnings report last week, leaving the market to determine whether the problems reflect internal corporate failings or a broader economic diagnosis.
CEO Raj Subramaniam pointed to external factors after the shipping giant missed Wall Street earnings and revenue estimates, telling CNBC’s Jim Cramer in Mad Money that the company is a “reflection of everyone else’s business” and that it is a “worldwide recession”. However, some analysts note the relative stability of rivals UPS and DHL and said FedEx’s own failure to adjust also contributed to its performance.
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“This is the second year in a row that FedEx has missed its own guidance for the fiscal first quarter, and I think that’s causing frustration among investors,” said Jonathan Kanarek, an analyst at Moody’s.
Kanarek was among analysts who noted the mix of factors — internal and external — that likely played a role in FedEx’s disappointing results.
confrontation with reality
Some experts see FedEx’s performance as a long overdue confrontation with market realities arising from the pandemic, which the company has previously failed to acknowledge.
At its investor day in June, FedEx provided an upbeat outlook for 2025, driven by annual revenue growth of between 4% and 6% and earnings per share growth of between 14% and 19%.
“Raj came out with a big show in June, her first analyst day in two years, and spoke about an environment that was quite optimistic. But here we are three months later,” said Ken Hoexter, an analyst with Bank of America CNBC.
“They neither expected nor built in an economic downturn,” said Höxter.
From around the time of its Investor Day last week, Subramaniam said FedEx had seen weekly declines in shipping volume. As a result, the company withdrew its 2023 guidance and said it would close offices and park planes to cut costs. Its shares fell more than 21%, erasing nearly $11 billion from its market cap the day after the report.
Still, FedEx stuck by its expectations for 2025, a move Gordon Haskett’s research advisers called “borderline madness.” FedEx’s competitors, they say, are more realistic about the end of the pandemic-era demand surge.
While FedEx reported weak demand in Europe amid its complaints last week, UPS gained market share in the region. In its recent earnings release, UPS boasted the highest quarterly consolidated operating margin in nearly 15 years and cited agility amid challenging macroeconomic conditions.
“UPS is two to three years ahead of FedEx in the way they look at post-Covid margins,” Capital Wealth’s Kevin Simpson said of Closing Bell: Overtime. “It’s almost as if FedEx didn’t think the environment would ever return to normal.”
As part of its cost-cutting efforts, FedEx said it will reduce some ground operations and postpone hiring. Meanwhile, UPS is hiring over 100,000 seasonal workers for the holiday season.
A lead changer?
Analysts note that FedEx’s ground and express deliveries are still vulnerable to global economic conditions and that the category’s disappointing performance may reflect a recessionary environment.
“We really haven’t seen evidence of a broad-based slowdown. But obviously FedEx is a leader and we don’t want to discount their statements,” Moody’s Kanarek said.
Bank of America’s Hoexter sees the express category’s performance, which was $500 million below FedEx’s own expectations, as the first indicator of a broader downturn. He said small drops in volume hurt margins significantly because air freight costs so much to maintain.
The ground service, which fell $300 million short of the company’s forecasts, is the next to feel a slowdown: “When the consumer stops buying, the stores start seeing the shelves filled, stop stocking that stock again.” fill up,” said Hoexter.
According to Bank of America’s Global Research Report, Hoexter’s bi-weekly truck haulier survey has reported 11 consecutive periods in “recession territory.” That comes as FedEx reports less-than-expected deals with top customers Target and Walmart, both of which have struggled with excess inventory in recent months.
FedEx reported strong freight margins, but Höxter noted that the category is “more production-weighted, which didn’t feel as strong.” If demand continues to slow and manufacturers need less production, Höxter said FedEx could start reducing freight volumes as well.
Regardless of the factors driving FedEx’s woes, the upcoming holiday season is unlikely to bring relief. In a statement, FedEx said the cost-cutting measures announced last week are not expected to impact the service. “We are confident that we can deliver this holiday season,” the company said.
But retailers expect subdued holiday sales. And for fear of last year’s delays, many items shipped earlier. The Port of Los Angeles said that by the end of August, 70% of vacation supplies had already landed.
Warehouse flooding, which has plagued retailers in recent months, could also persist, resulting in lower shipping volumes and further dampening FedEx’s business. A KPMG survey found that 56% of retail executives expect to be held back with excess merchandise after the holidays.
FedEx has some cushioning if the troubles continue, notes S&P’s Geoff Wilson. The company is sitting on a lot of cash — nearly $7 billion as of May 31 — as opposed to the roughly $3 billion to $4 billion it typically had before the pandemic. He also noted that the company has reiterated its approximately $1.5 billion stock repurchase plan
“This is the best signal management can give of FedEx’s long-term strength,” Wilson said.