Company / Analytics

Analytics, 17 September 2022

Stock Analysis - What is happening with FedEx?

FedEx took the spotlight on Friday 16th September, as its shares recorded their biggest daily drop after the company released its preliminary results for the three months leading to August 31 on Thursday 15th. The stock dropped 23% on Friday following the weaker-than-expected earnings, blaming “global volume softness” that “accelerated” in the final weeks of the quarter.

The company, whose report was officially due on September 22, said it expected to cut its capital expenditure by closing offices, freezing hiring, and parking aircraft in response to a decline in package shipping volumes. Chief executive Raj Subramaniam, who has been CEO since June, said global volumes declined as macroeconomic trends significantly worsened later in the quarter in both international and US markets, effectively cutting down shipping volumes.

FedEx also withdrew its full-year guidance issued in June due to the continued volatile operating environment, whilst sharply lowering guidance for the current quarter. The company also adjusted earnings for the quarter that ended August 31st down by $260 million, or 17%, from a year earlier. Revenue rose $1.2 billion, or 5%, despite missing the company’s earlier target.

FedEx preliminary Q1 earnings

On Thursday 15th, FedEx released preliminary results for the first quarter of fiscal 2023 (ended Aug 31, 2022). The earnings came in as worse than expected, as the company cited global volume softness that accelerated in the final weeks of the quarter.

From the preliminary results, FedEx expects first-quarter adjusted earnings per share to be $3.44, well below Wall Street’s Consensus Estimate of $5.06. This was also 19% lower than last year. For revenue, total company revenue is expected at $23.2 billion, which is also below Wall Street’s Estimate of $23.68 billion.

Other areas in the earnings report that came in as worse than expected were segmental revenues, which are expected to come in at $11.1 billion, indicating a decline from Wall Street’s Estimate of $11.5 billion.

FedEx Ground is also expected to be roughly $300 million below management’s forecasts. Even though FDX took immediate action to tweak its cost base, volumes declined, as evident from the disastrous preliminary results.

FedEx also expects weakness in shipping volumes to continue in fiscal year two, as the company set revenues in Q2 in the $23.5-$24 billion range. Wall Street’s current forecast for revenues in Q2 stands at $24.81 billion.

What caused FedEx’s decline in earning

FedEx officials said its Express division had been affected by macroeconomic weakness in Asia and service challenges in Europe when releasing preliminary Q1 earnings report. “Global volumes declined as macroeconomic trends significantly worsened later in the quarter, both internationally and in the US. We are swiftly addressing these headwinds, but given the speed at which conditions shifted, first quarter results are below our expectations,” said Raj Subramaniam, FedEx president and chief executive officer.

FedEx announced a set of company initiatives set to mitigate the decline in revenues. The cost initiatives outlined include a reduction in flight frequencies and temporarily parking aircraft; cuts in labour hours; consolidation of some operations; a reduction in Sunday operations; the cancellation of some planned network capacity projects; deferred hiring of staff; and the closure of some 90 FedEx office locations.

The U.S. firm joins global logistics peers such as Hong Kong’s Cathay Pacific Airways and France-based transporter CMA CGM in signaling that consumers are saving for essentials such as gas and food ahead of the holiday season as surging prices discourage casual shopping.

The company’s business contractors have also been hit had with a survey released this week found 54% saying their business with FedEx was losing money, 35% saying it was breaking even, and only 11% saying it was profitable. The association said the survey reached 1,200 contractors working for the company or who left the company within the last 12 months.

Stock market reactions

The preliminary results sent the stock tumbling 24% to about $155.95, with the company poised to shed about $12.5 billion in market capitalization.This was its biggest one-day drop since listing in 1978. The warning had an impact on the wider market, with the S&P 500 down 1.5% in early trading. Rival United Parcel Service (UPS) shed 4.0%, XPO Logistics dropped 6.9% and e-commerce giant slipped 3.1%. The Dow Jones Transport index (DJT) slipped nearly 5%.

Across the Atlantic, Germany’s Deutsche Post shed 6.1%, London’s Royal Mail fell 7.5% and Copenhagen-based DSV dropped 6.4% after the news.

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