FedEx’s warning reflects both the global economy and internal shortcomings

A FedEx worker makes deliveries on September 16, 2022 in Miami Beach, Florida.

Joe Riddell | Getty Images

FedEx warned of weak global shipping demand in an initial earnings report last week, leaving the market scrambling to determine whether the problems reflect internal company flaws or a broader economic diagnosis.

CEO Raj Subramaniam cited external factors after the shipping giant missed Wall Street earnings estimates, telling CNBC’s Jim Kramer on “Mad Money” that the company is “a reflection of everyone else’s business” and that he expects a “global recession” “. But some analysts noted the relative stability of competitors UPS and DHL, and said FedEx’s failure to adapt also contributed to their performance.

“This is the second year in a row that FedEx has missed its fiscal first-quarter guidance, and I think that creates some frustration among investors,” said Moody’s analyst Jonathan Kanarek.

Kanarek was among the analysts who noted the mix of factors — internal and external — that likely played a role in FedEx’s disappointing results.

face reality

Some experts see FedEx’s performance as a belated confrontation with market realities emerging from the Covid pandemic, which the company previously failed to acknowledge.

On Investor Day in June, FedEx set a bullish forecast for 2025 driven by annual revenue growth between 4% and 6% and earnings per share growth between 14% and 19%.

“The Raj came out with a big show in June, their first analyst day in two years, and talked about an environment that was very upbeat. However, here we are three months later,” said Ken Hoxter, an analyst at Bank of America. CNBC.

“They were not anticipating, nor building, an economic slowdown,” Hoxter said.

As recently as Investor Day, Subramaniam said last week that FedEx had seen a weekly drop in shipping volumes. That’s why the company withdrew its 2023 forecast and announced that it would close offices and planes to cut costs. Its stock fell more than 21%, wiping nearly $11 billion from its market value the day after the report.

However, FedEx stuck to its 2025 forecast, a move that Gordon Haskett’s research advisors called a “frontier delusion.” They say FedEx competitors are taking a more pragmatic approach to ending the demand boom in the age of the pandemic.

While FedEx reported weak European demand among its illnesses last week, UPS gained market share in the region. In its latest earnings call, UPS boasted its highest consolidated quarterly operating margin in nearly 15 years, citing resilience amid challenging macroeconomic conditions.

“UPS is two to three years ahead of FedEx in terms of the way they view post-Covid margins,” said Kevin Simpson of Capital Wealth. “It’s as if FedEx never thought the environment would ever return to normal.”

As part of its cost-cutting efforts, FedEx said it will reduce some ground operations and defer hiring. Meanwhile, UPS will hire more than 100,000 seasonal employees for the holiday period.

pioneer?

Analysts note that FedEx’s floor and express delivery are nonetheless vulnerable to global economic conditions, and the disappointing performance of the categories may reflect a stagnant environment.

“We haven’t really seen evidence of a widespread slowdown. But FedEx is clearly a leader and we don’t want to dismiss what it says,” Kanarik Moody’s said.

Bank of America’s Hoexter sees the performance of the express mail category, which fell short of FedEx’s forecast of $500 million, as the first indication of a broader slowdown. He said slight dips in volume greatly affect margins because air delivery costs so much to maintain.

The ground service, which came in at $300 million less than the company’s forecast, is the next feeling the slowdown: “When a consumer stops buying, stores start seeing shelves full, they stop replenishing those stocks,” Hoxter said.

Hoexter’s semi-weekly truck survey reported 11 consecutive periods in a “recession range” according to the Bank of America’s global research report. It comes as FedEx is reporting less-than-expected business with major customers Target and Walmart, both of which have struggled with excess inventory in recent months.

FedEx reported strong shipping margins, but Hoexter noted that the category was “more weighted to manufacturing, which didn’t feel the biggest burden.” If demand continues to slow and manufacturers require less production, Hoexter said FedEx may start to see shipping volumes drop as well.

holiday fade

Regardless of the factors driving FedEx’s problems, the upcoming holiday season likely won’t bring any relief. In a statement, FedEx said the cost-cutting measures it announced last week are not expected to impact the service. “We are confident in our ability to deliver this holiday season,” the company said.

But retailers expect holiday sales to decline. Fearing delays last year, many items were shipped early. The Port of Los Angeles said that 70% of vacation merchandise had already arrived on beaches by the end of August.

The glut of inventory that has plagued retailers in recent months may also persist, leading to lighter shipping volumes and further weakening FedEx’s business. A KPMG survey found that 56% of retail executives expect to leave surplus merchandise after the holiday.

S&P’s Jeff Wilson notes that FedEx has some mitigation if problems persist. The company has quite a bit of cash — nearly $7 billion as of May 31 — versus the roughly $3-4 billion it typically had before the pandemic. He also indicated that the company reconfirmed the plan to buy back its stake by about $1.5 billion

“This is the best signal management can do about FedEx’s long-term strength,” Wilson said.

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