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FedEx Cuts Forecast as Economy Hurts Premium Shipping

Sept. 18 (Bloomberg) -- Dominic Chu reports on FedEx earnings, whose profit outlook disappointed investors. He speaks with Deirdre Bolton on Bloomberg Television's "Money Moves." (Source: Bloomberg)

FedEx Corp. (FDX) dropped the most in three months after cutting its annual profit outlook because a weakening economy has prompted shippers in the U.S. and overseas to switch to cheaper delivery options.

Earnings for the year ending in May will be $6.20 to $6.60 a share compared with a previous forecast of $6.90 to $7.40, the Memphis, Tennessee-based company said today. That excludes potential benefits from cost cuts currently under review.

FedEx, an economic bellwether because it ships goods from financial documents to electronics, pared its forecast for 2012 U.S. expansion to 1.9 percent from a June prediction of 2.4 percent. Global growth will slow to 2.3 percent this year and 2.7 percent in 2013, FedEx said, pulling back on projections of 2.4 percent and 3 percent, respectively.

“I’m surprised they weren’t more pessimistic,” Donald Broughton, an Avondale Partners LLC analyst in Nashville, Tennessee, said in an interview. “Great companies and weak economies get together and the weak economy, in the short term, wins.”

FedEx, operator of the world’s largest cargo airline, fell 3.1 percent to $86.55 at the close of trading in New York. That was the largest drop since June 1 and the biggest among 60 companies in the Standard & Poor’s 500 Industrials Index.

Operating margin in the Express segment, FedEx’s largest by sales, slipped to 3.1 percent in the three months through August from 4.4 percent a year earlier. Revenue from domestic shipments in the U.S. grew 2 percent per package as higher rates tempered the effects of a 5 percent drop in average daily volume.

Segment Results

Unfavorable currency exchange rates and lower fuel surcharges damped revenue per package by 4 percent in international exports, eroding a 1 percent increase in average daily volume. Express profit dropped 28 percent to $207 million, FedEx said.

“The global trading economy is still the largest single economy in the world,” Chief Executive Officer Fred Smith said on a conference call. “But over the last several months, particularly as we went into this fiscal year, it’s been disappointing. It’s reflective of the low growth in the U.S., contraction going on in Europe” and the effect those issues are having on Chinese exports, he said.

‘Big Implications’

Simultaneously, increasing fuel prices have “had very big implications on the way people think about supply chains, whether they move things by ocean or move things by air,” he said. At $3.22 a gallon yesterday, jet fuel for immediate delivery in New York Harbor cost 5.6 percent more than a year earlier.

FedEx’s ground business in the U.S., which offers a less expensive alternative to air delivery, continued to bolster earnings in the quarter. Profit climbed 9.3 percent to $445 million and sales rose 7.9 percent to $2.46 billion. Average daily volume grew about 5 percent, driven by gains in business- to-business and home delivery, the company said.

“Weak global economic conditions dampened revenue growth, drove a shift by our customers to our deferred services and outpaced our near-term ability to reduce FedEx Express operating costs to match demand levels,” said Chief Financial Officer Alan Graf.

United Parcel Service Inc. (UPS), the world’s largest package delivery company, pared its annual profit forecast in July after second-quarter earnings trailed analysts’ estimates. FedEx and Atlanta-based UPS compete globally with Deutsche Post AG (DPW)’s DHL.

UPS, DHL

“Worldwide global air freight is a triopoly,” Avondale’s Broughton said. “FedEx is obviously seeing the results of a slowing global macro, so to suggest somehow that they could be experiencing what they are and UPS and DHL are not having similar conditions is Pollyanna-ish.”

Broughton has a market perform rating on FedEx and a market underperform on UPS. He doesn’t cover Bonn-based Deutsche Post.

U.S. industrial production shrank in August by 1.2 percent, the most since March 2009, as slowing global markets inhibited orders and unemployment higher than 8 percent reduced consumer spending, figures released Sept. 14 by the Federal Reserve show.

FedEx is “taking further actions to reduce costs and adjust our networks to match current and anticipated shipment volumes,” Smith said. The company has said it will detail those actions at an Oct. 9-10 investor meeting in Memphis.

Cost Savings

In August, FedEx said it would offer voluntary buyouts to some workers as part of “significant” cost reductions amid slower profit growth. The company is conducting a detailed analysis to find eligible employees and said offers may not be made until the fiscal fourth quarter that starts in March.

Net income for the quarter ended Aug. 31 dipped 1.1 percent to $459 million, or $1.45 a share, from $464 million, or $1.46, a year earlier, the company said. That topped the $1.40 average of 23 analyst estimates. Sales rose to $10.8 billion.

FedEx Express will increase shipping rates 5.9 percent on Jan. 7 for U.S. domestic, export and import services. Rates will climb a net 3.9 percent as the company reduces a surcharge linked to fuel costs.

To contact the reporter on this story: Mary Schlangenstein in Dallas at maryc.s@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

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