FedEx Profit Misses Estimates as Express Shipping Slows

FedEx Corp. (FDX) said fiscal second-quarter profit rose 14 percent as the operator of the world’s largest cargo airline began seeing initial results from a $1.7 billion, three-year cost reduction plan.

Net income rose to $500 million, or $1.57 a share, the Memphis, Tennessee-based company said in a statement today. Earnings on that basis fell short of the $1.65 average of analysts’ estimates compiled by Bloomberg, partly because of a reduced operating margin at its FedEx Ground unit.

Improved international yields and operating margin growth at FedEx Express showed some success in efforts to counter a shift by customers away from expensive overnight shipping methods, said Logan Purk, an Edward Jones & Co. analyst. Retiring older aircraft and moving some shipments to the bellies of passenger aircraft are two of the steps taken to reduce operating costs.

“We’re seeing a little bit of yield improvement in the Express business,” Purk said in an interview today. “We’re seeing a little bit of a volume pickup. Not a lot, but in terms of the Express business, that does reverse a trend that we’ve seen. If you look on the international side in particular, we haven’t seen positive yields in over a year.”

Photographer: Andrew Harrer/Bloomberg

The shadow of a package handler is seen on boxes as he loads a trailer for final delivery at a FedEx Corp. Ground hub in Hagerstown, Maryland. Close

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Photographer: Andrew Harrer/Bloomberg

The shadow of a package handler is seen on boxes as he loads a trailer for final delivery at a FedEx Corp. Ground hub in Hagerstown, Maryland.

Revenue per package for each international priority shipment rose 3 percent as volume slipped 5 percent. International economy yield increased 1 percent and volume climbed 10 percent. Express expenses fell 2 percent.

On Track

FedEx is “on track to be where we need to be by the end of 2016,” with the $1.7 billion plan, Chief Financial Officer Alan Graf said on a conference call with analysts and investors. “We are managing very aggressively the tradedown in international.”

FedEx boosted its full-year earnings per share growth forecast one percentage point to as much as 14 percent, or $7.10, as share repurchases under a record buyback plan announced in October are seen adding about 4 cents a share.

Sales rose 2.7 percent to $11.4 billion from $11.1 billion a year earlier. Analysts had forecast $11.5 billion. The company spent 8 percent less on fuel during the quarter as price and usage fell.

FedEx rose 0.5 percent to $139.72 at the close in New York. The shares have climbed 52 percent this year, leading rival United Parcel Service Inc.’s 40 percent gain and a 27 percent increase for the Standard & Poor’s 500 Index.

The operating margin at FedEx Ground dropped one point to 14.9 percent, a change the company blamed on a later start of the peak holiday shipping season that moved much of the volume into this quarter versus the second quarter last year.

Daniel Loeb

“A lot of people are giving 100 percent credit to this improvement plan working flawlessly,” Purk said of investors. “A lot of that optimism is now baked into the price today. It might be slightly aggressive.”

The financial results were the first by FedEx since activist investor Daniel Loeb disclosed on Nov. 12 that his Third Point LLC had taken a stake in the shipping company. Regulatory filings disclosed that George Soros’ Soros Fund Management LLC and John Paulson’s Paulson & Co. also had taken stakes of 1.52 billion shares and 646,800 shares, respectively.

Loeb said at the time that he had met with FedEx Chief Executive Officer Fred Smith and would not push for his ouster. The purchase focused new attention on succession plans for Smith, 69, who has run the company since its founding more than 40 years ago. He also is FedEx president and chairman.

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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