FedEx Trims 2016 Forecast as First-Quarter Earnings Fall Short

Updated on
  • Quarterly earnings fall short of analysts' estimates
  • FedEx again lowers forecast for U.S. industrial production

FedEx Corp. fell the most on the Standard & Poor’s 500 Index after cutting its full-year profit forecast just three months into the company’s new fiscal year.

Softer demand for U.S. freight cargo and higher costs in the Ground unit are weighing on results, according to FedEx, whose diverse shipments make it a U.S. economic bellwether. The earnings revision surprised analysts who had predicted that it was too soon in the corporate calendar for such a move.

FedEx is in the final year of a three-year $1.7 billion cost-cutting program primarily aimed at FedEx Express.
FedEx is in the final year of a three-year $1.7 billion cost-cutting program primarily aimed at FedEx Express.
Photographer: Patrick T. Fallon/Bloomberg

FedEx’s pessimism reflects weakness in the energy industry and fewer packages in the so-called less-than-truckload business, which fills trailers with goods from multiple customers, not just one shipper. While FedEx raised its forecast for gross domestic product, it pared its estimate for 2015 U.S. industrial production for the second time since June.

“The LTL industry is very closely tied to industrial production,” Mike Glenn, chief executive officer of FedEx Corporate Services, said on a conference call. With the lower projection for manufacturing output, “it’s not surprising we’d see an impact on volume not only at FedEX, but on the industry as a whole. We hope we’ve seen the worst of that.”

Stocks Fall

FedEx fell 2.8 percent to $149.63 at 4 p.m. in New York Wednesday. The S&P 500, a broad gauge of U.S. equities, closed higher for the fifth time in the last seven trading sessions.

Earnings for the year ending May 31 will be $10.40 to $10.90 per share before some costs, short of the company’s previous projection of $10.60 to $11.10. Profit for the quarter ended Aug. 31 was $2.42 a share, FedEx said. That trailed the $2.45-a-share average of 25 estimates compiled by Bloomberg.

Electronics parts, business documents and pharmaceuticals are among the goods moved around the globe by FedEx, which operates the world’s largest cargo airline as well as truck fleets. Volume levels didn’t meet expectations in what normally is a busy quarter, leaving the company’s freight division overstaffed, FedEx said.

But it didn’t elaborate further on the increases in operating expenses, or explain why its expectations for U.S. manufacturing weakness weren’t matched with a similar outlook for the broader economy.

Industrial Production

U.S. industrial production is not sending “great signals,” FedEx said, paring its outlook for growth to 1.6 percent from 1.8 percent in August. FedEx projected U.S. GDP growth of 2.5 percent this year, up from 2.3 percent earlier.

FedEx is still gearing up for a “record” holiday season. It’s hiring more than 55,000 workers for the peak period, up 10 percent from last year. FedEx customers are asking for more capacity during the busiest shopping season and the company will impose some caps on volume again this year. Shipping rates will rise by an average of 4.9 percent effective Jan. 4.

FedEx said first-quarter net income rose 13 percent to $692 million, and revenue increased to $12.3 billion.

Cost Cuts

Weaker less-than-truckload demand and higher FedEx Ground costs are “something that’s been a concern for a couple of quarters,” said Logan Purk, an Edward D. Jones & Co. analyst. “Top-line growth has been pretty good, but the expenses have been so elevated we’ve seen profit margins come down from 18 percent to 15 and, this quarter, to 14. That’s a huge drag on earnings growth.”

Analysts including Cowen & Co.’s Helane Becker had offered bullish assessments heading into Wednesday’s release. The average estimate for full-year profit had been $10.83 a share, now just within the upper range of FedEx’s forecast.

FedEx is in the final year of a three-year $1.7 billion cost-cutting program primarily aimed at FedEx Express, the company’s airline business. Memphis, Tennessee-based FedEx initiated the effort, which included employee buyouts and retiring older planes and vehicles in favor of more fuel-efficient models, as shippers moved away from expensive next-day deliveries.

The benefits of the cost-cutting program were partially offset by higher incentive compensation accruals, higher self-insurance reserves and operating costs at the FedEx Ground unit, in addition to lower volume in freight.