In announcing its first-quarter results to the end of August 2019, FedEx again cited macroeconomic weakness and trade uncertainty as primary drivers of less than stellar performance. Fred Smith, FedEx Chairman and CEO, attributed much of the company’s muted results to external forces, commenting that “Our performance continues to be negatively impacted by a weakening global macro environment driven by increasing trade tensions and policy uncertainty.” In its earnings release, FedEx also pins some of the blame “increased costs to expand service offerings and continued mix shift to lower-yielding services,” while also acknowledging that the decision to sever ties with Amazon had “negatively impacted results.”
The effects on the company’s Express segment are clear. Total US package revenues for the quarter were down 0.2%, with growth in Deferred package revenue unable to offset the decline in Overnight packages. As such, the US package mix continues to shift to lower-yielding package services, causing an overall US package yield to fall 0.7%. Of more concern, however, are the year-on-year trends in FedEx’ international express services. International Export revenues were 1.9% lower year-on-year in large part as a result of a 3.0% fall in International Priority revenue. Performance was further weighed down by a 4.9% fall in International Domestic revenue, resulting in revenue across the company’s International products falling 1.6%. Freight products within the Express segment also struggled, highlighting the starkness of Smith’s references to challenging trade conditions. Express ended the quarter with operating income of $285m, down some 26.5% year-on-year.
More positive results came from FedEx Ground, where revenue grew 7.9% year-on-year. The segment is providing the most hope amongst the gloom, particularly as it stands to continue its expansion as FedEx builds out residential delivery capability. Costs, though, provided a reality check. Purchased transportation was 11.7%, or $241m, higher in the quarter compared to the same three months last year, offsetting much of the top-line growth. With costs up 10% overall, operating income of $644m represented a 4.7% decline. In Freight, a 2.8% fall in revenue to $919m was offset by a reduction in purchased transportation of $72m over the three months. Operating income was up 10.2% to $194m.
Across the business then, top-line revenue was essentially flat year-on-year at $17.05bn, but evidently that masks the detail and what appear to be concerning questions for FedEx.
Operating income growth in both Express and Ground segments were negative, and even before the attribution of $57m in costs related to the integration of TNT, the Express segment would have seen a down year with income of $342m, 11.9% down year-on-year. For the quarter, net income at FedEx was $996m, down 10.5% year-on-year.
Given such results, it seems hard to have great enthusiasm in the immediate future for FedEx, as it acknowledges itself with the lower earnings outlook for its FY2020. So, the question becomes is this the bottom or will it get worse? The Amazon problem seems short-term, certainly painful, but as FedEx noted, with 1.3% of revenue at stake while it might hurt, the blow is not mortal by any stretch. The TNT integration continues to provide pain points – three years after the fact, FedEx would hope to be reaping the rewards of its ambitious takeover but instead continues to pour significant cash into the project. This too is a surmountable challenge, provided FedEx can convince investors to stomach the ongoing costs – its share price fell 13% on the release of these quarterly results.
At the macroeconomic level, FedEx faces the same challenges as its competitors but seems less able to deal with the outcomes. Albeit a crude comparison, while FedEx premium air product revenue fell 3.0%, DHL’s equivalent TDI product line saw revenue per day increase by 5.6%. Similarly, as FedEx US package business struggled, UPS saw revenue increases in all three of its U.S. Domestic product lines. Although to be fair to FedEx, UPS international package business also struggled and ended the nearest comparable quarter with year-on-year revenues down 2.7%. It’s likely to feel the pain more acutely of any further deterioration in global trade. Perhaps the most significant outcome, however, is FedEx characterisation of Amazon as a competitor that keeps it awake at night, long-term this may be the factor that provides FedEx with the biggest challenge.
Source: Transport Intelligence, September 19, 2019
Author: Nick Bailey
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